Filed electronically with the Securities and Exchange Commission on
September 29, 2000
File No. 2-36238
File No. 811-2021
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 /___/
Pre-Effective Amendment No. ___ /___/
Post-Effective Amendment No. 74 /_X_/
--
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No. 58 /_X_/
--
SCUDDER SECURITIES TRUST
------------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
------------------------------------ -----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2567
--------------
John Millette
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
-----------------------------------------
(Name and Address of Agent for Service)
<TABLE>
<CAPTION>
It is proposed that this filing will become effective (check appropriate box):
<S> <C>
/___/ Immediately upon filing pursuant to paragraph (b) /_X_/ On October I, 2000 pursuant to paragraph (b)
/___/ 60 days after filing pursuant to paragraph (a) (1) /___/ On ________ pursuant to paragraph (a)(1)
/___/ 75 days after filing pursuant to paragraph (a) (2) /___/ On ________ pursuant to paragraph (a) (2) of Rule 485.
</TABLE>
If appropriate, check the following box:
/___/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
SCUDDER SECURITIES TRUST
Scudder 21st Century Growth Fund
Scudder Development Fund
Scudder Health Care Fund
Scudder Small Company Value Fund
Scudder Technology Fund
<PAGE>
SCUDDER
INVESTMENTS (SM)
[LOGO]
Scudder Large Company Growth Fund
Supplement to Prospectus of October 1, 2000
Scudder Large Company Growth Fund currently offers three classes of shares to
provide investors with different purchase options: Class AARP shares, Class S
shares and Class R shares. Class AARP shares and Class S shares are described in
the prospectus; Class R shares are described in this supplement. Class R shares
are designed for participants of certain employer-sponsored retirement plans.
Class R shares currently are also available for purchase through certain
financial intermediaries as well as third-party providers and other entities.
Share certificates are not available for Class R shares.
The following information supplements each section of the prospectus as
indicated:
The Fund's Track Record
As Class R shares do not have a full calendar year of performance, no past
performance data is provided. However, the chart and table on page 8 of the
prospectus show how the returns for the fund's Class S shares have varied from
year to year, which may give some idea of risk. Although Class S shares are not
offered in this supplement, their annual returns would differ only to the extent
that the classes have different expenses.
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.70%
--------------------------------------------------------------------------------
Service (12b-1) Fee 0.25%
--------------------------------------------------------------------------------
Other Expenses* 0.30%
-----------------
--------------------------------------------------------------------------------
Total Annual Operating Expenses 1.25%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of the
fund's Class R shares to those of other mutual funds. The example assumes the
expenses above remain the same. It also assumes that you invested $10,000,
earned 5% annual returns, reinvested all dividends and distributions and sold
your shares at the end of each period. This is only an example; your actual
expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$127 $397 $686 $1,511
--------------------------------------------------------------------------------
2
<PAGE>
Understanding Distributions and Taxes
Dividends and other distributions that total $10 or less are automatically
reinvested in shares of the same fund unless you request otherwise.
Financial Highlights
Class R Shares
--------------------------------------------------------------------------------
2000(b)
--------------------------------------------------------------------------------
Net asset value, beginning of period $33.27
----------
--------------------------------------------------------------------------------
Income (loss) from investment operations:
--------------------------------------------------------------------------------
Net investment income (loss) (a) (.29)
--------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 9.98
---------
--------------------------------------------------------------------------------
Total from investment operations 9.69 Less distributions from:
--------------------------------------------------------------------------------
Net investment income --
--------------------------------------------------------------------------------
Net realized gains on investment transactions (.59)
---------
--------------------------------------------------------------------------------
Total distributions (.59)
--------------------------------------------------------------------------------
Net asset value, end of period $42.37
---------
--------------------------------------------------------------------------------
Total Return (%) 29.22**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions) 58
--------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.43(c)*
--------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.42(c)*
--------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.74)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 56*
--------------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period.
(b) For the period August 2, 1999 (commencement of Class R shares) to July 31,
2000.
(c) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.37% and
1.37%, respectively.
* Annualized
** Not annualized
3
<PAGE>
How to Buy Shares
To open an account
Class R shares are available only through employer-sponsored retirement plans.
Please consult your plan administrator or plan representative for more
information on how to purchase shares.
To buy additional shares
Please consult your plan administrator or plan representative for more
information on how to purchase shares.
How to Exchange or Sell Shares
To exchange shares
Shareholders of Class R shares may exchange their Class R shares only for shares
of funds authorized for exchange by their plan. Please consult your plan
administrator or plan representative for more information.
To sell shares
Please consult your plan administrator or plan representative
for information.
October 1, 2000
<PAGE>
SCUDDER
INVESTMENTS (SM)
[LOGO]
--------------------------------------------------------------------------------
U.S./EQUITY
--------------------------------------------------------------------------------
Class AARP and Class S Shares
Scudder 21st Century
Growth Fund
Scudder Large Company
Growth Fund
Scudder Development Fund
Prospectus
October 1, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
How the funds work
2 Scudder 21st Century Growth Fund
6 Scudder Large Company Growth Fund
10 Scudder Development Fund
14 Other Policies and Risks
15 Who Manages and Oversees the Funds
19 Financial Highlights
How to invest in the funds
24 How to Buy, Sell and Exchange
Class AARP Shares
26 How to Buy, Sell and Exchange
Class S Shares
28 Policies You Should Know About
33 Understanding Distributions and Taxes
<PAGE>
How the funds work
On the next few pages, you'll find information about each fund's investment
goal, the main strategies it uses to pursue that goal, and the main risks that
could affect its performance.
Whether you are considering investing in a fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
This prospectus offers two classes of shares for each of the funds described.
Class AARP shares have been created especially for AARP members. Class S shares
are available to all investors. Unless otherwise noted, all information in this
prospectus applies to both classes.
You can find prospectuses on the Internet for Class AARP shares at
aarp.scudder.com and for Class S shares at www.scudder.com.
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class S SCTGX fund number | Class AARP 150
| Class S 050
Scudder 21st Century Growth Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks long-term growth of capital by investing in common stocks of
emerging growth companies that the adviser believes are poised to be leaders in
the new century. The fund typically invests at least 80% of total assets in
common stocks of companies that are similar in size to those in the Russell 2000
Index (typically less than $2 billion in total market value).
Using extensive fundamental and field research, managers look for small
companies, such as those in the Russell 2000 Index, that have low debt,
exceptional management teams, strong current or potential competitive
positioning and potential annual earnings growth of at least 15%, among other
factors. The managers expect to find these companies in many rapidly-changing
sectors of the economy, such as telecommunications, biotechnology and high tech.
Growth orientation. The managers primarily invest in companies that they believe
offer the potential for sustainable above-average earnings growth and whose
market values appear reasonable in light of their business prospects.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented.
As companies in the portfolio exceed the market value of those in the Russell
2000 Index, the fund may continue to hold their stocks, but will generally not
add to these holdings. The fund will normally sell a stock when it reaches a
target price, when the managers believe other investments offer better
opportunities or in the course of adjusting its exposure to a given industry.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
--------------------------------------------------------------------------------
2 | Scudder 21st Century Growth Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may appeal to investors who are looking for a fund that seeks
out tomorrow's leaders and who can accept the risks of small-company
investing.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the small company portion of the U.S. market.
When small company stock prices fall, you should expect the value of your
investment to fall as well. Small company stocks tend to be more volatile than
stocks of larger companies, in part because small companies tend to be less
established than larger companies and more vulnerable to competitive challenges
and bad economic news. Many technology companies are smaller companies which may
have limited business lines and financial resources, making them especially
vulnerable to business risks and economic downturns. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies in which the fund invests.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect the value of portfolio securities. For example,
technology companies could be hurt by such factors as market saturation, price
competition, and rapid obsolescence. In addition, a rise in unemployment could
hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o derivatives could produce disproportionate losses
o growth stocks may be out of favor for certain periods
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
3 | Scudder 21st Century Growth Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the returns of the fund's Class S shares have varied
from year to year, which may give some idea of risk. The table shows average
annual total returns of the fund's Class S shares and a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31/1999 Class S
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
9.74 3.55 124.93
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
'97 '98 '99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: 4.50%
Best Quarter: 46.60%, Q4 1999 Worst Quarter: -23.99%, Q3 1998
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year Since Inception
--------------------------------------------------------------------------------
Fund -- Class S* 124.93 32.14**
--------------------------------------------------------------------------------
Index 43.09 16.45***
--------------------------------------------------------------------------------
Index: The Russell 2000 Growth Index, which consists of those stocks in the
Russell 2000 Index that have a greater-than-average growth orientation.
* Performance for Class AARP shares is not provided because this class does
not have a full calendar year of performance.
** Since 9/9/1996.
*** Since 9/30/1996.
Total returns would have been lower if operating expenses hadn't been reduced.
4 | Scudder 21st Century Growth Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees, other than a
redemption/exchange fee. The fund does have annual operating expenses, and as a
shareholder of either Class AARP or Class S shares, you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Redemption/Exchange fee on shares owned less than a year (as
a % of amount redeemed, if applicable) 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.75%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses 0.69%
------------
--------------------------------------------------------------------------------
Total Annual Operating Expenses* 1.44%
--------------------------------------------------------------------------------
Information in the table has been restated to reflect a new investment
management fee rate.
* The adviser will cap expenses voluntarily at 1.20%. This cap may be
terminated at any time at the option of the adviser.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses above remain the
same. It also assumes that you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions and sold your shares at the end of
each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$147 $456 $787 $1,724
--------------------------------------------------------------------------------
5 | Scudder 21st Century Growth Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class S SCQGX fund number | Class AARP 160
| Class S 060
Scudder Large Company Growth Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks long-term growth of capital by investing at least 65% of its
total assets in large U.S. companies (those with a market value of $1 billion or
more). These investments are primarily in common stocks, but may include
preferred stocks and securities convertible into common stocks.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with a history of
above-average growth, strong competitive positioning, attractive prices relative
to potential growth, sound financial strength and effective management, among
other factors.
Growth orientation. The managers generally look for companies with above-average
growth of revenue or earnings relative to the overall market.
Top-down analysis. The managers consider the economic outlooks for various
sectors and industries.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented.
The fund will normally sell a stock when its earnings growth appears less
promising, when the company no longer qualifies as a large company, when the
managers believe other investments offer better opportunities or in the course
of adjusting its exposure to a given industry.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
--------------------------------------------------------------------------------
6 | Scudder Large Company Growth Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] Investors with long-term goals who are looking for a fund with a
growth-style approach to large-cap investing may want to consider this
fund.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. market.
When large company stock prices fall, you should expect the value of your
investment to fall as well. Large company stocks at times may not perform as
well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect the value of portfolio securities. For example,
technology companies could be hurt by such factors as market saturation, price
competition, and rapid obsolescence. In addition, a rise in unemployment could
hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o derivatives could produce disproportionate losses
o growth stocks may be out of favor for certain periods
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
7 | Scudder Large Company Growth Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the returns of the fund's Class S shares have varied
from year to year, which may give some idea of risk. The table shows average
annual total returns of the fund's Class S shares and a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31/1999 Class S
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
6.66 -0.01 -1.34 32.50 18.22 32.80 33.23 35.05
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
`92 `93 `94 `95 `96 `97 `98 `99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: 3.88%
Best Quarter: 28.07%, Q4 1999 Worst Quarter: -12.27%, Q3 1998
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years Since Inception
--------------------------------------------------------------------------------
Fund -- Class S* 35.05 30.21 20.54**
--------------------------------------------------------------------------------
Index 33.16 32.41 21.16***
--------------------------------------------------------------------------------
Index: The Russell 1000 Growth Index, which consists of those stocks in the
Russell 1000 Index that have a greater-than-average growth orientation.
* Performance for Class AARP shares is not provided because this class does
not have a full calendar year of performance.
** Since 5/15/1991.
*** Since 5/31/1991.
Total returns from the date of inception to 1992 would have been lower if
operating expenses hadn't been reduced.
8 | Scudder Large Company Growth Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.70%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses 0.30%
------------
--------------------------------------------------------------------------------
Total Annual Operating Expenses* 1.00%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses above remain the
same. It also assumes that you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions and sold your shares at the end of
each period. This is only an example; your actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$102 $318 $552 $1,225
--------------------------------------------------------------------------------
9 | Scudder Large Company Growth Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class S SCDVX fund number | Class AARP 167
| Class S 067
Scudder Development Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks long-term capital appreciation by investing primarily in U.S.
companies with the potential for above-average growth. These investments are in
equities of companies of any size, mainly common stocks. In choosing stocks, the
portfolio managers use a combination of three analytical disciplines:
Bottom-up research. The managers look for companies that have strong finances,
management and product franchises, good business prospects and strong
competitive positioning, among other factors.
Growth orientation. The managers generally look for companies with above-average
growth of revenue or earnings.
Top-down analysis. The managers consider the economic outlooks for various
industries, looking for those that may benefit from changes in the overall
business environment.
The managers intend to keep the fund's holdings diversified by industry and by
company size, although, depending on their outlook, they may increase or reduce
the fund's exposure to a given industry, such as technology, or size of company.
The fund will normally sell a stock when its earnings growth rate slows, when
the managers believe other investments offer better opportunities, or in the
course of adjusting its emphasis on a given industry.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
While most of its investments are U.S. securities, the fund may invest up to 20%
of net assets in foreign securities.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies, or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
--------------------------------------------------------------------------------
10 | Scudder Development Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may be appropriate for investors with a long-term outlook
who can accept the risks of a fund that takes a growth approach to
choosing stocks.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform. When stock prices fall, you should expect the value of your
investment to fall as well. Because a stock represents ownership in its issuer,
stock prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
To the extent that the fund focuses on a given industry or a particular size of
company, any factors affecting that industry or size of company could affect the
value of portfolio securities. For example, technology companies could be hurt
by such factors as market saturation, price competition, and rapid obsolescence.
In addition, a rise in unemployment could hurt manufacturers of consumer goods,
and an economic downturn could hurt small and mid-size companies more than large
ones.
Other factors that could affect performance include:
o derivatives could produce disproportionate losses
o growth stocks may be out of favor for certain periods
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
11 | Scudder Development Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the returns of the fund's Class S shares have varied
from year to year, which may give some idea of risk. The table shows average
annual total returns of the fund's Class S shares and a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31/1999 Class S
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1.48 71.83 -1.82 8.84 -5.34 50.67 10.04 6.93 8.01 35.01
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
`90 `91 `92 `93 `94 `95 `96 `97 `98 `99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: 6.22%
Best Quarter: 29.61%, Q4 1999 Worst Quarter: -24.33%, Q3 1990
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Fund -- Class S* 35.01 20.92 16.38
--------------------------------------------------------------------------------
Index 21.03 28.54 18.19
--------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
* Performance for Class AARP shares is not provided because this class does
not have a full calendar year of performance. Each class is invested in the
same portfolio.
12 | Scudder Development Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.85%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses 0.45%
------------
--------------------------------------------------------------------------------
Total Annual Operating Expenses* 1.30%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.45%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management fee rate.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses above remain the
same. It also assumes that you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions and sold your shares at the end of
each period. This is only an example; your actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$132 $412 $713 $1,568
--------------------------------------------------------------------------------
13 | Scudder Development Fund
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could
change that fund's investment goal without seeking shareholder approval.
o As a temporary defensive measure, each fund could shift up to 100% of its
assets into investments such as money market securities. This could prevent
losses, but would mean that the fund was not pursuing its goal.
o These funds may trade securities actively. This could raise transaction
costs (thus lowering performance) and could mean higher taxable
distributions.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the funds' allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
14 | Scudder Development Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for managing
the funds, takes a team approach to asset management.
--------------------------------------------------------------------------------
Who Manages and Oversees the Funds
The investment adviser
The funds' investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
Scudder Kemper's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates paid by each fund for
the 12 months through the most recent fiscal year end, as a percentage of each
fund's average daily net assets.
Fund Name Fee Paid
--------------------------------------------------------------------------------
Scudder 21st Century Growth Fund 1.00%
--------------------------------------------------------------------------------
Scudder Large Company Growth Fund 0.70%
--------------------------------------------------------------------------------
Scudder Development Fund 0.98%
--------------------------------------------------------------------------------
15
<PAGE>
Each fund has entered into a new investment management agreement with Scudder
Kemper. This table describes the new fee rates for each fund.
--------------------------------------------------------------------------------
Investment Management Fee
--------------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------------
Scudder 21st Century Growth Fund
--------------------------------------------------------------------------------
first $500 million 0.75%
--------------------------------------------------------------------------------
next $500 million 0.70%
--------------------------------------------------------------------------------
more than $1 billion 0.65%
--------------------------------------------------------------------------------
Scudder Large Company Growth Fund
--------------------------------------------------------------------------------
first $1.5 billion 0.70%
--------------------------------------------------------------------------------
next $500 million 0.65%
--------------------------------------------------------------------------------
more than $2 billion 0.60%
--------------------------------------------------------------------------------
Scudder Development Fund
--------------------------------------------------------------------------------
first $1 billion 0.85%
--------------------------------------------------------------------------------
next $500 million 0.80%
--------------------------------------------------------------------------------
more than $1.5 billion 0.75%
--------------------------------------------------------------------------------
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in return
for services relating to investments by AARP members in AARP Class shares of
each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of the AARP Classes of all funds managed by Scudder Kemper.
The fee rates, which decrease as the aggregate net assets of the AARP Classes
become larger, are as follows: 0.07% for the first $6 billion in net assets,
0.06% for the next $10 billion and 0.05% thereafter.
16
<PAGE>
The portfolio managers
The following people handle the day-to-day management of each fund in this
prospectus.
Scudder 21st Century Scudder Development Fund
Growth Fund
Sewall F. Hodges
Peter Chin Lead Portfolio Manager
Lead Portfolio Manager o Began investment career in
o Began investment career in 1969 1978
o Joined the adviser in 1973 o Joined the adviser in 1995
o Joined the fund team in 1996 o Joined the fund team in 1999
Roy C. McKay Jesus C. Cabrera
o Began investment career in 1968 o Began investment career in
o Joined the adviser in 1988 1989
o Joined the fund team in 1996 o Joined the adviser in 1999
o Joined the fund team in 1999
Scudder Large Company Growth Fund
Valerie F. Malter
Lead Portfolio Manager
o Began investment career in 1985
o Joined the adviser in 1995
o Joined the fund team in 1998
17
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that each fund is
managed in the best interests of its shareholders.
The following people comprise each fund's Board.
Linda C. Coughlin Joan E. Spero
o Managing Director, Scudder o President, Doris Duke
Kemper Investments, Inc. Charitable Foundation
o President of each fund
Jean Gleason Stromberg
Henry P. Becton, Jr. o Consultant
o President, WGBH Educational
Foundation Jean C. Tempel
o Managing Director, First
Dawn-Marie Driscoll Light Capital, LLC (venture
o Executive Fellow, Center for capital firm)
Business Ethics, Bentley College
o President, Driscoll Associates Steven Zaleznick
(consulting firm) o President and Chief
Executive Officer, AARP
Edgar Fiedler Services, Inc.
o Senior Fellow and Economic
Counsellor, The Conference
Board, Inc. (a not-for-profit
business research organization)
Keith R. Fox
o General Partner, The Exeter
Group of Funds
18
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance. The figures in the first part of each table are for a single share.
The total return figures represent the percentage that an investor in a
particular fund would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover).
Effective October 2, 2000, existing shares of Scudder Large Company Growth Fund
and Scudder Development Fund are redesignated as Class S shares. Effective May
1, 2000, existing shares of Scudder 21st Century Growth Fund were redesignated
as Class S shares.
Class AARP shares are available beginning October 2, 2000. There is no financial
data for these shares as of the date of this prospectus.
19
<PAGE>
Scudder 21st Century Growth Fund-- Class S (a)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
2000(b) 1999(c) 1998(d) 1997(e)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $18.48 $10.15 $13.11 $12.00
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income (loss) (f) (.31) (.19) (.19) (.15)
-------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions 9.87 8.51 (2.78) 1.25
----------------------------------------
-------------------------------------------------------------------------------------
Total from investment operations 9.56 8.32 (2.97) 1.10
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net realized gains on investment
transactions (.82) -- -- --
-------------------------------------------------------------------------------------
Redemption fees .03 .01 .01 .01
-------------------------------------------------------------------------------------
Net asset value, end of period $27.25 $18.48 $10.15 $13.11
----------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) (g) 51.52 82.07(h)** (22.58) 9.25(h)**
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 352 72 27 23
-------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 1.74(i) 2.22* 2.17 3.52*
-------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 1.55(i) 1.75* 1.75 1.75*
-------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (1.10) (1.42)* (1.38) (1.27)*
-------------------------------------------------------------------------------------
Portfolio turnover rate (%) 135 148* 120 92*
-------------------------------------------------------------------------------------
</TABLE>
(a) On May 1, 2000, existing shares of the Fund were redesignated as Class S
shares.
(b) For the year ended July 31, 2000.
(c) For the eleven months ended July 31, 1999. On September 16, 1998, the
Trustees of the Fund changed the fiscal year end to July 31 from August 31.
(d) For the year ended August 31, 1998.
(e) For the period September 9, 1996 (commencement of operations) to August 31,
1997.
(f) Based on monthly average shares outstanding during the period.
(g) Total returns would have been lower had certain expenses not been reduced.
(h) Total returns do not reflect the effect to the shareholder of the 1%
redemption fee on shares held less than one year.
(i) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.69% and
1.51%, respectively (see Financial Statements).
* Annualized
** Not annualized
20
<PAGE>
Scudder Large Company Growth Fund-- Class S
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
2000(a)(b) 1999(a)(c) 1998(a)(d) 1997(a)(d) 1996(a)(d )1995(d)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $33.35 $28.17 $25.10 $21.19 $18.44 $16.17
------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
------------------------------------------------------------------------------------------------
Net investment income (loss) (.21) (.11) (.02) (.01) .08 .11
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions 9.91 7.00 4.55 5.69 3.41 3.40
------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Total from investment 9.70 6.89 4.53 5.68 3.49 3.51
operations
------------------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------------------
Net investment income -- -- -- -- (.14) (.15)
------------------------------------------------------------------------------------------------
Net realized gains on
investment transactions (.59) (1.71) (1.46) (1.77) (.60) (1.09)
------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Total distributions (.59) (1.71) (1.46) (1.77) (.74) (1.24)
------------------------------------------------------------------------------------------------
Net asset value, end
of period $42.46 $33.35 $28.17 $25.10 $21.19 $18.44
------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Total Return (%) 29.15 24.83** 18.86 28.84 19.49 23.78
------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 1,415 829 502 288 221 173
------------------------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.21(e) 1.23* 1.19 1.21 1.07 1.17
------------------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.21(e) 1.23* 1.19 1.21 1.07 1.17
------------------------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (.53) (.46)* (.06) (.05) .41 .71
------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 56 63* 54 68 69 92
------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the year ended July 31, 2000.
(c) For the nine months ended July 31, 1999. On August 10, 1998, the Trustees
of the Fund changed the fiscal year end from October 31 to July 31.
(d) For the year ended October 31.
(e) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.17% and
1.17%, respectively (see Financial Statements).
* Annualized
** Not annualized
21
<PAGE>
Scudder Development Fund -- Class S
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
2000(b) 1999(c) 1999(d) 1998(d) 1997(d) 1996(d)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $40.26 $42.06 $41.67 $39.02 $45.56 $37.35
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income (loss)
(a) (.42) (.04) (.35) (.41) (.40) (.38)
-------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions 11.58 (1.76) 4.49 6.94 (1.66) 12.79
----------------------------------------------------
-------------------------------------------------------------------------------------
Total from investment
operations 11.16 (1.80) 4.14 6.53 (2.06) 12.41
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net realized gains on investment
transactions (6.50) -- (3.75) (3.88) (4.48) (4.20)
----------------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (6.50) -- (3.75) (3.88) (4.48) (4.20)
-------------------------------------------------------------------------------------
Net asset value, end of period $44.92 $40.26 $42.06 $41.67 $39.02 $45.56
----------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) 29.22 (4.33)** 11.65 17.86 (4.93) 35.26
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 827 716 775 845 862 1,040
-------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 1.41(f) 1.52* 1.51 1.41 1.36 1.24
-------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 1.40(f) 1.52* 1.51 1.41 1.36 1.24
-------------------------------------------------------------------------------------
Ratio of net investment income (.95) (1.09)* (.94) (.99) (1.02) (.91)
(loss) (%)
-------------------------------------------------------------------------------------
Portfolio turnover rate (%) 100 4* 97(e) 52 52 59
-------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the year ended July 31, 2000.
(c) For the one month ended July 31, 1999. On June 7, 1999, the Trustees of the
Fund changed the fiscal year end from June 30 to July 31.
(d) For the year ended June 30.
(e) The change in the investment objective during the period resulted in a
higher portfolio turnover rate.
(f) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.40% and
1.39%, respectively (see Financial Statements).
* Annualized
** Not annualized
22
<PAGE>
How to invest in the funds
The following pages tell you how to invest in these funds and what to expect as
a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket or financial adviser -- your provider may
have its own policies or instructions, and you should follow those.
As noted earlier, there are two classes of shares of each fund available through
this prospectus. The instructions for buying and selling each class are slightly
different.
Instructions for buying and selling Class AARP shares, which have been created
especially for AARP members, are found on the next two pages. These are followed
by instructions for buying and selling Class S shares. Be sure to use the
appropriate table when placing any orders to buy, exchange or sell shares in
your account.
<PAGE>
How to Buy, Sell and Exchange Class AARP Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The AARP Investment Program."
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class AARP First investment Additional investments
------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more for regular $50 or more with an Automatic
accounts Investment Plan, Payroll
$500 or more for IRAs Deduction or Direct Deposit
------------------------------------------------------------------------------------
By mail o For enrollment forms, call Send a personalized investment
1-800-253-2277 slip or short note that
o Fill out and sign an includes:
enrollment form o fund and class name
o Send it to us at the o account number
appropriate address, along o check payable to "The AARP
with an investment check Investment Program"
------------------------------------------------------------------------------------
By wire o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
------------------------------------------------------------------------------------
By phone -- o Call 1-800-253-2277 for
instructions
------------------------------------------------------------------------------------
With an automatic o Fill in the information o To set up regular investments
investment plan required on your enrollment from a bank checking account,
form and include a voided call 1-800-253-2277 (minimum
check $50)
------------------------------------------------------------------------------------
Payroll Deduction o Select either of these o Once you specify a dollar
or Direct Deposit options on your enrollment amount (minimum $50),
form and submit it. You will investments are automatic.
receive further instructions
by mail.
------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-253-2277
------------------------------------------------------------------------------------
On the Internet o Go to "services and forms-- o Call 1-800-253-2277 to ensure
How to Open an Account" at you have electronic services
aarp.scudder.com o Register at aarp.scudder.com
o Print out a prospectus and an o Follow the instructions for
enrollment form buying shares with money from
o Complete and return the your bank account
enrollment form with your
check
------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The AARP Investment Program, PO Box 2540, Boston, MA 02208-2540
Express, registered or certified mail:
The AARP Investment Program, 66 Brooks Drive, Braintree, MA
02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
24
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class AARP Exchanging into another fund Selling shares
------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account ($500 or more for IRAs) most for over $100,000, can
only be ordered in writing; if
you're in doubt, see page 30
------------------------------------------------------------------------------------
By phone o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
------------------------------------------------------------------------------------
Using Easy-Access o Call 1-800- 631-4636 and o Call 1-800-631-4636 and
Line follow the instructions follow the instructions
------------------------------------------------------------------------------------
By mail or fax Your instructions should Your instructions should
(see previous include: include:
page)
o your account number o your account number
o names of the funds, class and o names of the funds, class
number of shares or dollar number of shares or dollar
amount you want to exchange amount you want to redeem
------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from an account,
call 1-800-253-2277
--------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-253-2277
------------------------------------------------------------------------------------
On the Internet o Register at aarp.scudder.com --
o Go to "services and forms"
o Follow the instructions for
making on-line exchanges
------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Services For Class AARP Investors
---------------------------------------------------------------------------------------
<S> <C>
To reach us: o Web site aarp.scudder.com
o Program representatives 1-800-253-2277, M-F, 8 a.m. - 8 p.m. EST
o Confidential fax line 1-800-821-6234, always open
o TDD line 1-800-634-9454, M-F, 9 a.m. - 5 p.m. EST
Services for o AARP Lump Sum Service For planning and setting up a lump
participants: sum distribution.
o AARP Legacy Service For organizing financial documents and
planning the orderly transfer of assets to heirs.
o AARP Goal Setting and Asset Allocation Service For allocating
assets and measuring investment progress.
o For more information, please call 1-800-253-2277.
---------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
How to Buy, Sell and Exchange Class S Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class S First investment Additional investments
------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
------------------------------------------------------------------------------------
By mail or o Fill out and sign an Send a Scudder investment slip
express application or short note that includes:
(see below)
o Send it to us at the o fund and class name
appropriate address, along
with an investment check o account number
o check payable to "The Scudder
Funds"
------------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
------------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
------------------------------------------------------------------------------------
With an automatic o Fill in the information on o To set up regular investments
investment plan your application and include from a bank checking account,
a voided check call 1-800-SCUDDER
------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
------------------------------------------------------------------------------------
On the Internet o Go to "funds and prices" at o Call 1-800-SCUDDER to ensure
www.scudder.com you have electronic services
o Print out a prospectus and a o Register at www.scudder.com
new account application
o Follow the instructions for
o Complete and return the buying shares with money from
application with your check your bank account
------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
26
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class S Exchanging into another fund Selling shares
------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 or more for most for over $100,000, can
IRAs) only be ordered in writing; if
you're in doubt, see page 30
$100 or more for exchanges
between existing accounts
------------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
------------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
------------------------------------------------------------------------------------
By mail, Your instructions should Your instructions should
express or fax include: include:
(see previous
page) o the fund, class, and account o the fund, class and account
number you're exchanging out of number from which you want to
sell shares
o the dollar amount or number
of shares you want to exchange o the dollar amount or number
of shares you want to sell
o the name and class of the
fund you want to exchange into o your name(s), signature(s)
and address, as they appear
o your name(s), signature(s), on your account
and address, as they appear on
your account o a daytime telephone number
o a daytime telephone number
------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
------------------------------------------------------------------------------------
On the Internet o Register at www.scudder.com --
o Follow the instructions for
making on-line exchanges
------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8 a.m.
and 8 p.m. Eastern time on any fund business day by calling
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
--------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the funds' Class AARP and Class S Shares. Scudder 21st Century Growth
Fund and Scudder Large Company Growth Fund each have other share classes, which
are described in separate prospectuses and which have different fees,
requirements and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
28
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. To get up-to-date information, review balances or
even place orders for exchanges, go to aarp.scudder.com (Class AARP)
or www.scudder.com (Class S).
--------------------------------------------------------------------------------
Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.
For Class AARP shares
--------------------------------------------------------------------------------
Call Easy-Access Line, the AARP Investment Program Automated Information
Line, at 1-800-631-4636
--------------------------------------------------------------------------------
For Class S shares
--------------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------------
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The funds
can only accept wires of $100 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject purchase orders, for
these or other reasons.
29
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
30
<PAGE>
How the funds calculate share prices
For each share class, the price at which you buy shares is its net asset value
per share, or NAV. To calculate NAV, each share class of each fund uses the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
The price at which you sell shares of Scudder 21st Century Growth Fund is also
the fund's NAV, minus a 1.00% redemption/exchange fee on shares owned less than
one year. You won't be charged this fee if you're investing in an
employer-sponsored retirement plan that is set up directly with Scudder. Certain
other types of accounts, as discussed in the Statement of Additional
Information, may be eligible for this waiver. If your employer-sponsored
retirement plan is through a third-party investment provider, or if you are
investing through an IRA or other individual retirement account, the fee will
apply.
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
To the extent that a fund invests in securities that are traded primarily in
foreign markets, the value of their holdings could change at a time when you
aren't able to buy or sell fund shares. This is because some foreign markets are
open on days when the funds don't price their shares.
31
<PAGE>
Other rights we reserve
For each fund in this prospectus, you should be aware that we may do any of the
following:
o withhold 31% of your distributions as federal income tax if you have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o for Class AARP and Class S shareholders, close your account and send you
the proceeds if your balance falls below $1,000; for Class S shareholders,
charge you $10 a year if your account balance falls below $2,500; in either
case, we will give you 60 days' notice so you can either increase your
balance or close your account (these policies don't apply to retirement
accounts, to investors with $100,000 or more in Scudder fund shares or in
any case where a fall in share price created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash; the fund generally won't make a redemption
in kind unless your requests over a 90-day period total more than $250,000
or 1% of the value of the fund's net assets, whichever is less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
32
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
Scudder 21st Century Growth Fund and Scudder Development Fund intend to pay
dividends and distributions to their shareholders in November or December, and
Scudder Large Company Growth Fund in December; if necessary each may do so at
other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
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The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o taxable income dividends you receive from the fund
--------------------------------------------------------------------------------
o short-term capital gains distributions you receive from the fund
--------------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions you receive from the fund
--------------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
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Notes
<PAGE>
Notes
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Notes
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To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call 1-800-253-2277 (Class
AARP) or 1-800-SCUDDER (Class S).
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, please contact Scudder or
the SEC. If you're a shareholder and have questions, please contact Scudder (see
below). Materials you get from Scudder are free; those from the SEC involve a
copying fee. If you like, you can look over these materials at the SEC's Public
Reference Room in Washington, DC or request them electronically at
[email protected].
AARP Investment
Program from Scudder Scudder Funds SEC
PO Box 2540 PO Box 2291 450 Fifth Street, N.W.
Boston, MA Boston, MA Washington, D.C.
02208-2540 02107-2291 20549-0102
1-800-253-2277 1-800-SCUDDER 1-202-942-8090
aarp.scudder.com www.scudder.com www.sec.gov
Fund SEC File Number
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Scudder 21st Century Growth Fund 811-2021
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Scudder Large Company Growth Fund 811-43
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Scudder Development Fund 811-2021
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<PAGE>
SCUDDER 21st CENTURY GROWTH FUND
A series of Scudder Securities Trust
A Mutual Fund Seeking
Long-Term Growth of Capital Through Investment
Primarily in Common Stocks of Emerging Growth Companies
The Adviser Believes Are Poised to be Leaders in the 21st Century
SCUDDER LARGE COMPANY GROWTH FUND
A series of Investment Trust
A Diversified Mutual Fund Seeking
Long-Term Growth of Capital through Investment
Primarily in Common Stocks of Large U.S. Companies
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
October 1, 2000
--------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus, and should be read
in conjunction with the combined prospectus of Scudder 21st Century Growth Fund
and Scudder Large Company Growth Fund dated October 1, 2000, as amended from
time to time, a copy of which may be obtained without charge by writing to
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
The Annual Report to Shareholders of each Fund dated July 31, 2000 is
incorporated by reference and is hereby deemed to be part of this Statement of
Additional Information. These may also be obtained without charge by calling
1-800-SCUDDER.
<PAGE>
TABLE OF CONTENTS
Page
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES ............................... 1
General Investment Objective and Policies of Scudder 21st
Century Growth Fund ................................................. 1
Special Considerations ................................................ 2
Investment Policies and Techniques Common to each Fund ................ 5
Investment Restrictions ............................................... 17
PURCHASES ................................................................... 18
Additional Information About Opening an Account ....................... 18
Additional Information About Making Subsequent Investments ............ 19
Minimum Balances ...................................................... 19
Additional Information About Making Subsequent Investments By Quickbuy. 19
Checks ................................................................ 20
Wire Transfer of Federal Funds ........................................ 20
Share Price ........................................................... 21
Share Certificates .................................................... 21
Other Information ..................................................... 21
EXCHANGES AND REDEMPTIONS ................................................... 21
Exchanges ............................................................. 21
Special Redemption and Exchange Information - Scudder 21st
Century Growth Fund ................................................. 21
Redemption By Telephone ............................................... 22
Redemption By Quicksell ............................................... 23
Redemption By Mail Or Fax ............................................. 24
Redemption-in-Kind .................................................... 24
Other Information ..................................................... 24
FEATURES AND SERVICES OFFERED BY THE FUND ................................... 25
The No-Load Concept ................................................... 25
Internet Access ....................................................... 25
Dividends and Capital Gains Distribution Options ...................... 26
Transaction Summaries ................................................. 26
THE SCUDDER FAMILY OF FUNDS ................................................. 26
SPECIAL PLAN ACCOUNTS ....................................................... 29
Scudder Retirement Plans: Profit-Sharing and Money Purchase ........... 29
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations
and Self-Employed Individuals ....................................... 30
Scudder IRA: Individual Retirement Account ............................ 30
Scudder Roth IRA: Individual Retirement Account ....................... 30
Scudder 403(b) Plan ................................................... 31
Automatic Withdrawal Plan ............................................. 31
Group or Salary Deduction Plan ........................................ 31
Automatic Investment Plan ............................................. 31
Uniform Transfers/Gifts to Minors Act ................................. 32
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS ................................... 34
PERFORMANCE INFORMATION ..................................................... 34
Average Annual Total Return ........................................... 34
Cumulative Total Return ............................................... 35
Total Return .......................................................... 36
Comparison of Fund Performance ........................................ 36
FUND ORGANIZATION ........................................................... 37
INVESTMENT ADVISER .......................................................... 38
AMA InvestmentLink(SM) Program ........................................ 42
Code of Ethics ........................................................ 42
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TABLE OF CONTENTS (continued)
Page
TRUSTEES AND OFFICERS FOR EACH TRUST ........................................ 42
REMUNERATION ................................................................ 46
Responsibilities of the Board-- Board and Committee Meetings .......... 46
Compensation of Officers and Trustees ................................. 46
DISTRIBUTOR ................................................................. 47
Administrative Fee .................................................... 48
TAXES ....................................................................... 49
PORTFOLIO TRANSACTIONS ...................................................... 52
Brokerage Commissions ................................................. 52
Portfolio Turnover .................................................... 54
NET ASSET VALUE ............................................................. 54
ADDITIONAL INFORMATION ...................................................... 55
Experts ............................................................... 55
Shareholder Indemnification ........................................... 56
Other Information ..................................................... 56
ADDITIONAL INFORMATION FOR LARGE COMPANY GROWTH FUND ........................ 57
FINANCIAL STATEMENTS ........................................................ 58
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THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
Except as otherwise indicated, each 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 a Fund remains an appropriate investment in light of their then current
financial position and needs. The net asset value of a Fund's shares will
increase or decrease with changes in the market price of the Fund's investments,
and there can be no assurance that a Fund's objective will be met.
Each Fund is an open-end management investment company which continuously
offers and redeems shares at net asset value. Each Fund is a company of the type
commonly known as a mutual fund. The combined prospectus and this Statement of
Additional Information for Scudder 21st Century Growth Fund and Scudder Large
Company Growth Fund each offer two classes of shares to provide investors with
different purchase options. The two classes are: Class S and Class AARP. Each
class has its own important features and policies. On October 2, 2000, shares
outstanding of Scudder 21st Century Growth Fund and Scudder Large Company Growth
Fund were redesignated as Class S shares of their respective funds. Shares of
Class AARP are especially designed for members of the American Association of
Retired Persons ("AARP").
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which a Fund may engage (such as hedging,
etc.) or a financial instrument which a Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Adviser"), in its
discretion, might, but is not required to, use in managing a Fund's portfolio
assets. The Adviser may, in its discretion, at any time employ such practice,
technique or instrument for each Fund, but not for all funds advised by it.
Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
the Fund, but, to the extent employed, could from time to time have a material
impact on the Fund's performance.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
General Investment Objective and Policies of Scudder 21st Century Growth Fund
Scudder 21st Century Growth Fund (the "21st Century Growth Fund") is a
diversified series of Scudder Securities Trust.
21st Century Growth Fund pursues long-term growth of capital by investing
in emerging growth companies that the Adviser believes are poised to be leaders
in the new 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.
21st Century Growth Fund normally invests at least 80% of its total 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 Adviser believes these companies are
well-positioned for above-average earnings growth and 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 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 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 , 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 that have, in the Adviser's opinion, potential earnings growth of at
least 15% per annum. 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 Ratings Service, a division of the McGraw-Hill
Companies, Inc. ("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 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 Investment Company Act
of 1940, as amended (the "1940 Act") requires borrowings to have 300% asset
coverage. The Fund may also enter into reverse repurchase agreements
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."
21st Century Growth Fund offers participation in the potential growth of
emerging growth companies that may be destined to become leading companies in
the new 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 new 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.
Special Considerations
Historical small stock performance. 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.
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
2
<PAGE>
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 Adviser'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.
IPO risk: Securities issued through an initial public offering (IPO) can
experience an immediate drop in value if the demand for the securities does not
continue to support the offering price. Information about the issuers of IPO
securities is also difficult to acquire since they are new to the market and may
not have lengthy operating histories. The Fund may engage in short-term trading
in connection with its IPO investments, which could produce higher trading costs
and adverse tax consequences. The number of securities issued in an IPO is
limited, so it is likely that IPO securities will represent a smaller component
of the Fund's portfolio as the Fund's assets increase (and thus have a more
limited effect on the Fund's performance).
Depositary Receipts. The Fund may invest indirectly in securities of emerging
market 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 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, subject to the Fund's restrictions on investments in illiquid
securities.
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.
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
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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.
When-Issued and Forward Delivery 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.
General Investment Objectives and Policies of Scudder Large Company Growth Fund
Scudder Large Company Growth Fund (the "Large Company Growth Fund"), a
diversified series of Investment Trust, seeks to provide long-term growth of
capital. It does this by investing at least 65% of its total assets in equities
of large U.S. companies (those with a market value of $1 billion or more).
Although current income is an incidental consideration, many of the Fund's
securities should provide regular dividends which are expected to grow over
time. The Fund offers an additional class of Shares: Class R shares. This
Statement of Additional Information applies only to the Class S and Class AARP
shares.
The Fund's equity investments consist of common stocks, preferred stocks
and securities convertible into common stocks, rights and warrants of companies
which offer, the Fund's management believes, the prospect for above-average
growth in earnings, cash flow or assets relative to the overall market. The
prospect for above-average growth in assets is evaluated in terms of the
potential future earnings such growth in assets can produce.
The Fund allocates its investments among different industries and
companies, and adjusts its portfolio securities based on long-term investment
considerations as opposed to short-term trading. While the Fund emphasizes U.S.
investments, it can commit a portion of assets to the equity securities of
foreign growth companies which meet the criteria applicable to domestic
investments.
Investments. Large Company Growth Fund invests primarily in equity securities
issued by large-sized domestic companies that offer, the Fund's management
believes, above-average appreciation potential. In seeking such investments, the
Adviser invests in companies with the following characteristics:
o companies that have exhibited above-average growth rates over an
extended period with prospects for maintaining greater than average
rates of growth in earnings, cash flow or assets in the future;
4
<PAGE>
o companies that are in a strong financial position with high credit
standings and profitability;
o companies with important business franchises, leading products or
dominant marketing and distribution systems;
o companies guided by experienced, motivated management; or
o companies selling at attractive prices relative to potential growth
in earnings, cash flow or assets.
The Adviser uses qualitative research techniques to identify companies
that have above-average quality and growth characteristics and that are deemed
to be selling at attractive market valuations. In-depth fundamental research is
used to evaluate various aspects of corporate performance, with a particular
focus on consistency of results, long-term growth prospects and financial
strength. From time to time, for temporary defensive or emergency purposes, the
Fund may invest a portion of its assets in cash and cash equivalents when the
Adviser deems such a position advisable in light of economic or market
conditions. It is impossible to predict for how long such alternate strategies
may be utilized. The Fund also may invest in foreign securities, repurchase
agreements, and may engage in strategic transactions.
Quality. Large Company Growth Fund invests at least 65% of its total assets in
the equity securities of large U.S. growth companies, i.e., those with total
market capitalization of $1 billion or more. The Fund looks for companies with
above-average financial quality. When assessing financial quality, the Adviser
weighs four elements of business risk. These factors are the Adviser's
assessment of the strength of a company's balance sheet, the accounting
practices a company follows, the volatility of a company's earnings over time
and the vulnerability of earnings to changes in external factors, such as the
general economy, the competitive environment, governmental action and
technological change.
Investment Policies and Techniques Common to each Fund
Master/feeder structure. The Board of Trustees for each Fund 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.
Foreign Securities. While the Funds generally emphasize investments in companies
domiciled in the U.S., they 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 Funds. However, 21st Century Growth 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.
Similarly, volume and liquidity in most foreign bond markets are less than the
volume and liquidity in the U.S., and at times volatility of price can be
greater than in the U.S. Further, foreign markets have different clearance and
settlement procedures and in certain markets there have been times when
settlements have
5
<PAGE>
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 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.
Common stocks. Under normal circumstances, each 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, a
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 a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Foreign Currencies. 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
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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.
Interfund Borrowing and Lending Program. Each Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Adviser. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent a Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging), except that the Fund may engage in reverse repurchase
agreements and dollar rolls for any purpose.
Investment Company Securities. Each Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. Each Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, a Fund may invest in a variety of investment companies which
seek to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their net asset values).
Index-based investments may not replicate exactly the performance of their
specified index because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
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Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Convertible Securities. Each Fund may invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stocks. Investments in convertible securities may
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 a Fund may invest include fixed-income
or zero coupon debt securities which 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 are generally 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
nonconvertible 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
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convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
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.
Debt Securities. When the Adviser believes that it is appropriate to do so in
order to achieve each Fund's objective of long-term capital appreciation, each
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.
Each 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.
Repurchase Agreements. Each Fund may enter into repurchase agreements with
member banks of the Federal Reserve System, any foreign bank or 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.
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.
Illiquid Securities. Each 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
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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. Each 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).
Borrowing. As a matter of fundamental policy, each 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 a Fund's
volatility and the risk of loss in a declining market. Borrowing by a Fund will
involve special risk considerations. Although the principal of each 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.
Warrants. Each Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by 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. Each 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. Such transactions may increase fluctuations in the market value of
a Fund's assets and may be viewed as a form of leverage.
Dollar Roll Transactions. "Dollar roll" transactions, consist of the sale by a
Fund to a bank or broker/dealers (the "counterparty") of GNMA certificates or
other mortgage-backed securities together with a commitment to purchase from the
counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The Fund
receives a
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fee from the counterparty as consideration for entering into the commitment to
purchase. Dollar rolls may be renewed over a period of several months with a
different purchase and repurchase price fixed and a cash settlement made at each
renewal without physical delivery of securities. Moreover, the transaction may
be preceded by a firm commitment agreement pursuant to which the Fund agrees to
buy a security on a future date.
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in each Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, each Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limitations imposed by the 1940 Act) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for each Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect each 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 each Fund's portfolio, or to establish a position in the
derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of each 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 each Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. Each Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of each Fund, and
each Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of each 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 each 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 each Fund can realize on its
investments or cause each Fund to hold a security it might otherwise sell. The
use of currency transactions can result in each 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
each Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of each 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,
each 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
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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, each 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 each 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. Each Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect each 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. Each 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.
Each 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. Each
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting each Fund to require the Counterparty
to sell the option back to each Fund at a formula price within seven days. Each
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 each Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, each Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction.
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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.
Each 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 each Fund, and
portfolio securities "covering" the amount of each 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 each Fund's limitation on
investing no more than 15% of its net assets in illiquid securities.
If each 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 each Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments 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. . Each Fund will not purchase call
options unless the aggregate premiums paid on all options held by each Fund at
any time do not exceed 20% of its total assets. All calls sold by each Fund must
be "covered" (i.e., each 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 each Fund will receive the
option premium to help protect it against loss, a call sold by each Fund exposes
each 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 each Fund to hold a security or instrument which it
might otherwise have sold.
Each Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. Each Fund will not purchase put options unless the aggregate
premiums paid on all options held by each Fund at any time do not exceed 20% of
its total assets. Each Fund will not sell put options if, as a result, more than
50% of each 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 each
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
General Characteristics of Futures. Each Fund may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by each Fund, as seller, to deliver
to the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
Each Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires each 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 each Fund. If each Fund exercises an option on
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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.
Each 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 each 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. Each 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. Each Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of 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. Each 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.
Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of each
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.
Each Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
Each 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 each Fund has or in which each Fund
expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, each Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which each Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a
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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
each 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 each 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"), each 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 each 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 each Fund is engaging in proxy hedging. If each Fund enters
into a currency hedging transaction, each Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to each 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. Each 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 each 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
each Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. Each Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities each Fund anticipates purchasing at a later
date. Each Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream each Fund may be
obligated to pay. Interest rate swaps involve the exchange by each 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.
Each 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 each Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as each Fund will
segregate assets (or enter into offsetting positions) to cover its obligations
under swaps, the Adviser and each Fund believe such obligations do not
constitute
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senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. Each 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, each 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. Each 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. Each 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 each 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 each 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 each 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 assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by each Fund will require each 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 each Fund on an index will require each 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 each 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 assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid 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 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
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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.
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 each 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 a Fund are
present or represented by proxy, or (2) more than 50% of the outstanding voting
securities of a 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, a Fund.
Each Fund has elected to be classified as a diversified series of an
open-end investment company. In addition, as a matter of fundamental policy,
each Fund will not:
(1) 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;
(2) issue senior securities, except as permitted under the 1940 Act, 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
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(7) make loans except as permitted under the 1940 Act, as amended, and
as interpreted or modified by regulatory authority having
jurisdiction, from time to time.
Nonfundamental policies of a Fund may be changed by the Trustees of the
applicable Trust and without shareholder approval. As a matter of nonfundamental
policy, each 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); or
(7) lend portfolio securities in an amount greater than 5% of its total
assets.
Other Investment Policies. The Trustees of each Trust have voluntarily adopted
policies and restrictions which are observed in the conduct of the Funds'
affairs. These represent intentions of the Trustees based upon current
circumstances. They differ from fundamental investment policies in that they may
be changed or amended by action of the Trustees without prior notice to or
approval of shareholders.
PURCHASES
Additional Information About Opening an Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Class S
and $1,000 for Class AARP through Scudder Investor Services, Inc. by letter,
fax, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have certified a tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. Investors interested in investing in
Class S
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must call 1-800-SCUDDER to get an account number. During the call the investor
will be asked to indicate the Fund name, class name, amount to be wired ($2,500
minimum for Class S and $1,000 for Class AARP), name of bank or trust company
from which the wire will be sent, the exact registration of the new account, the
tax identification number or Social Security number, address and telephone
number. The investor must then call the bank to arrange a wire transfer to The
Scudder Funds, Boston, MA 02101, ABA Number 011000028, DDA Account 9903-5552.
The investor must give the Scudder fund name, class name, account name and the
new account number. Finally, the investor must send a completed and signed
application to the Fund promptly. Investors interested in investing in Class
AARP should call 800-253-2277 for further instructions.
The minimum initial purchase amount is less than $2,500 for Class S under
certain plan accounts and is $1,000 for Class AARP.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Contact the Distributor at 1-800-SCUDDER for additional
information. A confirmation of the purchase will be mailed out promptly
following receipt of a request to buy. Federal regulations require that payment
be received within three business days. If payment is not received within that
time, the order is subject to cancellation. In the event of such cancellation or
cancellation at the purchaser's request, the purchaser will be responsible for
any loss incurred by the Fund or the principal underwriter by reason of such
cancellation. If the purchaser is a shareholder, each Trust shall have the
authority, as agent of the shareholder, to redeem shares in the account in order
to reimburse the Fund or the principal underwriter for the loss incurred. Net
losses on such transactions which are not recovered from the purchaser will be
absorbed by the principal underwriter. Any net profit on the liquidation of
unpaid shares will accrue to the Fund.
Minimum Balances
Shareholders should maintain a share balance worth at least $2,500 for
Class S and $1,000 for Class AARP. For fiduciary accounts such as IRAs, and
custodial accounts such as Uniform Gift to Minor Act, and Uniform Trust to Minor
Act accounts, the minimum balance is $1,000 for Class S and $500 for Class AARP.
These amounts may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for Class AARP and
fiduciary/custodial accounts) is established. Scudder group retirement plans and
certain other accounts have similar or lower minimum share balance requirements.
The Funds reserve the right, following 60 days' written notice to
applicable shareholders, to:
o for Class S 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 for Class S shareholders; 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 By Quickbuy
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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 a 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, a Fund may hold the
redemption proceeds for a period of up to seven business days. If you purchase
shares and there are insufficient funds in your bank account the purchase will
be canceled and you will be subject to any losses or fees incurred in the
transaction. QuickBuy transactions are not available for most retirement plan
accounts. However, QuickBuy transactions are available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing an QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 15 days for this service to be available.
Each 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 Funds do
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Funds will not be liable for acting upon
instructions communicated by telephone that they reasonably believe to be
genuine.
Investors interested in making subsequent investments in Class AARP should
call 800-253-2277 or 1-800-SCUDDER for Class S for further instruction.
Checks
A certified check is not necessary, but checks are only accepted subject
to collection at full face value in U.S. funds and must be drawn on, or payable
through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, each Trust reserves the right to cancel the purchase immediately
and the purchaser may be responsible for any loss incurred by each Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, each 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 a Fund.
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Share Price
Purchases will be filled without sales charge at the net asset value per
share next computed after receipt of the application in good order. Net asset
value normally will be computed for each class as of the close of regular
trading on each day during which the Exchange is open for trading. Orders
received after the close of regular trading on the Exchange will be executed at
the next business day's net asset value. If the order has been placed by a
member of the NASD, other than the Distributor, it is the responsibility of that
member broker, rather than a Fund, to forward the purchase order to Scudder
Service Corporation (the "Transfer Agent") in Boston by the close of regular
trading on the Exchange.
There is no sales charge in connection with the purchase of shares of any
class of the Funds.
Share Certificates
Due to the desire of the Trustee's management to afford ease of
redemption, certificates will not be issued to indicate ownership in a Fund.
Other Information
Each Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for its shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on a Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a Fund and the
broker, ordinarily orders will be priced at a Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of a Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also a 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 a Fund at any time for any reason.
The "Tax Identification Number" section of the Application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations a certification of exempt status), will be
returned to the investor. The Funds reserve the right, following 30 days'
notice, to redeem all shares in accounts without a correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
redemption by providing the applicable Fund with a tax identification number
during the 30-day notice period.
Each 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
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder Fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500 for Class S and
$1,000 for Class AARP. When an exchange represents an additional investment into
an existing account, the account receiving the exchange proceeds must have
identical registration, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more for Class S.
If
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the account receiving the exchange proceeds is to be different in any respect,
the exchange request must be in writing and must contain an original signature
guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's 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. Each 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 from the Scudder 21st Century Growth 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 Funds employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. A Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Funds
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder Funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated. The exchange
privilege may not be available for certain Scudder Funds or classes of Scudder
Funds. For more information, please call 1-800-SCUDDER (for Class S) or
1-800-253-2277 (Class AARP).
Scudder retirement plans may have different exchange requirements. Please
refer to appropriate plan literature.
Special Redemption and Exchange Information - Scudder 21st Century Growth Fund
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
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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 by telephone 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 the telephone redemption
privilege must complete the appropriate section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA, Scudder
pension and profit-sharing, Scudder 401(k) and Scudder 403(b)
Planholders) who wish to establish telephone redemption to a
predesignated bank account or who want to change the bank account
previously designated to receive redemption proceeds should either
return a Telephone Redemption Option Form (available upon request),
or send a letter identifying the account and specifying the exact
information to be changed. The letter must be signed exactly as the
shareholder's name(s) appears on the account. An original signature
and an original signature guarantee are required for each person in
whose name the account is registered.
If a request for a redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Funds employs procedure, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption requests by telephone (technically a repurchase agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption By Quicksell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of a Fund by telephone. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank
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checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, normally 4 p.m.
Eastern time, Shares will be redeemed at the net asset value per share
calculated at the close of trading on the day of your call. QuickSell requests
received after the close of regular trading on the Exchange will begin their
processing the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account 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 for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption By Mail Or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares registered in other than
individual names contact the Transfer Agent prior to any redemptions to ensure
that all necessary documents accompany the request. When shares are held in the
name of a corporation, trust, fiduciary agent, attorney or partnership, the
Transfer Agent requires, in addition to the stock power, certified evidence of
authority to sign. These procedures are for the protection of shareholders and
should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays of more
than seven (7) days of payment for shares tendered for repurchase or redemption
may result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for regular
accounts. For more information call 1-800-SCUDDER.
Redemption-in-Kind
The Funds reserve 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 each Fund
and valued as they are for purposes of computing each 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. Each Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of
which the Funds are 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 that Fund at the beginning of the
period.
Other Information
If a shareholder redeems all shares in the account after the record date
of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. A wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including redemptions undertaken to effect an exchange for
shares of another Scudder fund, may
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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 may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefore may be
suspended at times during which (a) the Exchange is closed, other than customary
weekend and holiday closings, (b) trading on the Exchange is restricted for any
reason, (c) an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
the SEC has by order permitted such a suspension for the protection of each
Trust's shareholders, provided that applicable rules and regulations of the SEC
(or any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b) or (c) exist.
FEATURES AND SERVICES OFFERED BY THE FUND
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of mutual
fund fee structures, and of how Scudder distinguishes its Scudder Family of
Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for the
sale and distribution of fund shares. There are three types of loads: front-end
loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of the
amount invested. A back-end load is a contingent deferred sales charge, which
can be as high as 8.50% of either the amount invested or redeemed. The maximum
front-end or back-end load varies, and depends upon whether or not 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 and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish Scudder funds and classes from other no-load funds. Scudder
pioneered the no-load concept when it created the nation's first no-load fund in
1928, and later developed the nation's first family of no-load mutual funds.
Internet Access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for Class AARP of shares is aarp.scudder.com. These sites offer
guidance on global investing and developing strategies to help meet financial
goals and provide access to the Scudder investor relations department via
e-mail. The sites also enable users to access or view fund prospectuses and
profiles with links between summary information in Profiles and details in the
Prospectus. Users can fill out new account forms on-line, order free software,
and request literature on funds.
Account Access -- The Adviser is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
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The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web sites. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions for
an account, with trade dates, type and amount of transaction, share price and
number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional Shares of a Fund. A change of instructions for the method of
payment may be given to the Transfer Agent in writing at least five days prior
to a dividend record date. Shareholders may change their dividend option by
calling 1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP or by
sending written instructions to the Transfer Agent. Please include your account
number with your written request.
Reinvestment is usually made at the closing net asset value determined on
the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the same class of the same Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's Direct
Distributions Program. Shareholders who elect to participate in the Direct
Distributions Program, and whose predesignated checking account of record is
with a member bank of Automated Clearing House Network (ACH) can have income and
capital gain distributions automatically deposited to their personal bank
account usually within three business days after a Fund pays its distribution. A
Direct Distributions request form can be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277 for Class AARP. Confirmation Statements will be
mailed to shareholders as notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal Plan
must reinvest any dividends or capital gains. For most retirement plan accounts,
the reinvestment of dividends and capital gains is also required.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available to
shareholders. The summaries may be obtained by calling 1-800-SCUDDER for Class S
and 1-800-253-2277 for Class AARP.
THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds and
the nation's oldest family of no-load mutual funds; a list of Scudder's family
of funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
----------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
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TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
TAX FREE
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
Scudder Small Company Value Fund
Scudder Small Company Stock Fund
Growth
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Scudder Capital Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund***
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
----------
** Only Class S and Class AARP Shares are part of the Scudder Family of
Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
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Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Fund
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 for Class S shares or 1-800-253-2277 for Class
AARP shares.
Certain Scudder funds or classes thereof may not be available for purchase
or exchange. For more information, please call 1-800-SCUDDER.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of a Fund may also be a permitted investment under profit sharing
and pension plans and IRAs other than those offered by a 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
Shares of a 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.
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Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and
Self-Employed Individuals
Shares of a 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 a 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, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
Scudder Roth IRA: Individual Retirement Account
Shares of a Fund may be purchased as the underlying investment for a Roth
Individual Retirement Account which meets the requirements of Section 408A of
the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000 per
year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
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Scudder 403(b) Plan
Shares of a 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). Any
such requests must be received by a 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 a 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-SCUDDER for Class S and 1-800-253-2277 for Class AARP.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where satisfactory
arrangements have been made with Scudder Investor Services, Inc. for forwarding
regular investments through a single source. The minimum annual investment is
$240 per investor which may be made in monthly, quarterly, semiannual or annual
payments. The minimum monthly deposit per investor is $20. Except for trustees
or custodian fees for certain retirement plans, at present there is no separate
charge for maintaining group or salary deduction plans; however, each Trust and
its agents reserve the right to establish a maintenance charge in the future
depending on the services required by the investor.
Each Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments in all classes
through automatic deductions from checking accounts by completing the
appropriate form and providing the necessary documentation to establish this
service. The minimum investment is $50 for Class R and Class S shares.
Shareholders may arrange to make periodic investments in Class AARP of
each Fund through automatic deductions from checking accounts. The minimum
pre-authorized investment amount is $50. New shareholders who open a Gift to
Minors Account pursuant to the Uniform Gift to Minors Act (UGMA) and the Uniform
Transfer to Minors Act (UTMA) and who sign up for the Automatic Investment Plan
will be able to open a Fund account for less than $500 if they agree to increase
their investment to $500 within a 10 month period. Investors may also invest in
any Class AARP for $500 a month if they establish a plan with a minimum
automatic investment of at least $100 per month. This feature is only available
to Gifts to Minors Account investors. The Automatic Investment Plan may be
discontinued
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at any time without prior notice to a shareholder if any debit from their bank
is not paid, or by written notice to the shareholder at least thirty days prior
to the next scheduled payment to the Automatic Investment Plan.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
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.
FEATURES AND SERVICES OFFERED BY THE AARP INVESTMENT PROGRAM
o Experienced Professional Management: The Adviser provides investment
advice to the Funds.
o AARP's Commitment: the Program was designed with AARP's active
participation to provide strong, ongoing representation of the members'
interests and to help ensure a high level of service.
o Diversification: you may benefit from investing in one or more large
portfolios of carefully selected securities.
o No Sales Commissions: the AARP Funds are no-load funds, so you pay no
sales charges to purchase, transfer or redeem shares, nor do you pay Rule
12b-1 (i.e., distribution) fees.
o Automatic Dividend Reinvestment: you may receive dividends by check or
arrange to have them automatically reinvested.
o Readily Available Account, Price, Yield and Total Return Information: You
may dial our automated Easy-Access Line, toll-free, 1-800-631-4636 for
recorded account information, share price, yield and total return
information, 7 days a week.
o Convenience and Efficiency: simplified investment procedures save you time
and help your money work harder for you.
o Direct Deposit Program: you may have your Social Security or other checks
received from the U.S. Government or any other regular income checks, such
as pension, dividend, interest, and even payroll checks automatically
deposited directly to your account.
o Direct Payment of Regular Fixed Bills: with a minimum qualifying balance
of $10,000 in one Fund, you may arrange to have your regular bills that
are of fixed amounts, such as rent, mortgage, or other obligations of $50
or more sent directly from your account at the end of the month.
o Personal Service and Information: professionally trained service
representatives are available to help you whenever you have questions
through our toll-free number, 1-800-253-2277.
o Consolidated Statements: in addition to receiving a confirmation statement
of each transaction in your account, you receive, without extra charge, a
convenient monthly consolidated statement. (Retirement Plan statements are
mailed quarterly.) This statement contains the market value of all your
holdings in the Funds and a complete listing of your transactions for the
statement period.
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o Shareholder Handbook: the Shareholder Handbook was created to help answer
many of the questions you may have about investing in the Program.
o IRA Shareholder Handbook: the IRA Shareholder Handbook was created to help
answer many of the questions you may have about investing in the no-fee
AARP IRA.
o A Glossary of Investment Terms: the Glossary of Investment Terms defines
commonly used financial and investment terms.
o Newsletter: every month, shareholders receive our newsletter, Financial
Focus (retirement plan shareholders receive a special edition of Financial
Focus on a quarterly basis) which is designed to help keep you up-to-date
on economic and investment developments, and any new financial services
and features of the Program.
Distributions Direct
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through the AARP Funds'
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-253-2277. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Reports to Shareholders
The AARP Funds send to shareholders semiannually financial statements,
which are examined annually by independent accountants, including a list of
investments held and statements of assets and liabilities, operations, changes
in net assets, and financial highlights.
Investors receive a brochure entitled Your Guide to Simplified Investment
Decisions when they order an investment kit for the Funds which also contains a
prospectus. The Shareholder's Handbook is sent to all new shareholders to help
answer any questions they may have about investing. Similarly, an IRA Handbook
is sent to all new IRA shareholders. Every month, shareholders will be sent the
newsletter, Financial Focus. Retirement plan shareholders will be sent a special
edition of Financial Focus on a quarterly basis. The newsletters are designed to
help you keep up to date on economic and investment developments, and any new
financial services and features of the Program.
Direct Payment of Regular Fixed Bills
Shareholders who own or purchase $10,000 or more of shares of an AARP Fund
may arrange to have regular fixed bills such as rent, mortgage or other payments
of more than $50 made directly from their account. The arrangements are
virtually the same as for an Automatic Withdrawal Plan (see above). For more
information concerning this plan, write to the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free,
1-800-253-2277.
Direct Deposit Program
Investors can have Social Security or other checks from the U.S.
Government or any other regular income checks such as pension, dividends, and
even payroll checks automatically deposited directly to their accounts.
Investors may allocate a minimum of 25% of their income checks into any AARP
Fund. Information may be obtained by contacting the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll
free, 1-800-253-2277.
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DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each 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. Each 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, a
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 a 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. In certain circumstances, the Fund may determine that it
is in the interest of shareholders to distribute less than such an amount.
Distributions of investment company taxable income and net realized capital
gains are taxable (See "TAXES"), whether made in shares or cash.
Earnings and profits distributed to shareholders on redemptions of Fund
shares may be utilized by the Fund, to the extent permissible, as part of a
Fund's dividend paid deduction on its federal tax return.
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.
Any dividends or capital gains distributions declared in October, November
or December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Additional distributions
for each Fund may be made if necessary. Both types of distributions will be made
in shares of a 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.
21st Century Growth Fund intends to distribute it'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.
Large Company Growth Fund intends to distribute investment company taxable
income in December each year. The Fund intends to declare in December any net
realized capital gains resulting from its investment activity. The Fund intends
to distribute the December dividends and capital gains either in December or in
the following January.
PERFORMANCE INFORMATION
From time to time, quotations of a 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):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
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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 July 31, 2000*
One Year Five Years Life of Fund
Scudder 21st Century Fund(1) 51.52% N/A 24.33%
Scudder Large Company Growth Fund(2) 29.15% 25.12% 19.18%
(1) The Fund commenced operations on September 9, 1996. The average
annual total returns for the one year, five years and life of the
Fund periods would have been lower had the Adviser not maintained
the Fund's expenses.
(2) The Fund commenced operations on May 15, 1991. The average annual
total return for the life of the Fund would have been lower had the
Adviser not maintained the Fund's expenses.
* Performance information provided is for the Funds' Scudder shares
(redesignated as Class S shares on May 1, 2000 for Scudder 21st
Century Growth Fund and October 2, 2000 for Scudder Large Company
Growth Fund). Performance for Class AARP shares is not provided
because this class does not have a full fiscal year of performance.
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 July 31, 2000*
One Year Five Years Life of Fund
Scudder 21st Century Fund(1) 51.52% N/A 133.47%
Scudder Large Company Growth Fund(2) 29.15% 206.63% 404.04%
(1) The Fund commenced operations on September 9, 1996. The cumulative
total returns for the one year, five years and life of the Fund
periods would have been lower had the Adviser not maintained the
Fund's expenses.
(2) The Fund commenced operations on May 15, 1991. The cumulative total
returns for the life of the Fund would have been lower had the
Adviser not maintained the Fund's expenses.
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* Performance information provided is for the Funds' Scudder shares
(redesignated Class S shares on May 1, 2000 for Scudder 21st Century
Growth Fund and October 2, 2000 for Scudder Large Company Growth
Fund).. Performance for Class AARP shares is not provided because
this class does not have a full fiscal year of performance.
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 a 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 Funds' prospectus which may be higher or lower than
those included in the bar chart.
Comparison of Fund Performance
In connection with communicating its performance to current or prospective
shareholders, each Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
From time to time, in advertising and marketing literature, 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.
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.
Each Fund may be advertised as an investment choice in Scudder's college
planning program.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond 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
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purchase higher quality securities relative to bond funds that purchase lower
quality securities. Growth and income equity funds are generally considered to
be less risky and offer the potential for less return than growth funds. In
addition, international equity funds usually are considered more risky than
domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical information
made by independent sources may also be used in advertisements concerning the
Funds, including reprints of, or selections from, editorials or articles about
the Fund.
FUND ORGANIZATION
The Trustees for each Trust 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 series of each Fund has equal rights with
each other share of that series as to voting, dividends and liquidations. All
shares issued and outstanding will be fully paid and nonassessable by each
Trust, and redeemable as described in this Statement of Additional Information
and in each series' prospectus.
The assets of each Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to 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 each 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
each 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 each 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 each 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 of each Fund.
Each Trust's Declaration of Trust provides that obligations of the Funds
are not binding upon the Trustees individually but only upon the property of the
Funds, that the Trustees and officers will not be liable for errors of judgment
or mistakes of fact or law and that the Funds 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 Funds. Nothing in the Declaration of Trust, however,
protects or indemnifies a Trustee or officer against any liability to which that
person would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
that person's office.
21st Century Growth Fund
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, consisting
of two classes and each have equal rights as to voting, dividends and
liquidation. The Trust's shares are currently divided into five series, Scudder
Development Fund, Scudder Health Care Fund, Scudder Small Company Value Fund,
Scudder Technology Fund and Scudder 21st Century Growth Fund.
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
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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.
Large Company Growth Fund
The Fund is a series of Investment Trust, a Massachusetts business trust
established under a Declaration of Trust dated September 20, 1984, as amended.
The name of the Trust was changed, effective May 15, 1991, from Scudder Growth
and Income Fund, and on June 10, 1998 from Scudder Investment Trust. The Fund
changed its name from Scudder Quality Growth Fund on March 1, 1997.
The Trust's authorized capital consists of an unlimited number of shares
of beneficial interest, par value $0.01 per share. The Trust's shares are
currently divided into five series, Scudder Large Company Growth Fund, Scudder
Growth and Income Fund, Scudder S&P 500 Index Fund, Classic Growth Fund, and
Scudder Dividend & Growth Fund. The Fund's shares are currently divided into
three classes: Class AARP, Class S and R shares.
Each Fund's activities are supervised by the corresponding Trust's Board
of Trustees. Each Trust adopted a plan on May 3, 1999 pursuant to Rule 18f-3
under the 1940 Act ((the "Plan") to permit each Trust to establish a multiple
class distribution system for the Funds.
Under the Plan, shares of each class represent an equal pro rata interest
in the Fund and, generally, shall have identical voting, dividend, liquidation,
and other rights, preferences, powers, restrictions, limitations, qualifications
and terms and conditions, except that: (1) each class shall have a different
designation; (2) each class of shares shall bear its own "class expenses;" (3)
Class R Shares may be subject to a distribution services fee and an
administrative services fee, which shall be paid pursuant to a Rule 12b-1 and
Administrative Services Plan adopted for that class, (4) each class shall have
exclusive voting rights on any matter submitted to shareholders that relates to
its administrative services, shareholder services or distribution arrangements;
(5) each class shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class; (6) each class may have separate and distinct exchange
privileges; (7) each class may have different conversion features; and (8) each
class may have separate account size requirements. Expenses currently designated
as "Class Expenses" by the Trust's Board of Trustees under the Plan include, for
example, transfer agency fees attributable to a specific class, and certain
securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or
fraction thereof in respect of a fractional share) on matters that such shares
(or class of shares) shall be entitled to vote. Shareholders of the Fund shall
vote together on any matter, except to the extent otherwise required by the 1940
Act, or when the Board of Trustees has determined that the matter affects only
the interest of shareholders of one or more classes of the Fund, in which case
only the shareholders of such class or classes of the Fund shall be entitled to
vote thereon. Any matter shall be deemed to have been effectively acted upon
with respect to the Fund if acted upon as provided in Rule 18f-2 under the 1940
Act, or any successor rule, and in the Trust's Declaration of Trust. As used in
the Prospectus and in this Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with general matters affecting the Trust and all additional
portfolios (e.g., election of directors), means the vote of the lesser of (i)
67% of the Trust's shares represented at a meeting if the holders of more than
50% of the outstanding shares are present in person or by proxy, or (ii) more
than 50% of the Fund's outstanding shares. The term "majority", when referring
to the approvals to be obtained from shareholders in connection with matters
affecting a single Fund or any other single portfolio (e.g., annual approval of
investment management contracts), means the vote of the lesser of (i) 67% of the
shares of the portfolio represented at a meeting if the holders of more than 50%
of the outstanding shares of the portfolio are present in person or by proxy, or
(ii) more than 50% of the outstanding shares of the portfolio. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
INVESTMENT ADVISER
Scudder Kemper Investments, Inc., an investment counsel firm, acts as
investment adviser to each 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
38
<PAGE>
in securities of issuers in several foreign countries. The predecessor firm
reorganized from a partnership to a corporation on June 28, 1985. On December
31, 1997, Zurich Insurance Company ("Zurich") acquired a majority interest in
the Adviser, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became
part of the Adviser. The Adviser's name changed to Scudder Kemper Investments,
Inc. On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Adviser's income is professional fees received
from providing continuous investment advice. Today, it provides investment
counsel for many individuals and institutions, including insurance companies,
colleges, industrial corporations, and financial and banking organizations, as
well as providing investment advice to over 280 open and closed-end mutual
funds.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which a Fund may invest, the conclusions and
investment decisions of the Adviser with respect to a Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for a Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a Fund. Purchase and sale orders for a Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to a Fund.
In certain cases the investments for a Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser
that have similar names, objectives and investment styles as the Fund. You
should be aware that each Fund is likely to differ from these other mutual funds
in size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of each Fund can be expected to vary from those of the other mutual
funds.
Under each investment management agreement (each an "Agreement"), the
Adviser regularly provides each Fund with continuing investment management for a
Fund's portfolio consistent with a Fund's investment objective, policies and
restrictions and determines what securities shall be purchased, held or sold and
what portion of a Fund's assets shall be held uninvested, subject to each 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 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.
39
<PAGE>
Under each Agreement, the Adviser also renders significant administrative
services (not otherwise provided by third parties) necessary for each 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 each Fund (such as a Fund's transfer agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of each
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 each Fund under applicable
federal and state securities laws; maintaining a Fund's books and records to the
extent not otherwise maintained by a third party; assisting in establishing
accounting policies of each Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring each Fund's operating budget;
processing the payment of each Fund's bills; assisting a Fund in, and otherwise
arranging for, the payment of distributions and dividends and otherwise
assisting a Fund in the conduct of its business, subject to the direction and
control of the Trustees.
[To Be Updated]
21st Century Growth Fund. The current investment management agreement (the
"Agreement") was approved by the Trustees on February 7, 2000, and will become
effective October 2, 2000. . The Agreement will continue in effect 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.
Large Company Growth Fund. The current investment management agreement
(the "Agreement"), which becomes effective on October 2, 2000, will be approved
by the Trustees on October 10, 2000. . The Agreement will continue in effect
until _____________ 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.
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 21st Century Growth 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 contractually agreed until May
1, 2000 to maintain the total annualized expenses of the Fund at no more than
1.75% of the average daily net assets of the Fund. Effective May 1, 2000, the
Adviser voluntary agreed to maintain the total annualized expenses of the Fund
at no more than 1.20% through October 1, 2000. For the fiscal year ended July
31, 2000, the Adviser did not impose a portion of its management fee amounting
to $6,495, and the amount imposed amounted to $2,245,091. In addition, for the
fiscal year ended July 31, 2000, the Adviser agreed not to impose certain
class-specific expenses in the amount of $37,351. For the eleven months ended
July 31, 1999, the Adviser did not impose a portion of its management fee
amounting to $195,129, and the amount imposed amounted to $221,549For 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. For the period September 9, 1996 (commencement of
operations) to August 31, 1997, the Adviser waived its management fee amounting
to $129,231.
40
<PAGE>
The Large Company Growth Fund is charged by the Adviser a fee equal to
approximately 0.70 of 1% of the Fund's average daily net assets. The fee is
payable monthly, provided the Fund will make such interim payments as may be
requested by Scudder not to exceed 75% of the amount of the fee then accrued on
the books of the Fund and unpaid. The Agreement provides that if the Fund's
expenses, exclusive of taxes, interest, and extraordinary expenses, exceed
specified limits, such excess, up to the amount of the management fee, will be
paid by the Adviser. The Adviser retains the ability to be repaid by the Fund if
expenses fall below the specified limit prior to the end of the fiscal year.
These expense limitation arrangements can decrease the Fund's expenses and
improve its performance. During the fiscal years ended October 31, and 1998, the
Adviser imposed a portion of its management fee amounting to $1,790,426 and
$2,478,112 respectively. For the 9 months ended July 31, 1999, the Adviser
imposed a portion of its management fee amounting to $3,855,969, of which
$488,848 was unpaid at July 31, 1999. For the fiscal year ended July 31, 2000,
the fee pursuant to the Agreement amounted to $$8,344,919.
Under each Agreement a 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 a 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. Each Fund may
arrange to have third parties assume all or part of the expenses of sale,
underwriting and distribution of shares of a Fund. Each 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.
Each 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, each Trust, with respect to each 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 each 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 a Fund's expense.
Each Agreement provides that the Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by a Fund in connection
with matters to which each 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 such 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 a
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of a Fund.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in
return for services relating to investments by AARP members in AARP Class shares
of each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of the AARP Classes of all funds managed by Scudder Kemper.
The fee rates,
41
<PAGE>
which decrease as the aggregate net assets of the AARP Classes become larger,
are as follows: 0.07% for the first $6 billion in net assets, 0.06% for the next
$10 billion and 0.05% thereafter.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Code of Ethics
The Funds, the Adviser and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Funds and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Funds, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Funds. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
TRUSTEES AND OFFICERS FOR BOTH TRUSTS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
Linda C. Coughlin (48)+* Trustee and President Managing Director of Scudder Kemper Director and Senior
Investments, Inc. Vice President
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board, Inc.
Chapel Hill, NC
Keith R. Fox (45) Trustee Private Equity Investor, President, --
10 East 53rd Street Exeter Capital Management Corporation
New York, NY 10022
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation; Department of State -
Foundation Undersecretary of State for Economic,
650 Fifth Avenue Business and Agricultural Affairs
New York, NY 10128 (March 1993 to January 1997)
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski Law
Firm (1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place 23rd Floor Capital
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
Thomas V. Bruns (43)# Vice President Managing Director of Scudder Kemper --
Investments, Inc.
James M. Eysenbach (38)@ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
William F. Glavin (41)# Vice President Managing Director of Scudder Kemper Vice President
Investments, Inc.
James E. Masur (40)+ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Ann M. McCreary (43) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Kathryn L. Quirk (47)+ Vice President and Managing Director of Scudder Kemper Director, Senior Vice
Assistant Secretary Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
Howard S. Schneider (43)# Vice President Managing Director of Scudder Kemper --
Investments, Inc.
John R. Hebble (42)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Scudder
Kemper Investments, Inc.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
John Millette (37)+ Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
</TABLE>
ADDITIONAL OFFICERS FOR SECURITIES TRUST
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Peter Chin (58)++ Vice President Senior Vice President of --
Scudder Kemper Investments, Inc.
J. Brooks Dougherty (41)++ Vice President Managing Director of --
Scudder Kemper Investments, Inc.
James E. Fenger (41)# Vice President Managing Director of --
Scudder Kemper Investments, Inc.
Sewall Hodges (45)++ Vice President Senior Vice President of --
Scudder Kemper Investments, Inc.
</TABLE>
ADDITIONAL OFFICERS FOR INVESTMENT TRUST
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Bruce F. Beatty (__)++ Vice President Managing Director of --
Scudder Kemper Investments, Inc.
William F. Gadsden (45)++ Vice President Managing Director of --
Scudder Kemper Investments, Inc.
Valerie F. Malter (42)++ Vice President Managing Director of --
Scudder Kemper Investments, Inc.
</TABLE>
44
<PAGE>
<TABLE>
<S> <C> <C> <C>
Kathleen T. Millard (39)++ Vice President Managing Director of --
Scudder Kemper Investments, Inc.
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Funds and
their counsel to be persons who are "interested persons" of the
Adviser or of the Trust, within the meaning of the Investment
Company Act of 1940, as amended.
** Unless otherwise stated, all of the Trustees and officers have
been associated with their respective companies for more than five
years, but not necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
The Trustees and Officers of the Trusts also serve in similar capacities
with respect to other Scudder Funds.
To the best of the Trust's knowledge, as of August 31, 2000, all Trustees
and Officers of the 21ST Century Growth Fund as a group owned beneficially (as
that term is defined under Section 13(d) of the Securities and Exchange Act of
1934) less than 1% of the outstanding shares of any class of the Fund.
To the best of the Trust's knowledge, as of August 31, 2000, all Trustees
and Officers of the Large Company Growth Fund as a group owned beneficially (as
that term is defined under Section 13(d) of the Securities and Exchange Act of
1934) less than 1% of the outstanding shares of any class of the Fund.
To the best of the Trust's knowledge, as of August 31, 2000, no person
owned of record more than 5% or more of the outstanding shares of any class of
any Fund, except as stated below. They may be deemed to be the beneficial owner
of certain of these shares.
45
<PAGE>
<TABLE>
Number of Percentage
Name and Address Fund Class Shares Owned
<S> <C> <C> <C> <C>
Scudder Trust Company Scudder 21st Century Growth Fund S 1,447,945 10.97%
Trustee for Farmers Group, Inc.
Employee Profit Sharing Services
4680 Wilshire Blvd.
Los Angeles, CA 90010
Merrill Lynch, Pierce, Fenner and Scudder Large Company Fund S 2,648,237 7.80%
Smith
4800 Deer Lake Drive East
Jacksonville, FL 32246
</TABLE>
To the best of the Trust's knowledge, as of August 31, 2000, no person
owned beneficially more than 5% of the Large Company Growth Fund's Class R
Shares.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
Each Independent Trustee receives compensation for his or her services,
which includes an annual retainer and an attendance fee for each meeting
attended. The Independent Trustee who serves as lead trustee receives additional
compensation for his or her service. 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.
46
<PAGE>
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 1999 from each Trust and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
Name Scudder Securities Trust* Investment Trust** All Scudder Funds
---- ------------------------- ------------------ -----------------
<S> <C> <C> <C>
Henry P. Becton, Jr.*** $ 0 $31,155 $140,000 (30 funds)
Dawn-Marie Driscoll*** 0 33,218 150,000 (30 funds)
Edgar R. Fiedler+ 945.81 0 73,230 (29 funds)
Keith R. Fox*** 36,375 0 160,325 (23 funds)
Joan E. Spero*** 39,625 0 175,275 (23 funds)
Jean Gleason Stromberg 0 0 40,935 (16 funds)
Jean C. Tempel*** 0 31,025 140,000 (30 funds)
</TABLE>
* Scudder Securities Trust consists of five funds: Scudder Development Fund,
Scudder Health Care Fund, Scudder Technology Fund, Scudder Small Company
Value Fund and Scudder 21st Century Growth Fund.
** Investment Trust consists of five funds:. Scudder Large Company Growth
Fund, Scudder Growth and Income Fund, Scudder S&P 500 Index Fund, Classic
Growth Fund, and Scudder Dividend & Growth Fund
*** Newly elected Trustee. On July 13, 2000, shareholders of each Fund elected
a new Board of Trustees. See the "Trustees and Officers" section for the
newly-constituted Board of Trustees.
+ Mr. Fiedler's total compensation includes the $9,900 accrued, but not
received, through the deferred compensation program.
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
Each of the Trusts 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. Each underwriting agreement, dated May 8, 2000, will remain in
effect until September 30, 2001, 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. Each underwriting agreement was last approved by the
Trustees on July 10, 2000.
Under each 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.
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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 Large Company Growth 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.
Administrative Fee
Each Fund has entered into administrative services agreements with Scudder
Kemper (the "Administration Agreements"), pursuant to which Scudder Kemper will
provide or pay others to provide substantially all of the administrative
services required by the Funds (other than those provided by Scudder Kemper
under its investment management agreements with the Funds, as described above)
in exchange for the payment by each Fund of an administrative services fee (the
"Administrative Fee") of 0.30% of average daily net assets for Scudder Large
Company Growth Fund and 0.45% of average daily net assets for Scudder 21st
Century Growth Fund. One effect of these arrangements is to make each Fund's
future expense ratio more predictable. The details of the proposal (including
expenses that are not covered) are set out below.
Various third-party service providers (the "Service Providers"), some of
which are affiliated with Scudder Kemper, provide certain services to the Funds
pursuant to separate agreements with the Funds. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Funds and maintains their accounting records. Scudder Service Corporation, also
a subsidiary of Scudder Kemper, is the transfer, shareholder servicing and
dividend-paying agent for the shares of the Funds. Scudder Trust Company, an
affiliate of Scudder Kemper, provides subaccounting and recordkeeping services
for shareholders in certain retirement and employee benefit plans. As custodian,
State Street Bank and Trust Company holds the portfolio securities of the Funds,
pursuant to a custodian agreement. PricewaterhouseCoopers LLP audits the
financial statements of the Funds and provides other audit, tax, and related
services. Dechert Price & Rhoads acts as general counsel for each Fund. In
addition to the fees they pay under the investment management agreements with
Scudder Kemper, the Funds pay the fees and expenses associated with these
service arrangements, as well as each Fund's insurance, registration, printing,
postage and other costs.
Scudder Kemper will pay the Service Providers for the provision of their
services to the Funds and will pay other Funds' expenses, including insurance,
registration, printing and postage fees. In return, each Fund will pay Scudder
Kemper an Administrative Fee.
The Administration Agreement has an initial term of three years, subject
to earlier termination by the Funds' Board. The fee payable by the Funds to
Scudder Kemper pursuant to the Administration Agreements is reduced by the
amount of any credit received from the Funds' custodian for cash balances.
Certain expenses of the Funds will not be borne by Scudder Kemper under
the Administration Agreements, such as taxes, brokerage, interest and
extraordinary expenses; and the fees and expenses of the Independent Trustees
(including the fees and expenses of their independent counsel). In addition,
each Fund will continue to pay the fees required by its investment management
agreement with Scudder Kemper.
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TAXES
Each 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 the Fund's
earnings and profits, and would be eligible for the dividends received deduction
in the case of corporate shareholders.
At July 31, 2000, Scudder 21st Century Growth Fund designated
approximately $15,000,000 as capital gains dividends.
Each 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
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shares will have a cost basis for federal income tax purposes in each share so
received equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution for any
taxable year only if (i) neither the individual nor his or her spouse (unless
filing separate returns) is an active participant in an employer's retirement
plan, or (ii) the individual (and his or her spouse, if applicable) has an
adjusted gross income below a certain level ($52,000 for married individuals
filing a joint return, with a phase-out of the deduction for adjusted gross
income between $52,000 and $62,000; $32,000 for a single individual, with a
phase-out for adjusted gross income between $32,000 and $42,000). However, an
individual not permitted to make a deductible contribution to an IRA for any
such taxable year may nonetheless make nondeductible contributions up to $2,000
to an IRA (up to $2,000 per individual for married couples if only one spouse
has earned income) for that year. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable. Also, annual contributions may
be made to a spousal IRA even if the spouse has earnings in a given year if the
spouse elects to be treated as having no earnings (for IRA contribution
purposes) for the year.
Distributions by a 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.
Each 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.
Each 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
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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 or loss. 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.
If a Fund writes a covered call option on portfolio stock, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
Positions of a 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 a 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.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to a Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount imputed income will
comprise a part of the investment company taxable income of the Fund, which must
be distributed to shareholders in order to maintain the qualification of the
Fund as a regulated investment company and to avoid federal income tax at the
Fund's level.
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Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables, or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain 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.
Each 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.
Each 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.
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 each Fund to
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reported commissions paid by others. The Adviser routinely reviews commission
rates, execution and settlement services performed and makes internal and
external comparisons.
Each Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and not all such information is used by the Adviser
in connection with the Fund. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Fund.
The Trustees review, from time to time, whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
[To Be Updated]
21st Century Growth Fund. For the fiscal period from September 9, 1996
(commencement of operations) to August 31, 1997, the fiscal year ended August
31, 1998, the eleven month period ended July 31, 1999, and the fiscal year ended
July 31, 2000, the Fund paid brokerage commissions of $150,026, $32,583, $58,549
and $______, 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.
For the eleven month period ended July 31, 1999, $48,860 (83% 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
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amount of brokerage transactions aggregated $135,702,793, of which $103,124,642
(76% of all brokerage transactions) were transactions which included research
commissions.
For the fiscal year ended July 31, 2000, $______ (__% 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
$___________, of which $___________ (__% of all brokerage transactions) were
transactions which included research commissions.
Large Company Growth Fund. For the fiscal years ended October 31, 1998and
1997, the Fund paid brokerage commissions of $828,829and $317,984, respectively.
For the nine months ended July 31, 1999, the Fund paid brokerage commissions of
$551,527. For the fiscal year ended July 31, 2000, the Fund paid brokerage
commissions of $_______.
For the fiscal year ended October 31, 1998, $793,177 (95.7% of the total
brokerage commissions paid) resulted from orders placed, consistent with the
policy of seeking to obtain the most favorable net results, with brokers and
dealers who provided supplementary research services to the Trust or Adviser.
For the nine months ended July 31, 1999, $446,773 (81% of the total
brokerage commissions paid) resulted from orders placed, consistent with the
policy of seeking to obtain the most favorable net results, with brokers and
dealers who provided supplementary research services to the Trust or Adviser.
For the fiscal year ended July 31, 2000, $_______(__% of the total
brokerage commissions paid) resulted from orders placed, consistent with the
policy of seeking to obtain the most favorable net results, with brokers and
dealers who provided supplementary research services to the Trust or Adviser.
The total amount of brokerage transactions aggregated, for the fiscal year
ended October 31, 1998 was $504,513,801, of which 79.86% were transactions which
included research commissions. The total amount of brokerage transactions
aggregated for the nine months ended July 31, 1999 was $808,965,832, of which
$664,562,646 (82.15% of all brokerage transactions) were transactions which
included research commissions. The total amount of brokerage transactions
aggregated, for the fiscal year ended July 31, 2000 was $__________, of which
_____6% were transactions which included research commissions.
Portfolio Turnover
21st Century Growth Fund. 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 year
ended July 31, 2000, was 135%, for the eleven month period ended July 31, 1999,
was 147.6% and for the fiscal year ended August 30, 1998, was 119.8%., For the
eleven-month period ended July 31, 1999, the figure was annualized.
Large Company Growth Fund. The Fund's average annual portfolio turnover
rate for the fiscal year ended October 31, 1998 was 54.1%. For the fiscal year
ended July 31, 2000, and the nine month period ended July 31, 1999, the Fund's
average annual portfolio turnover rates were56% and 62.6%, respectively. For the
nine-month period ended July 31, 1999, the figure was annualized. A higher rate
involves greater brokerage and transaction expenses to the Fund and may result
in the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for the Fund's portfolio whenever
necessary, in management's opinion, to meet the Fund's objective.
NET ASSET VALUE
The net asset value of shares of each class of each Fund is computed as of
the close of regular trading on the Exchange on each day the Exchange is open
for trading. The 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
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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 Nasdaq Stock Market Inc. ("Nasdaq")
system will be valued at its most recent sale price on such system as of the
Value Time. Lacking any sales, the security will be valued at the most recent
bid quotation as of the Value Time. The value of an equity security not quoted
on the Nasdaq system, but traded in another over-the-counter market, is its most
recent sale price, if there are any sales of such security on such market as of
the Value Time. Lacking any sales, the security is valued at the Calculated
Mean. 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.
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 each Fund included in the Funds' prospectus
and the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, 160 Federal Street,
Boston, MA 02110, independent accountants, given on the authority of said firm
as experts in accounting and auditing. PricewaterhouseCoopers LLP audits the
financial statements of each Fund and provides other audit, tax, and related
services.
55
<PAGE>
Shareholder Indemnification
Each 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 a 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 Funds, 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 CUSIP number of Class S shares of 21st Century Growth Fund is 811196
40 1.
The CUSIP number of Class AARP shares of 21st Century Growth Fund is
811196-84-9
The CUSIP number for the Class S shares of Large Company Growth Fund is
811167-20-4.
The CUSIP number for the Class R shares of Large Company Growth Fund is
490965-84-1.
The CUSIP number for the Class AARP shares of Large Company Growth Fund is
460965-75-9
On September 16, 1998, the Board changed 21st Century Growth Fund's fiscal
year end to July 31 from August 31.
On August 10, 1998, the Board changed Large Company Growth Fund's fiscal
year end to July 31 from October 31.
Dechert Price & Rhoads acts as general counsel for each Fund.
Each Fund employs State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 as Custodian.
Costs of $23,340 incurred by 21st Century Growth Fund in conjunction with
its organization are amortized over the five year period beginning September 9,
1996.
ADDITIONAL INFORMATION FOR 21st Century Growth Fund
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.
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 0.025% 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
56
<PAGE>
excess of $1 billion, plus holding and transaction charges for this service. For
the fiscal year ended July 31, 2000, SFAC imposed fees amounting to $86,751, of
which $11,510 was unpaid at July 31, 2000. For the eleven month period ended
July 31, 1999, SFAC imposed fees amounting to $35,359, of which $7,091 was
unpaid at July 31, 1999. 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 July 31, 2000, SSC did not impose a portion of its fees amounting to
$178,539, and the amount imposed amounted to $403,593. For the eleven month
period ended July 31, 1999, SSC imposed fees amounting to $140,376, of which
$16,387 was unpaid at July 31, 1999. 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"), an affiliate 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 July 31,
2000, STC did not impose a portion of its fees amounting to $173,297, and the
amount imposed amounted to $162,519. For the eleven month period ended July 31,
1999, STC imposed fees amounting to $34,388, of which $8,169 was unpaid at July
31, 1999. 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
ADDITIONAL INFORMATION FOR LARGE COMPANY GROWTH FUND
The Fund is a series of Investment Trust, a Massachusetts business trust
established under a Declaration of Trust dated September 20, 1984, as amended.
The name of the Trust was changed, effective May 15, 1991, from Scudder Growth
and Income Fund, and on June 10, 1998 from Scudder Investment Trust. The Fund
changed its name from Scudder Quality Growth Fund on March 1, 1997. 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. Nothing in the Declaration of Trust, however, protects or
indemnifies a Trustee or officer against any liability to which that person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of that
person's office. 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.
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% on the next 85
million of such assets, 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges for this service. For the fiscal year ended
October 31,
57
<PAGE>
1997, SFAC's fee amounted to $57,787, and for the fiscal year ended October 31,
1998, SFAC's fee was $62,799. For the nine months ended July 31, 1999, SFAC's
fee was $76,061, of which $18,026 was unpaid at July 31, 1999. For the fiscal
year ended July 31, 2000, SFAC's fee was $135,642, of which $10,344 was unpaid
at July 31, 2000.
Scudder Service Corporation ("SSC"), P.O. Box 2291, Boston, Massachusetts
02107-2291, a subsidiary of the Adviser, is the transfer, dividend-paying and
shareholder service agent for the Fund and also provides subaccounting and
recordkeeping services for shareholder accounts in certain retirement and
employee benefit plans. The Fund pays SSCan annual fee of $26.00 for each
account maintained for a participant. For the fiscal years ended October 31,
1997, and 1998, SSC's fee amounted to $525,877 and $626,382. For the nine months
ended July 31, 1999, SSC's fee amounted to $830,924, of which $93,939 was unpaid
at July 31, 1999. For the fiscal year ended July 31, 2000, SSC's fee amounted to
$1,295,705, of which $113,553 was unpaid at July 31, 2000. Please call
1-800-SCUDDER for specific mailing instructions regarding your investment.
A 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 generally
held in an omnibus account.
Scudder Trust Company ("STC"), Two International Place, Boston, MA
02110-4103, an affiliate of the Adviser provides services for certain retirement
plan accounts. The Fund pays STC an annual fee of $29.00 for each account
maintained for a participant. For the fiscal year ended October 31, 1997, STC's
fee amounted to $320,268, and for the fiscal year ended October 31, 1998, STCs
fee amounted to $411,592. For the nine months ended July 31, STC's fee amounted
to $777,528, of which $256,667 was unpaid at July 31, 1999. For the fiscal year
ended July 31, 2000, STC's fees amounted to $2,696,270, of which $280,780 was
unpaid at July 31, 2000.
The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which eachTrust has
filed with the Commission under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further information with respect
to each Fund and the securities offered hereby. This Registration Statement is
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, and Large Company Growth Fund together with the Report of
Independent Accountants, Financial Highlights and notes to financial statements
in the Annual Report to the Shareholders of each Fund dated July 31, 2000, are
incorporated herein by reference, and are hereby deemed to be a part of this
Statement of Additional Information.
58
<PAGE>
Standard & Poor's Earnings and Dividend Rankings for Common Stocks
The investment process involves assessment of various factors -- such as
product and industry position, corporate resources and financial policy -- with
results that make some common stocks more highly esteemed than others. In this
assessment, Standard & Poor believes that earnings and dividend performance is
the end result of the interplay of these factors and that, over the long run,
the record of this performance has a considerable bearing on relative quality.
The rankings, however, do not pretend to reflect all of the factors, tangible or
intangible, that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of protection
for principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements in
establishing Standard & Poor's earnings and dividend rankings for common stocks,
which are designed to capsulize the nature of this record in a single symbol. It
should be noted, however, that the process also takes into consideration certain
adjustments and modifications deemed desirable in establishing such rankings.
The point of departure in arriving at these rankings is a computerized
scoring system based on per-share earnings and dividend records of the most
recent ten years -- a period deemed long enough to measure significant time
segments of secular growth, to capture indications of basic change in trend as
they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.
Further, the ranking system makes allowance for the fact that, in general,
corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the stock
is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
A ranking is not a forecast of future market price performance, but is basically
an appraisal of past performance of earnings and dividends, and relative current
standing. These rankings must not be used as market recommendations; a
high-score stock may at times be so overpriced as to justify its sale, while a
low-score stock may be attractively priced for purchase. Rankings based upon
earnings and dividend records are no substitute for complete analysis. They
cannot take into account potential effects of management changes, internal
company policies not yet fully reflected in the earnings and dividend record,
public relations standing, recent competitive shifts, and a host of other
factors that may be relevant to investment status and decision.
59
<PAGE>
SCUDDER
INVESTMENTS(SM)
[LOGO]
October 1, 2000
Prospectus
SCUDDER 21st CENTURY GROWTH FUND
Advisor Classes A, B, and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder 21st Century Growth Fund
How the fund works
2 Investment Approach
3 Main Risks to Investors
4 The Fund's Track Record
5 How Much Investors Pay
7 Other Policies and Risks
8 Who Manages and Oversees the Fund
10 Financial Highlights
How to invest in the fund
14 Choosing a Share Class
19 How to Buy Shares
20 How to Exchange or Sell Shares
21 Policies You Should Know About
26 Understanding Distributions and Taxes
<PAGE>
How the fund works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal, and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class A SCNAX fund number | Class A 151
| Class B SCNBX | Class B 251
| Class C SCNCX | Class C 351
Scudder 21st Century Growth Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks long-term growth of capital by investing in common stocks of
emerging growth companies that the adviser believes are poised to be leaders in
the new century. The fund typically invests at least 80% of total assets in
common stocks of companies that are similar in size to those in the Russell 2000
Index (typically less than $2 billion in total market value).
Using extensive fundamental and field research, managers look for small
companies, such as those in the Russell 2000 Index, that have low debt,
exceptional management teams, strong current or potential competitive
positioning and potential annual earnings growth of at least 15%, among other
factors. The managers expect to find these companies in many rapidly-changing
sectors of the economy, such as telecommunications, biotechnology and high tech.
Growth orientation. The managers primarily invest in companies that they believe
offer the potential for sustainable above-average earnings growth and whose
market values appear reasonable in light of their business prospects.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented.
As companies in the portfolio exceed the market value of those in the Russell
2000 Index, the fund may continue to hold their stocks, but will generally not
add to these holdings. The fund will normally sell a stock when it reaches a
target price, when the managers believe other investments offer better
opportunities or in the course of adjusting its emphasis on a given industry.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
2
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may appeal to investors who are looking for a fund that seeks
out tomorrow's leaders and who can accept the risks of small-company
investing.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the small company portion of the U.S. market.
When small company stock prices fall, you should expect the value of your
investment to fall as well. Small company stocks tend to be more volatile than
stocks of larger companies, in part because small companies tend to be less
established than larger companies and more vulnerable to competitive challenges
and bad economic news. Many technology companies are smaller companies which may
have limited business lines and financial resources, making them especially
vulnerable to business risks and economic downturns. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies in which the fund invests.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect the value of portfolio securities. For example,
technology companies could be hurt by such factors as market saturation, price
competition, and rapid obsolescence. In addition, a rise in unemployment could
hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o growth stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
3
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know. This page
looks at fund performance two different ways: year by year and over
time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the returns for the fund's Class S shares have varied
from year to year, which may give some idea of risk. The table shows average
annual returns for the fund's Class S shares and a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 Class S
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'97 9.74
'98 3.55
'99 124.93
2000 Total Return as of June 30: 4.50%
Best Quarter: 46.60%, Q4 1999 Worst Quarter: -23.99%, Q3 1998
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year Since Inception
------------------------------------------------------------------------
Fund -- Class S 124.93 32.14*
------------------------------------------------------------------------
Index 43.09 16.45**
------------------------------------------------------------------------
Index: The Russell 2000 Growth Index, which consists of those stocks in the
Russell 2000 Index that have a greater-than-average growth orientation.
Total returns would have been lower if operating expenses hadn't been reduced.
* Since 9/9/1996.
** Since 9/30/1996.
Performance for Classes A, B and C shares is not provided because these classes
do not have a full calendar year of performance. Although Class S shares are not
offered in this prospectus, they are invested in the same portfolio. Class S
shares' annual returns differ to the extent that the classes have different fees
and expenses.
4
<PAGE>
How Much Investors Pay
The table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as a % of redemption
proceeds) None* 4.00% 1.00%
------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
------------------------------------------------------------------------
Management Fee 0.75% 0.75% 0.75%
------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75% 0.75%
------------------------------------------------------------------------
Other Expenses 1.10% 1.44% 1.91%
------------------------------------
------------------------------------------------------------------------
Total Annual Operating Expenses** 1.85% 2.94% 3.41%
------------------------------------------------------------------------
Information in the table has been restated to reflect a new investment
management fee rate.
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50%
if redeemed during the second year following purchase.
** The adviser will cap total annual operating expenses voluntarily at
1.45%, 2.20% and 2.20% for Class A, B and C shares, respectively. These
caps may be terminated at any time at the option of the adviser.
5
<PAGE>
------------------------------------------------------------------------
Expense Example
------------------------------------------------------------------------
Based on the costs above, this example helps you compare each share class's
expenses to those of other mutual funds. The example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------
Class A shares $752 $1,123 $1,518 $2,619
------------------------------------------------------------------------
Class B shares 697 1,210 1,748 2,767
------------------------------------------------------------------------
Class C shares 444 1,048 1,774 3,694
------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------
Class A shares $752 $1,123 $1,518 $2,619
------------------------------------------------------------------------
Class B shares 297 910 1,548 2,767
------------------------------------------------------------------------
Class C shares 344 1,048 1,774 3,694
------------------------------------------------------------------------
6
<PAGE>
Other Policies and Risks
While the previous pages describe the main points of the fund's strategy and
risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could change
the fund's investment goal without seeking shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of assets
into investments such as money market securities. This could prevent losses, but
would mean that the fund would not be pursuing its goal.
o This fund may trade securities actively. This could raise transaction costs
(thus lowering performance) and could mean higher taxable distributions.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
7
<PAGE>
--------------------------------------------------------------------------------
[ICON] The fund is managed by a team of investment professionals who work
together to develop the fund's investment strategies.
--------------------------------------------------------------------------------
Who Manages and Oversees the Fund
The investment adviser
The fund's investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
As payment for serving as the fund's investment adviser, Scudder Kemper receives
a management fee. For the most recent fiscal year, the actual amount the fund
paid in management fees was 1.00% of average daily net assets.
The fund has entered into a new investment management agreement with Scudder
Kemper. This table describes the new fee rates for the fund.
---------------------------------------------------------------------------
Investment Management Fee
---------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
---------------------------------------------------------------------------
first $500 million 0.75%
---------------------------------------------------------------------------
next $500 million 0.70%
---------------------------------------------------------------------------
more than $1 billion 0.65%
---------------------------------------------------------------------------
The portfolio managers
Below are the people who handle the fund's day-to-day management:
Peter Chin Roy C. McKay
Lead Portfolio Manager o Began investment career
o Began investment career in 1969 in 1968
o Joined the adviser in 1973 o Joined the adviser in 1988
o Joined the fund team in 1996 o Joined the fund team in 1996
8
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that the fund is
managed in the best interests of its shareholders.
The following people comprise the fund's Board.
Linda C. Coughlin Keith R. Fox
o Managing Director, o General Partner,
Scudder Kemper The Exeter Group of Funds
Investments, Inc.
o President of the fund Joan E. Spero
o President, Doris Duke
Henry P. Becton, Jr. Charitable Foundation
o President, WGBH Educational
Foundation Jean Gleason Stromberg
o Consultant
Dawn-Marie Driscoll
o Executive Fellow, Center for Jean C. Tempel
Business Ethics, Bentley College o Managing Director,
o President, Driscoll Associates First Light Capital, LLC
(consulting firm) (venture capital firm)
Edgar Fiedler Steven Zaleznick
o Senior Fellow and Economic o President and Chief
Counsellor, The Conference Executive Officer, AARP
Board, Inc. (a not-for-profit Services, Inc.
business research organization)
9
<PAGE>
Financial Highlights
These tables are designed to help you understand the fund's financial
performance. The figures in the first part of each table are for a single share.
The total return figures represent the percentage that an investor in the class
would have earned (or lost), assuming all dividends and distributions were
reinvested. This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the fund's financial statements, is included in the
fund's annual report (see "Shareholder reports" on the back cover).
Scudder 21st Century Growth Fund -- Class A
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
2000(a)
---------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $29.07
----------
---------------------------------------------------------------------------------------
Income (loss) from investment operations:
---------------------------------------------------------------------------------------
Net investment income (loss) (b) (.06)
---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments transactions (1.77)
----------
---------------------------------------------------------------------------------------
Total from investment operations (1.83)
---------------------------------------------------------------------------------------
Net asset value, end of period $27.24
----------
---------------------------------------------------------------------------------------
Total Return (%) (c) (d) (6.30)**
---------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 2
---------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.10*
---------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.45*
---------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.26)**
---------------------------------------------------------------------------------------
Portfolio turnover rate (%) 135
---------------------------------------------------------------------------------------
</TABLE>
(a) For the period May 1, 2000 (commencement of sales of Class A shares) to
July 31, 2000.
(b) Based on monthly average shares outstanding during the period.
(c) Total return would have been lower had certain expenses not been
reduced.
(d) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
10
<PAGE>
Scudder 21st Century Growth Fund -- Class B
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
2000(a)
---------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $29.07
----------
---------------------------------------------------------------------------------------
Income (loss) from investment operations:
---------------------------------------------------------------------------------------
Net investment income (loss) (b) (.12)
---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments transactions (1.76)
----------
---------------------------------------------------------------------------------------
Total from investment operations (1.88)
---------------------------------------------------------------------------------------
Net asset value, end of period $27.19
----------
---------------------------------------------------------------------------------------
Total Return (%) (c) (d) (6.47)**
---------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------
Net assets, end of period ($ millions) .69
---------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 3.19*
---------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.20*
---------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.45)*
---------------------------------------------------------------------------------------
Portfolio turnover rate (%) 135
---------------------------------------------------------------------------------------
</TABLE>
(a) For the period May 1, 2000 (commencement of sales of Class B shares) to
July 31, 2000.
(b) Based on monthly average shares outstanding during the period.
(c) Total return would have been lower had certain expenses not been
reduced.
(d) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
11
<PAGE>
Scudder 21st Century Growth Fund -- Class C
--------------------------------------------------------------------------------
2000(a)
--------------------------------------------------------------------------------
Net asset value, beginning of period $29.07
---------
--------------------------------------------------------------------------------
Income (loss) from investment operations:
--------------------------------------------------------------------------------
Net investment income (loss) (b) (.12)
--------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments transactions (1.76)
---------
--------------------------------------------------------------------------------
Total from investment operations (1.88)
--------------------------------------------------------------------------------
Net asset value, end of period $27.19
---------
--------------------------------------------------------------------------------
Total Return (%) (c) (d) (6.47)**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions) .34
--------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 3.66*
--------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.20*
--------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.45)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 135
--------------------------------------------------------------------------------
(a) For the period May 1, 2000 (commencement of sales of Class C shares) to
July 31, 2000.
(b) Based on monthly average shares outstanding during the period.
(c) Total return would have been lower had certain expenses not been
reduced.
(d) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
12
<PAGE>
How to invest in the fund
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
<PAGE>
Choosing a Share Class
Offered in this prospectus are three share classes for the fund. The fund offers
two other classes of shares separately. Each class has its own fees and
expenses, offering you a choice of cost structures. Class A, Class B and Class C
shares are intended for investors seeking the advice and assistance of a
financial representative, who may receive compensation for those services
through sales commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Classes and features Points to help you compare
----------------------------------------------------------------------------------------
<S> <C> <C>
Class A o Sales charges of up to 5.75%, o Some investors may be able to
charged when you buy shares reduce or eliminate their sales
charges; see next page
o In most cases, no charges
when you sell shares o Total annual operating
expenses are lower than those
o No distribution fee for Class B or Class C
----------------------------------------------------------------------------------------
Class B o No charges when you buy shares o The deferred sales charge
rate falls to zero after six
o Deferred sales charge years
declining from 4.00%, charged
when you sell shares you bought o Shares automatically convert
within the last six years to Class A after six years,
which means lower annual
o 0.75% distribution fee expenses going forward
----------------------------------------------------------------------------------------
Class C o No charges when you buy shares o The deferred sales charge
rate is lower, but your shares
o Deferred sales charge of never convert to Class A, so
1.00%, charged when you sell annual expenses remain higher
shares you bought within the
last year
o 0.75% distribution fee
----------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class A shares may make sense for long-term investors, especially those
who are eligible for reduced or eliminated sales charges.
--------------------------------------------------------------------------------
Class A shares
Class A shares have a sales charge that varies with the amount you invest:
Sales charge as a Sales charge as % of
Your investment % of offering price your net investment
------------------------------------------------------------------------
Up to $50,000 5.75% 6.10%
------------------------------------------------------------------------
$50,000-$99,999 4.50 4.71
------------------------------------------------------------------------
$100,000-$249,999 3.50 3.63
------------------------------------------------------------------------
$250,000-$499,999 2.60 2.67
------------------------------------------------------------------------
$500,000-$999,999 2.00 2.04
------------------------------------------------------------------------
$1 million or more See below and next page
------------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $50,000
("cumulative discount")
o you are investing a total of $50,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
15
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a
fee to an investment adviser or other firm for portfolio management
services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Shareholder Services
can answer your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Shareholder Services can answer your questions and help you
determine if you're eligible.
16
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class B shares can be a logical choice for long-term investors who
would prefer to see all of their investment go to work right away, and
can accept somewhat higher annual expenses in exchange.
--------------------------------------------------------------------------------
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan under which a distribution fee of 0.75% is deducted
from fund assets during each of the first six years. This means the annual
expenses for Class B shares are somewhat higher (and their performance
correspondingly lower) compared to Class A shares, which don't have a 12b-1 fee.
After six years, Class B shares automatically convert to Class A, which has the
net effect of lowering the annual expenses from the seventh year on. However,
unlike Class A shares, your entire investment goes to work immediately.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
------------------------------------------------------------------------
First year 4.00%
------------------------------------------------------------------------
Second or third year 3.00
------------------------------------------------------------------------
Fourth or fifth year 2.00
------------------------------------------------------------------------
Sixth year 1.00
------------------------------------------------------------------------
Seventh year and later None (automatic conversion to
Class A)
------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Shareholder Services can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
17
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class C shares may appeal to investors who plan to sell some or all
shares within six years of buying them, or who aren't certain of their
investment time horizon.
--------------------------------------------------------------------------------
Class C shares
Like Class B shares, Class C shares have no up-front sales charges. However,
Class C shares do have a 12b-1 plan under which a distribution fee of 0.75% is
deducted from fund assets each year. Because of this fee, the annual expenses
for Class C shares are similar to those of Class B shares, but higher than those
for Class A shares (and the performance of Class C shares is correspondingly
lower than that of Class A). However, unlike Class A shares, your entire
investment goes to work immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
------------------------------------------------------------------------
First year 1.00%
------------------------------------------------------------------------
Second year and later None
------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Shareholder Services can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
18
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
First investment Additional investments
-------------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more for regular $100 or more for regular
accounts accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan, Payroll
Deduction or Direct Deposit
-------------------------------------------------------------------------------------------
Through a o Contact your representative o Contact your representative
financial using the method that's most using the method that's most
representative convenient for you convenient for you
-------------------------------------------------------------------------------------------
By mail or o Fill out and sign an o Send a check made out to
express mail (see application "Kemper Funds" and a Kemper
below) Investment slip to us at the
o Send it to us at the appropriate address below
appropriate address, along with
an investment check o If you don't have an
investment slip, simply include
a letter with your name,
account number, the full name
of the fund and the share class
and your investment instructions
-------------------------------------------------------------------------------------------
By wire o Call (800) 621-1048 for o Call (800) 621-1048 for
instructions instructions
-------------------------------------------------------------------------------------------
By phone -- o Call (800) 621-1048 for
instructions
-------------------------------------------------------------------------------------------
With an automatic -- o To set up regular
investment plan investments, call (800)
621-1048 (minimum $50)
-------------------------------------------------------------------------------------------
On the Internet -- o Go to www.kemper.com and
register
o Follow the instructions for
buying shares with money from
your bank account
-------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO
64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
--------------------------------------------------------------------------------
19
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
-----------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account most for over $50,000, can only
be ordered in writing with a
$100 or more for exchanges signature guarantee; if you're
between existing accounts in doubt, see page 22
-----------------------------------------------------------------------------------------
Through a o Contact your representative o Contact your representative
financial by the method that's most by the method that's most
representative convenient for you convenient for you
-----------------------------------------------------------------------------------------
By phone or wire o Call (800) 621-1048 for o Call (800) 621-1048 for
instructions instructions
-----------------------------------------------------------------------------------------
By mail, express Write a letter that includes: Write a letter that includes:
mail or fax
(see previous o the fund, class and account o the fund, class and account
page) number you're exchanging out of number from which you want to
sell shares
o the dollar amount or number
of shares you want to exchange o the dollar amount or number
of shares you want to sell
o the name and class of the
fund you want to exchange into o your name(s), signature(s)
and address, as they appear on
o your name(s), signature(s) your account
and address, as they appear on
your account o a daytime telephone number
o a daytime telephone number
-----------------------------------------------------------------------------------------
With a systematic o To set up regular exchanges --
exchange plan from a fund account, call
(800) 621-1048
-----------------------------------------------------------------------------------------
With a systematic -- o To set up regular cash
withdrawal plan payments from a fund account,
call (800) 621-1048
-----------------------------------------------------------------------------------------
On the Internet o Go to www.kemper.com and --
register
o Follow the instructions for
making on-line exchanges
-----------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class A, Class B and Class C shares. The fund does have other
share classes, which are described in a separate prospectus and which have
different fees, requirements and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
(800)-621-1048.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 3 p.m. Central time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
21
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Kemper Web site can be a valuable resource for shareholders with
Internet access. Go to www. kemper.com to get up-to-date information,
review balances or even place orders for exchanges.
--------------------------------------------------------------------------------
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use KemperACCESS to get information on funds
generally and on accounts held directly at Kemper. You can also use it to make
exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Kemper or Scudder account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
When you call us to sell shares, we may record the call, ask you for certain
information or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are normally completed within 24 hours. The fund can only send
or accept wires of $1,000 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject or limit purchase orders,
for these or other reasons.
When you want to sell more than $50,000 worth of shares, or send the proceeds to
a third party or to a new address, you'll usually need to place your order in
writing and include a signature guarantee. The only exception is if you want
money wired to a bank account that is already on file with us; in that case, you
don't need a signature guarantee. Also, you don't need a signature guarantee for
an exchange, although we may require one in certain other circumstances.
22
<PAGE>
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan.
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns
of excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege, redemption of shares whose dealer of record at the time of
the investment notifies Kemper Distributors that the dealer is waiving
the applicable commission
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Shareholder Services can answer your questions and help you determine if you are
eligible.
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Scudder or Kemper. You'll also be reimbursed (in the form of fund
shares) for any CDSC you paid when you sold. Future CDSC calculations will be
based on your original investment date, rather than your reinstatement date.
There is also an option that lets investors who sold Class B shares buy Class A
shares with no sales charge, although they won't be reimbursed for any CDSC they
paid. You can only use the reinstatement feature once for any given group of
shares. To take advantage of this feature, contact Shareholder Services or your
financial representative.
23
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
Money from shares you sell is normally sent out within one business day of when
your order is received in proper form, although it could be delayed for up to
seven days. There are also two circumstances when it could be longer: when you
are selling shares you bought recently by check and that check hasn't cleared
yet (maximum delay: 10 days) or when unusual circumstances prompt the SEC to
allow further delays. Certain expedited redemption processes may also be delayed
when you are selling recently purchased shares.
How the fund calculates share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing a Share Class")
Class B and Class C shares-- NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
--------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For the fund and each share class, the price at which you sell shares is also
the NAV, although a CDSC may be taken out of the proceeds (see "Choosing a Share
Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
24
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash; generally, the fund won't make
a redemption in kind unless your requests over a 90-day period total
more than $250,000 or 1% of the value of the fund's net assets
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
25
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund intends to pay dividends and distributions to its shareholders in
November or December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares (at NAV), all sent to you by
check, have one type reinvested and the other sent to you by check or have them
invested in a different fund. Tell us your preference on your application. If
you don't indicate a preference, your dividends and distributions will all be
reinvested without sales charges. For retirement plans, reinvestment is the only
option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
26
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
------------------------------------------------------------------------
o short-term capital gains from selling fund shares
------------------------------------------------------------------------
o income dividends you receive from the fund
------------------------------------------------------------------------
o short-term capital gains distributions received from the fund
------------------------------------------------------------------------
Generally taxed at capital gains rates
------------------------------------------------------------------------
o long-term capital gains from selling fund shares
------------------------------------------------------------------------
o long-term capital gains distributions you received from the fund
------------------------------------------------------------------------
The fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
27
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of the fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get these
reports automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, please contact Scudder or
the SEC. If you're a shareholder and have questions, please contact Scudder (see
below). Materials you get from Scudder are free; those from the SEC involve a
copying fee. If you like, you can look over these materials at the SEC's Public
Reference Room in Washington, DC or request them electronically at
[email protected].
SEC
450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (202) 942-8090
Scudder Funds c/o
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
Tel (800) 621-1048
SEC File Number
Scudder 21st Century Growth Fund 811-2021
Principial Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800)621-1048
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
October 1, 2000
SCUDDER 21ST CENTURY GROWTH FUND (Class A, B and C Shares)
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, Class B and Class C Shares (the
"Shares") of Scudder 21st Century Growth Fund (the "Fund"), a diversified series
of Scudder Securities Trust (the "Trust"), an open-end management investment
company. It should be read in conjunction with the prospectus of the Shares
dated October 1, 2000. The prospectus may be obtained without charge from the
Fund at the address or telephone number on this cover or the firm from which
this Statement of Additional Information was received.
Scudder 21st Century Growth Fund offers the following classes of shares:
Class S shares, Class AARP and Class A, Class B and Class C shares (the
"Shares"). Only Class A, Class B and Class C shares of Scudder 21st Century
Growth Fund are offered herein.
TABLE OF CONTENTS
Investment Restrictions........................................................2
Investment Policies and Techniques.............................................3
Dividends, Distributions and Taxes............................................16
Performance...................................................................21
Investment Manager and Underwriter............................................23
Portfolio Transactions........................................................29
Purchase, Repurchase and Redemption of Shares.................................31
Purchase of Shares............................................................31
Redemption or Repurchase of Shares............................................36
Special Features..............................................................39
Officers and Trustees.........................................................43
Shareholder Rights............................................................47
Scudder Kemper Investments, Inc. (the "Advisor") serves as the Fund's investment
manager.
The financial statements appearing in the Fund's July 31, 2000 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund accompanies this document.
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INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which cannot be
changed without approval of a "majority" of its outstanding voting Shares. As
defined in the Investment Company Act of 1940, as amended (the "1940 Act"), this
means the lesser of (1) 67% of the Fund's Shares present at a meeting where more
than 50% of the outstanding Shares are present in person or by proxy; or (2)
more than 50% of the Fund's outstanding Shares.
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
management investment company.
The Fund may not, as a fundamental policy:
1. borrow money, except as permitted under the 1940 Act, and as interpreted
or modified by regulatory authority having jurisdiction, from time to
time;
2. issue senior securities, except as permitted under the 1940 Act, 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, 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 to other persons, except as permitted under the 1940 Act, and
as interpreted or modified by regulatory authority having jurisdiction,
from time to time.
Other Investment Policies
The Trustees of the Trust have voluntarily adopted certain policies and
restrictions which are observed in the conduct of the Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of shareholders.
As a matter of nonfundamental policy, the Fund currently does not 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;
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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.
Master/feeder Fund 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.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC that permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Advisor. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging), except that the Fund may engage in reverse repurchase
agreements and dollar rolls for any purpose.
INVESTMENT POLICIES AND TECHNIQUES
General. The Fund pursues long-term growth of capital by investing in emerging
growth companies that are poised to be leaders in the new 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.
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.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
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The Fund normally invests at least 80% of its total 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 Advisor believes these companies are well-positioned for
above-average earnings growth and 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 greater market recognition expected are factors believed to
offer significant opportunity for capital appreciation, and the Advisor will
attempt to identify these opportunities before their potential is recognized by
investors in general.
To help reduce risk in its search for emerging growth companies, the
Advisor allocates the Fund's investments among many companies and different
industries in the U. S. and, where opportunity warrants, abroad as well. The
Advisor seeks companies that, in the Advisor's opinion, have excellent
management which own a significant stake in the company, clean balance sheets,
and either a commanding position in a growing market or the real possibility of
building a commanding position in the 21st century. Emerging growth companies
are those with the ability, in the Advisor'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 Advisor 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 Ratings Service, a division of the McGraw-Hill
Companies, Inc. ("S&P"), or, if unrated, are deemed by the Advisor to be of
equivalent quality, U.S. Government securities and invest in money market
instruments which are rated in the two highest categories by Moody's or S&P, or,
if unrated, are deemed by the Advisor 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 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 new century.
The Fund offers the benefit of professional management to identify investments
in emerging growth companies with the greatest potential, in the Advisor's
opinion, to have a profound and positive impact on the lives of consumers and
businesses as we enter the new century. The Advisor 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.
Special Considerations
Historical small stock performance.
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 that 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.
IPO risk: Securities issued through an initial public offering (IPO) can
experience an immediate drop in value if the demand for the securities does not
continue to support the offering price. Information about the issuers of IPO
securities is also difficult to acquire since they are new to the market and may
not have lengthy operating histories. The Fund may engage in short-term trading
in connection with its IPO investments, which could produce higher trading costs
and adverse tax consequences. The number of securities issued in an IPO is
limited, so it is likely that IPO securities will represent a smaller component
of the Fund's portfolio as the Fund's assets increase (and thus have a more
limited effect on the Fund's performance).
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 Advisor 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.
Similarly, volume and liquidity in most foreign bond markets is less than in the
U.S. and at times, volatility of price can be greater than in the U.S. 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 that 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 that 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
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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 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 a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Debt Securities. When the Advisor 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, A or Baa by Moody's or
AAA, AA, A or BBB by S&P or, if unrated, judged to be of equivalent quality as
determined by the Advisor.
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.
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
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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 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.
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.
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. 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. 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 Advisor will monitor the liquidity of such restricted securities
subject to the supervision of the Board of Trustees. In reaching liquidity
decisions, the Advisor 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
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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).
When-Issued and Forward Delivery 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
respective 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.
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System, any foreign bank or 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
Advisor 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.
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 Advisor 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
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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.
Reverse Repurchase Agreements. In a reverse repurchase agreement, the Fund sells
a portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, the Fund will
maintain liquid assets in a segregated custodial account to cover its obligation
under the agreement. The Fund will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by the Advisor.
Such transactions may increase fluctuations in the market value of the fund's
assets and may be viewed as a form of leverage.
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 the 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
market 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 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, subject to the Fund's restrictions on investments in illiquid
securities.
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 for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
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 instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic
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transactions may also include new techniques, instruments or strategies that are
permitted as regulatory changes occur. Strategic Transactions may be used
without limit (subject to certain limitations imposed by the 1940 Act) to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets 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 fixed-income securities in the Fund's portfolio, or to establish a position
in the derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Advisor'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 will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Advisor'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.
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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 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 Advisor 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 Advisor.
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, foreign sovereign
debt, 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
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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, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's total assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement 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 primarily in order to hedge, or manage the risk of 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
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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 Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. 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 generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The 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 Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
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, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the 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 Advisor, 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 Advisor's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the
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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, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. 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 the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Advisor 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
Advisor. 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 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 assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
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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.
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 assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid 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 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.
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 Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Fund may invest in a variety of investment companies
which seek to track the composition and performance of specific indices or a
specific portion of an index. These index-based investments hold substantially
all of their assets in securities representing their specific index.
Accordingly, the main risk of investing in index-based investments is the same
as investing in a portfolio of equity securities comprising the index. The
market prices of index-based investments will fluctuate in accordance with both
changes in the market value of their underlying portfolio securities and due to
supply and demand for the instruments on the exchanges on which they are traded
(which may result in their trading at a discount or premium to their net asset
values). Index-based investments may not replicate exactly the performance of
their specified index because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
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companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends. 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"
hereafter.)
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" hereafter.) 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 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" hereafter), whether made in shares or cash.
Any dividends or capital gains distributions declared in October, November
or December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared.
A brief explanation of the form and character of the distribution
accompany each 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.
Dividends paid by the Fund with respect to each class of its shares will
be calculated in the same manner, at the same time and on the same day. The
level of income dividends per share (as a percentage of net asset value) will be
lower for Class B and Class C Shares than for Class A Shares primarily as a
result of the distribution services fee
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applicable to Class B and Class C Shares. Distributions of capital gains, if
any, will be paid in the same proportion for each class.
Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value on the reinvestment date, except that, upon written request
to the Shareholder Service Agent, a shareholder may select one of the following
options:
1. To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
2. To receive income and capital gain dividends in cash.
Dividends will be reinvested in Shares of the same class of the Fund
unless shareholders indicate in writing that they wish to receive them in cash
or in shares of other Scudder Funds with multiple classes of shares or Kemper
Funds as provided in the prospectus. See "Special Features -- Class A Shares --
Combined Purchases" for a list of such other Funds. To use this privilege of
investing dividends of the Fund in shares of another Scudder or Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Fund will reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions of the Fund in the aggregate
amount of $10 or less are automatically reinvested in shares of the Fund unless
the shareholder requests that such policy not be applied to the shareholder's
account.
Taxes. The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute, and has qualified as
such since its inception. 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 the Fund's
earnings and profits, and would be eligible for the dividends-received deduction
in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required
to be but not distributed under a prescribed formula. The formula requires
payment to shareholders during a calendar year of distributions representing at
least 98% of the Fund's ordinary income for the calendar year, at least 98% of
the excess of its capital gains over capital losses (adjusted for certain
ordinary losses) realized during the one-year period ending October 31 during
such year, and all ordinary income and capital gains for prior years that were
not previously distributed.
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund. 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,
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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 Kemper fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
A single individual who is not an active participant in an employer-maintained
retirement plan, such as a pension or profit sharing plan, a governmental plan,
a simplified employee pension plan, a simple retirement account, 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. If an individual is an active participant, the deductibility of his or
her IRA contributions in 2000 is phased out if the individual has gross income
between $32,000 and $42,000 and is single, if the individual has gross income
between $52,000 and $62,000 and is married filing jointly, or if the individual
has gross income between $0 and $10,000 and is married filing separately; the
phase-out ranges for individuals who are single or married filing jointly are
subject to annual adjustment through 2005 and 2007, respectively. If an
individual is married filing jointly and the individual's spouse is an active
participant but the individual is not, the deductibility of his or her IRA
contributions is phased out if their combined gross income is between $150,000
and $160,000. 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. 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.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
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.
In some cases, shareholders of the Fund will not be permitted to take all
or portion of their sales loads into account for purposes of determining the
amount of gain or loss realized on the disposition of their shares. This
prohibition generally applies where (1) the shareholder incurs a sales load in
acquiring the shares of the Fund, (2) the
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shares are disposed of before the 91st day after the date on which they were
acquired, and (3) the shareholder subsequently acquires shares in the Fund or
another regulated investment company and the otherwise applicable sales charge
is reduced under a "reinvestment right" received upon the initial purchase of
Fund shares. The term "reinvestment right" means any right to acquire shares of
one or more regulated investment companies without the payment of a sales load
or with the payment of a reduced sales charge. Sales charges affected by this
rule are treated as if they were incurred with respect to the shares acquired
under the reinvestment right. This provision may be applied to successive
acquisitions of fund shares.
The Fund may invest in shares of certain foreign corporations that 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 a Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the Fund's holding period for the underlying
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 or loss. 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. A
brief explanation of the form and character of the distribution accompany each
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.
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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.
PERFORMANCE
The Shares' historical performance or return for a class of Shares may be
shown in the form of "average annual total return" and "total return" figures.
These measures of performance are described below. Performance information will
be computed separately for each class. The Advisor has agreed to a reduction of
its management fee for the Fund to the extent specified in the prospectus. See
"Investment Manager and Underwriter." This fee reduction will improve the
performance results of the Fund.
The Fund may advertise several types of performance information for a
class of shares, including "average annual total return" and "total return."
Performance information will be computed separately for each of Class A, Class B
and Class C shares. Each of these figures is based upon historical results and
is not representative of the future performance of any class of the Fund.
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.
Calculation of the Fund's total return is not subject to a standardized
formula, except when calculated for the Fund's financial statements and
prospectus. Total return performance for a specific period is calculated by
first taking a hypothetical investment ("initial investment") in the shares of a
class of the Fund's shares on the first day of the period, either adjusting or
not adjusting to deduct the maximum sales charge (in the case of Class A
Shares), and computing the "ending value" of that investment at the end of the
period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The ending value
in the case of Class B Shares or Class C Shares may or may not include the
effect of the applicable contingent deferred sales charge that may be imposed at
the end of the period. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value per share on
the reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A Shares or the contingent deferred sales charge for Class B and Class C Shares
would be reduced if such charges were included.
Average annual total return and total return measure both the net
investment income generated by, and the effect of any realized or unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio. The Fund's average annual total return quotation is computed in
accordance with a standardized method prescribed by rules of the SEC. The
average annual total return for each class of the Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the class' Shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A Shares), and computing the
"redeemable value" of that investment at the end of the period. Average annual
return quotations will be determined to the nearest 1/100th of 1%. The
redeemable value in the case of Class B Shares or Class C Shares include the
effect of the applicable contingent deferred sales charge that may be imposed at
the end of the period. The redeemable value is then divided by the initial
investment, and this quotient is taken to the Nth root (N representing the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. Average annual return calculated in accordance
with this formula does not take into account any required payments for federal
of state income taxes. Such quotations for Class B Shares for periods over six
years will reflect conversion of such Shares to Class A Shares at the end of the
sixth year. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Average annual total return may also be calculated in a
manner not consistent with the standard formula described above, without
deducting the maximum sales charge or contingent deferred sales charge.
The Fund's performance figures are based upon historical results and are
not necessarily representative of future performance. The Fund's Class A Shares
are sold at net asset value plus a maximum sales charge of 5.75% of the offering
price. Class B and Class C Shares are sold at net asset value. Redemption of
Class B Shares may be subject to a contingent deferred sales charge that is 4%
in the first year following the purchase, declines by a specified percentage
each year thereafter and becomes zero after six years. Redemption of Class C
Shares may be subject to a 1% contingent deferred sales charge in the first year
following the purchase. Returns and net asset value will fluctuate. Factors
affecting the Fund's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce returns described in this section.
Shares of the Fund are redeemable at the then current net asset value, which may
be more or less than original cost.
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There are differences and similarities between the investments that a Fund
may purchase and the investments measured by the indices which are described
herein. The Consumer Price Index is generally considered to be a measure of
inflation. The Dow Jones Industrial Average and the Standard & Poor's 500 Stock
Index are indices of common stocks which are considered to be generally
representative of the U.S. stock market. The Financial Times/Standard & Poor's
Actuaries World Index-Europe(TM) is a managed index that is generally
representative of the equity securities of European markets. The foregoing
indices are unmanaged. The net asset value and returns of a Fund will fluctuate.
Investors may want to compare the performance of the Fund to certificates
of deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of the Fund to that of
U.S. Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of the Fund to that of money
market funds. Money market funds seek to maintain a stable net asset value and
yield fluctuates. Information regarding the performance of money market funds
may be based upon, among other things, IBC/Donoghue's Money Fund Averages(R)
(All Taxable). As reported by IBC/Donoghue's, all investment results represent
total return (annualized results for the period net of management fees and
expenses) and one year investment results are effective annual yields assuming
reinvestment of dividends.
The figures below are based on the actual performance of the Class S
shares, which are offered pursuant to a separate prospectus and statement of
additional information, and show performance information for the period ended
July 31, 2000. Class A, Class B and Class C shares were newly offered beginning
May 1, 2000.
Returns for the Class A, Class B and Class C shares reflect the
performance of the Class S shares for the period ended July 31,2000, restated to
reflect the deduction of the current applicable sales charges (that is, the
maximum 5.75% sales charge for Class A shares or the deferred sales charge in
effect at the applicable period for Class B shares or Class C shares). The Class
A, Class B and Class C shares' average annual total returns reflect an estimate
of the difference in expense structure among share classes.
All returns assume reinvestment of distributions at net asset value and
represent past performance; they do not guarantee future results. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Average Annual Total Returns
For the period ended July 31, 2000
Class A* Class B* Class C* Class S*
-------- -------- -------- --------
One Year 42.47% 45.60% 50.04% 51.52%
Since Inception** 11.67% 10.21% -7.40% 24.33%
* If the Advisor had not maintained Fund expenses and had imposed a full
management fee, total returns for each period would have been lower.
** Class S shares commenced operations on September 9, 1996, and the
performance figures for Class A, B and C shares also commence on such
date.
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INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Scudder Kemper Investments, Inc. (the "Advisor"), Two
International Place, Boston, Massachusetts, an investment counsel firm, acts as
investment advisor to the Fund. This organization, the predecessor of which is
Scudder, Stevens & Clark, Inc., ("Scudder") 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 Advisor 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 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. On September 7, 1998, the businesses of Zurich
(including Zurich's 70% interest in Scudder Kemper) and the financial services
businesses of B.A.T Industries p.l.c. ("B.A.T") were combined to form a new
global insurance and financial services company known as Zurich Financial
Services Group. By way of a dual holding company structure, former Zurich
shareholders initially owned approximately 57% of Zurich Financial Services
Group, with the balance initially owned by former B.A.T shareholders. The
Advisor manages the Fund's daily investment and business affairs subject to the
policies established by the Trust's Board of Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law.
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.
Pursuant to an investment management agreement with the Fund, the Advisor
acts as the Fund's investment adviser, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions.
The principal source of the Advisor'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, industrial
corporations, and financial and banking organizations, as well as providing
investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Advisor 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
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world researching hundreds of companies.
In selecting securities in which the Fund may invest, the conclusions and
investment decisions of the Advisor 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 Advisor. 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 Advisor 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 Advisor in the interest of achieving the most
favorable net results to the Fund.
The present investment management agreement (the "Agreement") was most
recently approved by the Trustees on September 14, 1999, and will continue in
effect until September 30, 2000. A new Agreement, which becomes
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<PAGE>
effective on October 2, 2000, was approved by the Trustees on February 7, 2000,
and by the shareholders at a shareholder meeting held on July 13, 2000. The
Agreement will continue in effect until 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 Advisor 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 Advisor regularly provides the Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of the Fund's
assets shall be held uninvested, subject to the Trust's Declaration of Trust,
By-Laws, the 1940 Act, the Code and to the Fund's investment objective, policies
and restrictions, and subject, further, to such policies and instructions as the
Board of Trustees of the Trust may from time to time establish. The Advisor also
advises and assists the officers of the Trust in taking such steps as are
necessary or appropriate to carry out the decisions of its Trustees and the
appropriate committees of the Trustees regarding the conduct of the business of
the Fund.
Under the Agreement, the Advisor 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 Advisor 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; Boston, Massachusetts and Chicago,
Illinois) of the Fund affiliated with the Advisor and makes available, without
expense to the Trust, the services of such Trustees, officers and employees of
the Advisor as may duly be elected officers or Trustees 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 Advisor an annual 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 Advisor not to exceed
75% of the amount of the fee then accrued on the books of the Fund and unpaid.
Since inception, the Advisor has agreed until May 1, 2000 to maintain the total
annualized expenses of the Class S shares of the Fund at no more than 1.75% of
the average daily net assets of the Fund. The Advisor has agreed until October
1, 2000 to maintain the total annualized expenses of the Fund at no more than
1.45% for the Class A shares, and 2.20% for the Class B and Class C shares. In
addition the Advisor has voluntarily agreed to maintain expenses at no more than
1.20% of average daily nets assets for Class S shares from May 1, 2000 through
October 1, 2000. For the fiscal year ended July 31, 2000, the Advisor did not
impose a portion of its management fee amounting to $6,495, and the amount
imposed amounted to $2,245,091, which was equivalent to an annual effective rate
of 1.00%. In addition, for the fiscal year ended July 31, 2000, the Advisor
agreed to not impose certain class-specific expenses in the amounts of $481,
$432, $432 and $37,352 for Class A, B, C and S shares, respectively. For the
eleven months ended July 31, 1999, the Advisor did not impose a portion of its
management fee amounting to $195,129 and the amount imposed amounted to
$221,549. For the fiscal year ended August 31, 1998, the Advisor did not impose
a portion of its management fee amounting to $136,802 and the amount paid to the
Advisor amounted to $187,185. For the period September 9, 1996 (commencement of
operations) to August 31, 1997, the Advisor waived its management fee amounting
to $129,231. 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 Advisor; the cost of printing and
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<PAGE>
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 Advisor 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
Advisor concerning such Agreement, the Trustees of the Trust who are not
"interested persons" of the Advisor are represented by independent counsel at
the Fund's expense.
The Agreement provides that the Advisor 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 Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Advisor'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 Advisor may serve as advisor 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 the
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of Shares of the Fund.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
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<PAGE>
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor 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 Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
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 advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Code of Ethics
The Fund, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Trust and employees of the The Advisor and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The The Advisor's
Code of Ethics contains provisions and requirements designed to identify and
address certain conflicts of interest between personal investment activities and
the interests of the Fund. Among other things, the The Advisor's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the The
Advisor's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, is the principal underwriter and distributor for the Class A, B and C
shares of the Fund and acts as agent of the Fund in the continuous offering of
its Shares. KDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. The Fund pays
the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI, as principal underwriter, pays for
the printing and distribution of copies thereof used in connection with the
offering of Shares to prospective investors. KDI also pays for supplementary
sales literature and advertising costs.
26
<PAGE>
The distribution agreement continues in effect from year to year so long
as such continuance is approved for each class at least annually by a vote of
the Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees or a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the distribution agreement or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The distribution agreement may not be amended for a class to increase
the fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund, and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the distribution
agreement.
Underwriting commissions paid in connection with the distribution of Class
A shares for the period May 1, 2000 (commencement of Class A, B and C shares)
aggregated $2,032, of which none was paid to other firms.
Class B Shares and Class C Shares. The Fund has adopted a plan under Rule
12b-1 (the "Rule 12b-1 Plan") that provides for fees payable as an expense of
the Class B shares and Class C shares that are used by KDI to pay for
distribution and services for those classes. Because 12b-1 fees are paid out of
fund assets on an ongoing basis they will, over time, increase the cost of an
investment and cost more than other types of sales charges.
Rule 12b-1 Plan. Since the distribution agreement provides for fees
payable as an expense of the Class B shares and the Class C shares that are used
by KDI to pay for distribution services for those classes, that agreement is
approved and reviewed separately for the Class B shares and the Class C shares
in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in
which an investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its
terms, the obligation of a Fund to make payments to KDI pursuant to the Plan
will cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under a Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under the Plan
may or may not be sufficient to reimburse KDI for its expenses incurred.
For its services under the distribution agreement, KDI receives a fee from
the Fund, payable monthly, at the annual rate of 0.75% of average daily net
assets of the Fund attributable to Class B shares. This fee is accrued daily as
an expense of Class B shares. KDI also receives any contingent deferred sales
charges. KDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%. For the period May 1, 2000 (commencement of Class A, B
and C shares) the contingent deferred sales charge for Class B shares aggregated
$53, and there was no contingent deferred sales charge for Class C.
For its services under the distribution agreement, KDI receives a fee from
the Fund, payable monthly, at the annual rate of 0.75% of average daily net
assets of the Fund attributable to Class C shares. This fee is accrued daily as
an expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or a Fund. KDI also receives any
contingent deferred sales charges.
For the period May 1, 2000, (commencement of Class A, B and C shares)
through the fiscal year ended July 31, 2000, the distribution fees were $512 and
$270 for Class B and C shares, respectively.
Administrative Services. Administrative services are provided to the Fund on
behalf of Class A, B and C shareholders under an administrative services
agreement ("administrative agreement") with KDI. KDI bears all its expenses of
providing services pursuant to the administrative agreement between KDI and the
Fund, including the payment of service fees. The Fund pays KDI an administrative
services fee, payable monthly, at an annual rate of up to 0.25% of average daily
net assets of Class A, B and C shares of the Fund.
KDI enters into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms") that provide services and
facilities for their customers or clients who are investors in the Fund. The
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries
27
<PAGE>
regarding the Fund, assistance to clients in changing dividend and investment
options, account designations and addresses and such other administrative
services as may be agreed upon from time to time and permitted by applicable
statute, rule or regulation. With respect to Class A Shares, KDI pays each firm
a service fee, payable quarterly, at an annual rate of up to 0.25% of the net
assets in Fund accounts that it maintains and services attributable to Class A
Shares, commencing with the month after investment. With respect to Class B and
Class C Shares, KDI currently advances to firms the first-year service fee at a
rate of up to 0.25% of the purchase price of such Shares. For periods after the
first year, KDI currently intends to pay firms a service fee at a rate of up to
0.25% (calculated monthly and paid quarterly) of the net assets attributable to
Class B and Class C Shares maintained and serviced by the firm. After the first
year, a firm becomes eligible for the quarterly service fee and the fee
continues until terminated by KDI or the Fund. Firms to which service fees may
be paid include affiliates of KDI. In addition KDI may, from time to time, from
its own resources pay certain firms additional amounts for ongoing
administrative services and assistance provided to their customers and clients
who are shareholders of the Fund.
KDI also may provide some of the above services and may retain any portion
of the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of 0.25%
based upon Fund assets in accounts for which a firm provides administrative
services and at the annual rate of 0.15% based upon Fund assets in accounts for
which there is no firm of record (other than KDI) listed on the Fund's records.
The effective administrative services fee rate to be charged against all assets
of the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services. The Board of Trustees of the Fund, in its discretion,
may approve basing the fee to KDI at the annual rate of 0.25% on all Fund assets
in the future
For the period May 1, 2000 (commencement of Class A, B and C shares)
through the fiscal year ended July 31, 2000, the administrative services fees
were $431, $171 and $89 for Class A, B and C shares, respectively. At July 31,
2000, the amounts of fees unpaid were $348, $144 and $72 for Class A, B and C
shares, respectively
Certain trustees or officers of the Fund are also directors or officers of
the Advisor or KDI, as indicated under "Officers and Trustees."
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, a subsidiary of the Advisor,
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 and 0.0045% of such assets in excess of $1
billion, plus holding and transaction charges for this service. For the fiscal
year ended July 31, 2000, SFAC imposed fees amounting to $86,751, of which
$11,510 was unpaid at July 31, 2000. For the eleven month period ended July 31,
1999, SFAC imposed fees amounting to $35,359, of which $7,091 was unpaid at July
31, 1999. 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.
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company (the "Custodian"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian has custody of all securities and cash of the Fund held
outside the United States. The Custodian attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Fund. Kemper Service Company ("KSVC"), 811 Main Street, Kansas City,
Missouri 64105-2005, an affiliate of the Advisor, is the Fund's transfer agent,
dividend-paying agent and shareholder service agent for the Fund's Class A, B
and C shares. KSVC receives as transfer agent, annual account fees of $5 per
account, transaction and maintenance charges, annual fees associated with the
contingent deferred sales charge (Class B shares only) and out-of-pocket expense
reimbursement. For the period May 1, 2000 (commencement of Class A, B and C
shares), the amounts charged to Class A, B and C shares by KSC aggregated $621,
$241 and $90, respectively, all of which was not imposed at July 31, 2000.
Independent Accountants and Reports to Shareholders. The financial highlights of
the Fund included in the Fund's prospectus and the Financial Statements
incorporated by reference in this Statement of Additional Information have been
so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. PricewaterhouseCoopers LLP audits the financial
statements of the Fund and provides other audit, tax and related services.
Shareholders will receive annual audited financial statements and semi-annual
unaudited financial statements.
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<PAGE>
PORTFOLIO TRANSACTIONS
Brokerage Commissions. Allocation of brokerage may be placed by the Advisor.
The primary objective of the Advisor in placing orders for the purchase
and sale of securities for the Fund's portfolio 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 Advisor seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
the familiarity of Scudder Investor Services, Inc. ("SIS"), a corporation
registered as a broker-dealer and a subsidiary of the Advisor, with commissions
charged on comparable transactions, as well as by comparing commissions paid by
the Fund to reported commissions paid by others. The Advisor 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 Advisor 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 Advisor'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 Advisor is not 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 solely on account of the receipt of
research, market or statistical information. 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.
In selecting among firms believed to meet the criteria for handling a
particular transaction, the Advisor may give consideration to those firms that
have sold or are selling shares of the Fund or other funds managed by the
Advisor.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through SIS. SIS will place orders on behalf
of the Fund with issuers, underwriters or other brokers and dealers. SIS 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 Advisor, it is the opinion
of the Advisor that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than the Fund and not all such information is used by
the Advisor in connection with the Fund. Conversely, such information provided
to the Advisor by broker/dealers through whom other clients of the Advisor
effect securities transactions may be useful to the Advisor in providing
services to the Fund.
The Trustees of the Fund 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.
The Fund's average portfolio turnover rate is the ratio of the lesser of
sales or purchases to the monthly average value of the portfolio securities
owned during the year, excluding all securities with maturities or expiration
dates at the time of acquisition of one year or less. A higher rate involves
greater brokerage transaction expenses to the Fund and may result in the
realization of net capital gains, which would be taxable to shareholders when
distributed. Purchases and sales are made for the Fund's portfolio whenever
necessary, in management's opinion, to meet the Fund's objective.
[To Be Updated]
For the fiscal period from September 9, 1996 (commencement of operations)
to August 31, 1997, the fiscal year ended August 31, 1998, the eleven month
period ended July 31, 1999, and the fiscal year ended July 31, 2000, the Fund
paid brokerage commissions of $150,026, $32,583,$58,549and $_______,
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 Advisor. The total amount of brokerage transactions
29
<PAGE>
aggregated $53,769,054, of which $10,797,522 (20% of all brokerage transactions)
were transactions which included research commissions.
For the eleven month period ended July 31, 1999, $48,860 (83% 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 Advisor. The total amount of brokerage transactions aggregated
$135,702,793, of which $103,124,642 (76% of all brokerage transactions) were
transactions which included research commissions.
For the fiscal year ended July 31, 2000, $______ (__% 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 Advisor. The total amount of brokerage transactions aggregated
$_______________, of which $___________ (__% of all brokerage transactions) were
transactions which included research commissions.
Portfolio Turnover
The portfolio turnover rates for Fund (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 year ended July
31, 2000 was 135%, for the eleven month period ended July 31, 1999 was 148% and
for the fiscal year ended August 30, 1998, was 120% For the eleven-month period
ended July 31, 1999, the figure was annualized.
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. Net asset value
per share of each class of 21st Century Growth Fund is computed by dividing the
value of the total assets attributable to shares of a class, less all
liabilities attributable shares of that class, by the total number of
outstanding shares of that class.
An exchange-traded equity security is valued at its most recent sale
price. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security that is traded on the Nasdaq Stock
Market ("Nasdaq") system is valued at its most recent sale price. Lacking any
sales, the security is valued at the most recent bid quotation. The value of an
equity security not quoted on the Nasdaq System, but traded in another
over-the-counter market, is its most recent sale price. Lacking any sales, the
security is valued at the Calculated Mean. Lacking a Calculated Mean, the
security is valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
purchased with remaining maturities of sixty days or less 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 Advisor 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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<PAGE>
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.
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Fund Shares are sold at their public offering price, which is the net
asset value per such shares next determined after an order is received in proper
form plus, with respect to Class A Shares, an initial sales charge. The minimum
initial investment for Class A, B or C is $1,000 and the minimum subsequent
investment is $100 but such minimum amounts may be changed at any time. The Fund
may waive the minimum for purchases by trustees, directors, officers or
employees of the Fund or the Advisor and its affiliates. An order for the
purchase of Shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
PURCHASE OF SHARES
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in
their initial and contingent deferred sales charge structures and in their
ongoing expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. Each
class has distinct advantages and disadvantages for different investors, and
investors may choose the class that best suits their circumstances and
objectives.
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
Class A Maximum initial sales None(1) Initial sales
charge of charge waived or
5.75% of the public reduced for
offering price certain purchases
Class B Maximum contingent 0.75% Shares convert
deferred sales charge of to Class A
4% of redemption shares six years
proceeds; declines to after issuance
zero after six years
Class C Contingent deferred 0.75% No conversion
sales charge of 1% of feature
redemption proceeds for
redemptions made during
first year after purchase
(1) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales
charge if redeemed within one year of purchase and a 0.50% contingent
deferred sales charge if redeemed within the second year of purchase.
The minimum initial investment for each of Class A, B and C of the Fund is
$1,000 and the minimum subsequent investment is $100. The minimum initial
investment for an Individual Retirement Account is $250 and the minimum
subsequent investment is $50. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion.
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<PAGE>
Share certificates will not be issued unless requested in writing and may
not be available for certain types of account registrations. It is recommended
that investors not request share certificates unless needed for a specific
purpose. You cannot redeem shares by telephone or wire transfer or use the
telephone exchange privilege if share certificates have been issued. A lost or
destroyed certificate is difficult to replace and can be expensive to the
shareholder (a bond worth 2% or more of the certificate value is normally
required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of as a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over .00** .00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI,
the Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Kemper Fund
listed under "Special Features -- Class A Shares -- Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features"; or (b) a participant-directed qualified
retirement plan described in Code Section 401(a), a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of the purchase of shares
purchased under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge. See "Redemption or Repurchase of Shares --
Contingent Deferred Sales Charge -- Large Order NAV Purchase Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer-sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
cumulative amount invested by the purchaser in the Fund and other Kemper Fund
listed under "Special Features -- Class A Shares -- Combined Purchases,"
including purchases pursuant to the "Combined Purchases," "Letter of Intent" and
"Cumulative Discount" features referred to above and including purchases of
Class R shares of certain Scudder Funds. The privilege of purchasing Class A
shares of the Fund at net asset value under the Large Order NAV Purchase
Privilege is not available if another net asset value purchase privilege also
applies.
Class A shares of the Fund or of any other Kemper Fund listed under
"Special Features -- Class A Shares -- Combined Purchases" may be purchased at
net asset value in any amount by members of the plaintiff class in the
proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No.
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<PAGE>
93 C 5231 (N.D. IL). This privilege is generally non-transferable and continues
for the lifetime of individual class members and for a ten year period for
non-individual class members. To make a purchase at net asset value under this
privilege, the investor must, at the time of purchase, submit a written request
that the purchase be processed at net asset value pursuant to this privilege
specifically identifying the purchaser as a member of the "Tabankin Class."
Shares purchased under this privilege will be maintained in a separate account
that includes only shares purchased under this privilege. For more details
concerning this privilege, class members should refer to the Notice of (1)
Proposed Settlement with Defendants; and (2) Hearing to Determine Fairness of
Proposed Settlement, dated August 31, 1995, issued in connection with the
aforementioned court proceeding. For sales of Fund shares at net asset value
pursuant to this privilege, KDI may in its discretion pay investment dealers and
other financial services firms a concession, payable quarterly, at an annual
rate of up to 0.25% of net assets attributable to such shares maintained and
serviced by the firm. A firm becomes eligible for the concession based upon
assets in accounts attributable to shares purchased under this privilege in the
month after the month of purchase and the concession continues until terminated
by KDI. The privilege of purchasing Class A shares of the Fund at net asset
value under this privilege is not available if another net asset value purchase
privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons
who purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any
amount by certain professionals who assist in the promotion of Kemper Funds
pursuant to personal services contracts with KDI, for themselves or members of
their families. KDI in its discretion may compensate financial services firms
for sales of Class A shares under this privilege at a commission rate of 0.50%
of the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons
who purchase shares of the Fund through KDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a)
officers, trustees, employees (including retirees) and sales representatives of
the Fund, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families; (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI and officers, directors and employees of service agents of
the Fund, for themselves or their spouses or dependent children; (c) any trust,
pension, profit-sharing or other benefit plan for only such persons; (d) persons
who purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
programs described in the prospectuses of such trusts that have such programs.
Class A shares of the Fund may be sold at net asset value through certain
investment advisers registered under the 1940 Act and other financial services
firms acting solely as agent for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
advisor or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another investment company, or
to shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in
33
<PAGE>
existence for at least six months and has some purpose other than the purchase
of redeemable securities of a registered investment company at a discount. In
order to qualify for a lower sales charge, all orders from an organized group
will have to be placed through a single investment dealer or other firm and
identified as originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of
the Fund six years after issuance on the basis of the relative net asset value
per share of the Class B shares. The purpose of the conversion feature is to
relieve holders of Class B shares from the distribution services fee when they
have been outstanding long enough for KDI to have been compensated for
distribution related expenses. For purposes of conversion to Class A shares,
shares purchased through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's Fund account will be
converted to Class A shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares." KDI currently advances to firms the first year distribution fee
at a rate of 0.75% of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this decision, investors should review their particular circumstances carefully
with their financial representative. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than six years might consider Class B shares. Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might consider Class C shares. KDI has established the following procedures
regarding the purchase of Class A, Class B and Class C shares. These procedures
do not reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $500,000 or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value where the combined
subaccount value in a Fund or other Kemper Mutual Funds listed under "Special
Features - Class A Shares - Combined Purchases" is in excess of $1 million for
Class B shares or $5 million for Class C shares including purchases pursuant to
the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features." KemFlex Plans that on May 1, 2000 have in
excess of $1 million invested in Class B shares of Kemper Mutual Funds, or have
in excess of $850,000 invested in Class B shares of Kemper Mutual Funds and are
able to qualify for the purchase of Class A shares at net asset value (e.g.,
pursuant to a Letter of Intent), will have future investments made in Class A
shares and will have the option to covert their holdings in Class B shares to
Class A shares free of any contingent deferred sales charge on May 1, 2002. For
more information about the three sales arrangements, consult your financial
representative or the Shareholder Service Agent. Financial services firms may
receive different compensation depending upon which class of shares they sell.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial
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services firms may be subject to various state laws regarding the services
described above and may be required to register as dealers pursuant to state
law. If banking firms were prohibited from acting in any capacity or providing
any of the described services, management would consider what action, if any,
would be appropriate. KDI does not believe that termination of a relationship
with a bank would result in any material adverse consequences to the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the
amount of shares of the Fund sold under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
Kemper Service Company, (iii) the registered representative placing the trade is
a member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will,
from time to tome, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other Funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price
based on the net asset value of the Fund next determined after receipt in good
order by KDI of the order accompanied by payment. However, orders received by
dealers or other financial services firms prior to the determination of net
asset value (see "Net Asset Value") and received in good order by KDI prior to
the close of its business day will be confirmed at a price based on the net
asset value effective on that day ("trade date"). The Fund reserves the right to
determine the net asset value more frequently than once a day if deemed
desirable. Dealers and other financial services firms are obligated to transmit
orders promptly. Collection may take significantly longer for a check drawn on a
foreign bank than for a check drawn on a domestic bank. Therefore, if an order
is accompanied by a check drawn on a foreign bank, funds must normally be
collected before shares will be purchased. See "Purchase and Redemption of
Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering
made by this prospectus and to reject purchase orders for any reason. Also, from
time to time, the Fund may temporarily suspend the offering of any class of its
shares to new investors. During the period of such suspension, persons who are
already shareholders of such class of such Fund normally are permitted to
continue to purchase additional shares of such class and to have dividends
reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. 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 applicable Fund with a tax
identification number during the 30-day notice period.
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Shareholders should direct their inquiries to Kemper Service Company, 811
Main Street, Kansas City, Missouri 64105-2005 or to the firm from which they
received this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper Funds, Attention: Redemption Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557. When certificates for shares have
been issued, they must be mailed to or deposited with the Shareholder Service
Agent, along with a duly endorsed stock power and accompanied by a written
request for redemption. Redemption requests and a stock power must be endorsed
by the account holder with signatures guaranteed by a commercial bank, trust
company, savings and loan association, federal savings bank, member firm of a
national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed exactly as the account is
registered including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
The redemption price for shares of a class of the Fund will be the net
asset value per share of that class of the Fund next determined following
receipt by the Shareholder Service Agent of a properly executed request with any
required documents as described above. Payment for shares redeemed will be made
in cash as promptly as practicable but in no event later than seven days after
receipt of a properly executed request accompanied by any outstanding share
certificates in proper form for transfer. When the Fund is asked to redeem
shares for which it may not have yet received good payment (i.e., purchases by
check, EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of
redemption proceeds until it has determined that collected funds have been
received for the purchase of such shares, which will be up to 10 days from
receipt by the Fund of the purchase amount. The redemption within two years of
Class A shares purchased at net asset value under the Large Order NAV Purchase
Privilege may be subject to a contingent deferred sales charge (see "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares"), the redemption
of Class B shares within six years may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge -- Class B Shares" below), and the
redemption of Class C shares within the first year following purchase may be
subject to a contingent deferred sales charge (see "Contingent Deferred Sales
Charge -- Class C Shares" below).
Because of the high cost of maintaining small accounts, the Fund may
assess a quarterly fee of $9 on any account with a balance below $1,000 for the
quarter. The fee will not apply to accounts enrolled in an automatic investment
program, Individual Retirement Accounts or employer-sponsored employee benefit
plans using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited
wire transfer redemptions and EXPRESS-Transfer transactions (see "Special
Features") and exchange transactions for individual and institutional accounts
and pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed.
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Telephone requests may be made by calling 1-800-621-1048. Shares purchased by
check or through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed
under this privilege of redeeming shares by telephone request until such shares
have been owned for at least 10 days. This privilege of redeeming shares by
telephone request or by written request without a signature guarantee may not be
used to redeem shares held in certificated form and may not be used if the
shareholder's account has had an address change within 30 days of the redemption
request. During periods when it is difficult to contact the Shareholder Service
Agent by telephone, it may be difficult to use the telephone redemption
privilege, although investors can still redeem by mail. The Fund reserves the
right to terminate or modify this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the discretionary commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested
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dividends on Class B shares. The charge is computed at the following rates
applied to the value of the shares redeemed, excluding amounts not subject to
the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of
the total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
(g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly, and (g)
redemption of shares purchased through a dealer-sponsored asset allocation
program maintained on an omnibus record-keeping system provided the dealer of
record had waived the advance of the first year administrative services and
distribution fees applicable to such shares and has agreed to receive such fees
quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of 3% ($300) because it was in the second year after the purchase was
made.
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The rate of the contingent deferred sales charge is determined by the
length of the period of ownership. Investments are tracked on a monthly basis.
The period of ownership for this purpose begins the first day of the month in
which the order for the investment is received. For example, an investment made
in March 1998 will be eligible for the second year's charge if redeemed on or
after March 1, 1999. In the event no specific order is requested when redeeming
shares subject to a contingent deferred sales charge, the redemption will be
made first from shares representing reinvested dividends and then from the
earliest purchase of shares. KDI receives any contingent deferred sales charge
directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Kemper Fund listed under "Special Features -- Class A Shares
-- Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the other listed Kemper Funds. A shareholder of the Fund or other
Kemper Funds who redeems Class A shares purchased under the Large Order NAV
Purchase Privilege (see "Purchase of Shares -- Initial Sales Charge Alternative
-- Class A Shares") or Class B shares or Class C shares and incurs a contingent
deferred sales charge may reinvest up to the full amount redeemed at net asset
value at the time of the reinvestment, in the same class of shares as the case
may be, of the Fund or of other Kemper Funds. The amount of any contingent
deferred sales charge also will be reinvested. These reinvested shares will
retain their original cost and purchase date for purposes of the contingent
deferred sales charge schedule. Also, a holder of Class B shares who has
redeemed shares may reinvest up to the full amount redeemed, less any applicable
contingent deferred sales charge that may have been imposed upon the redemption
of such shares, at net asset value in Class A shares of the Fund or of the other
Kemper Funds listed under "Special Features -- Class A Shares -- Combined
Purchases." Purchases through the reinvestment privilege are subject to the
minimum investment requirements applicable to the shares being purchased and may
only be made for Kemper Funds available for sale in the shareholder's state of
residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same value used to
determine net asset value, and selecting the securities in such manner as the
Board of Trustees may deem fair and equitable. If such a distribution occurred,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in 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 a Share at the
beginning of the period.
SPECIAL FEATURES
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Strategic Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash
Reserves Fund (available only upon exchange or conversion from Class A shares of
another Kemper Mutual Fund), Kemper U.S. Mortgage Fund, Kemper
Short-Intermediate Government Fund, Kemper Value Plus Growth Fund, Kemper
Horizon Fund, Kemper New Europe Fund, Inc., Kemper Asian Growth Fund, Kemper
Aggressive Growth Fund, Kemper Global/International Series, Inc., Kemper Equity
Trust and Kemper Securities Trust, ("Kemper Mutual Funds"). Except as noted
below, there is no combined purchase credit for direct purchases of shares of
Zurich Money Funds, Cash Equivalent Fund, Tax-Exempt California Money Market
Fund, Cash Account Trust, Investor's Municipal Cash Fund or Investors Cash Trust
("Money Market Funds"), which are not considered a "Kemper Mutual Fund" for
purposes hereof. For purposes of the Combined Purchases feature described above
as well as for the Letter of Intent and Cumulative Discount features described
below, employer sponsored employee benefit plans using the subaccount record
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keeping system made available through the Shareholder Service Agent may include:
(a) Money Market Funds as "Kemper Mutual Funds", (b) all classes of shares of
any Kemper Mutual Fund and (c) the value
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Funds listed above made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
KDI. The Letter, which imposes no obligation to purchase or sell additional
Class A shares, provides for a price adjustment depending upon the actual amount
purchased within such period. The Letter provides that the first purchase
following execution of the Letter must be at least 5% of the amount of the
intended purchase, and that 5% of the amount of the intended purchase normally
will be held in escrow in the form of shares pending completion of the intended
purchase. If the total investments under the Letter are less than the intended
amount and thereby qualify only for a higher sales charge than actually paid,
the appropriate number of escrowed shares are redeemed and the proceeds used
toward satisfaction of the obligation to pay the increased sales charge. The
Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Funds held of record as of the initial purchase date under the
Letter as an "accumulation credit" toward the completion of the Letter, but no
price adjustment will be made on such shares. Only investments in Class A shares
are included for this privilege.
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Kemper Funds (computed at the maximum offering price at
the time of the purchase for which the discount is applicable) already owned by
the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Kemper Funds and shares of the Money
Market Funds listed under "Special Features -- Class A Shares -- Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of calculating the contingent deferred sales charge.
Class B Shares. Class B shares of the Fund and Class B shares of any other
Kemper Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class B shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For purposes of calculating the contingent
deferred sales charge that may be imposed upon the redemption of the Class B
shares received on exchange, amounts exchanged retain their original cost and
purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Kemper Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class C shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For purposes of determining whether there is a
contingent deferred sales charge that may be imposed upon the redemption of the
Class C shares received by exchange, they retain the cost and purchase date of
the shares that were originally purchased and exchanged.
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General. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange through another Kemper
Fund, or from a Money Market Fund, may not be exchanged thereafter until they
have been owned for 15 days (the "15-Day Hold Policy"). In addition, shares of a
Kemper fund with a value of $1,000,000 or less (except Kemper Cash Reserves
Fund) acquired by exchange from another Kemper fund, or from a money market
fund, may not be exchanged thereafter until they have been owned for 15 days,
if, in the Adviser's judgment, the exchange activity may have an adverse effect
on the fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Kemper fund and therefore may be
subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including, without limitation, accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged must
at least equal the minimum investment requirement of the Kemper Fund into which
they are being exchanged. Exchanges are made based on relative dollar values of
the shares involved in the exchange. There is no service fee for an exchange;
however, dealers or other firms may charge for their services in effecting
exchange transactions. Exchanges will be effected by redemption of shares of the
fund held and purchase of shares of the other fund. For federal income tax
purposes, any such exchange constitutes a sale upon which a gain or loss may be
realized, depending upon whether the value of the shares being exchanged is more
or less than the shareholder's adjusted cost basis of such shares. Shareholders
interested in exercising the exchange privilege may obtain prospectuses of the
other Funds from dealers, other firms or KDI. Exchanges may be accomplished by a
written request to Kemper Service Company, Attention: Exchange Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the shareholder
has given authorization. Once the authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048, subject to the
limitations on liability under "Redemption or Repurchase of Shares -- General."
Any share certificates must be deposited prior to any exchange of such shares.
During periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone exchange privilege. The
exchange privilege is not a right and may be suspended, terminated or modified
at any time. Exchanges may only be made for Funds that are available for sale in
the shareholder's state of residence. Currently, Tax-Exempt California Money
Market Fund is available for sale only in California and Investors Municipal
Cash Fund is available for sale only in certain states. Except as otherwise
permitted by applicable regulations, 60 days' prior written notice of any
termination or material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Kemper Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the shareholder or the Kemper Fund terminates the privilege.
Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated ClearingHouse System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (maximum
$50,000) from the shareholder's account at a bank, savings and loan or credit
union into the shareholder's Fund account. By enrolling in Bank Direct Deposit,
the shareholder authorizes the Fund and its agents to either draw checks or
initiate Automated ClearingHouse debits against the designated account at a bank
or other financial institution.
41
<PAGE>
This privilege may be selected by completing the appropriate section on the
Account Application or by contacting the Shareholder Service Agent for
appropriate forms. A shareholder may terminate his or her Plan by sending
written notice to Kemper Service Company, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination by a shareholder will become effective within thirty
days after the Shareholder Service Agent has received the request. A Fund may
immediately terminate a shareholder's Plan in the event that any item is unpaid
by the shareholder's financial institution. The Fund may terminate or modify
this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $100. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic
withdrawal plan will ordinarily be disadvantageous to the investor because the
investor will be paying a sales charge on the purchase of shares at the same
time that the investor is redeeming shares upon which a sales charge may have
already been paid. Therefore, the Fund will not knowingly permit additional
investments of less than $2,000 if the investor is at the same time making
systematic withdrawals. KDI will waive the contingent deferred sales charge on
redemptions of Class A shares purchased under the Large Order NAV Purchase
Privilege, Class B shares and Class C shares made pursuant to a systematic
withdrawal plan. The right is reserved to amend the systematic withdrawal plan
on 30 days' notice. The plan may be terminated at any time by the investor or
the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Savings Incentive Match Plan for Employees of Small
Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP") IRA
accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to employees
of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be adopted
by employers. The maximum annual contribution per participant is the
lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit
plans, target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and
materials for establishing them are available from the Shareholder Service Agent
upon request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the Exchange is closed other than
customary weekend and holiday closings or during any period in which trading on
the Exchange is restricted, (b) during any period when an emergency exists as a
result of which (i) disposal of the Fund's investments is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund to determine
the value of its net assets, or (c) for such other periods as the SEC may by
order permit for the protection of the Fund's shareholders.
The net asset value per Share of the Fund is determined separately for
each class by dividing the value of the Fund's net assets attributable to that
class by the number of Shares of that class outstanding. The per share net asset
value of the Class B and Class C Shares of the Fund will generally be lower than
that of the Class A Shares of the Fund because of the higher expenses borne by
the Class B and Class C Shares. 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
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<PAGE>
scheduled to be closed on the following holidays: New Year's Day, Martin Luther
King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
Although it is the Fund's present policy to redeem in cash, if the Board
of Trustees determines that a material adverse effect would be experienced by
the remaining shareholders if payment were made wholly in cash, the Fund will
satisfy the redemption request in whole or in part by a distribution of
portfolio securities in lieu of cash, in conformity with the applicable rules of
the SEC, taking such securities at the same value used to determine net asset
value, and selecting the securities in such manner as the Board of Trustees may
deem fair and equitable. If such a distribution occurred, shareholders receiving
securities and selling them could receive less than the redemption value of such
securities and in addition would incur certain transaction costs. Such a
redemption would not be so liquid as a redemption entirely in cash.
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B Shares and
not Class A Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B Shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
Officers and Trustees
The officers and trustees of the Trust, their ages, their principal
occupations and their affiliations, if any, with the Advisor, and Scudder
Investor Services, Inc., are as follows:
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
Linda C. Coughlin (48)+* Trustee and President Managing Director of Scudder Kemper Director and Senior
Investments, Inc. Vice President
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board, Inc.
Chapel Hill, NC
Keith R. Fox (45) Trustee Private Equity Investor, President, --
10 East 53rd Street Exeter Capital Management Corporation
New York, NY 10022
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation; Department of State -
Foundation Undersecretary of State for
650 Fifth Avenue Economic, Business and
New York, NY 10128 Agricultural Affairs (March 1993 to
January 1997)
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski Law
Firm (1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place 23rd Floor Capital
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, --
601 E Street Inc.
Washington, D.C. 20004
Thomas V. Bruns (43)# Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Peter Chin (58)++ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
J. Brooks Dougherty (41)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
James M. Eysenbach (38)@ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
James E. Fenger (41)# Vice President Managing Director of Scudder --
Kemper Investments, Inc.
William F. Glavin (41)# Vice President Managing Director of Scudder Vice President
Kemper Investments, Inc.
Sewall Hodges (45)++ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
James E. Masur (40)+ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Ann M. McCreary (43) ++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Kathryn L. Quirk (47)+ Vice President and Managing Director of Scudder Director, Senior Vice
Assistant Secretary Kemper Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
Howard S. Schneider (43)# Vice President Managing Director of Scudder Kemper --
Kemper Investments, Inc.
John R. Hebble (42)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Scudder
Kemper Investments, Inc.
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.;
Associate, Dechert Price & Rhoads
(law firm) 1989 - 1997
John Millette (37)+ Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Funds and their
counsel to be persons who are "interested persons" of the Adviser or
of the Trust, within the meaning of the Investment Company Act of
1940, as amended.
** Unless otherwise stated, all of the Trustees and officers have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
The Trustees and officers of the Trust also serve in similar capacities
with respect to other Scudder Funds.
To the best of the Trust's knowledge, as of August 31, 2000, all Trustees
and officers of the Trust as a group owned beneficially (as that term is defined
under Section 13(d) of the Securities Exchange Act of 1934) less than 1% of the
shares of any class of the Fund outstanding on such date.
To the best of the Trust's knowledge, as of August 31, 2000, no person
owned beneficially more than 5% of the shares of any class of the Fund
outstanding on such date.
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<PAGE>
Remuneration
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees of the Trust 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 of the Trust and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to Scudder and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by Scudder 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 of the Independent Trustees serve on the Committee of 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 of the Fund
Each Independent Trustee receives compensation for his or her services, which
includes an annual retainer and an attendance fee for each meeting attended. The
Independent Trustee who serves as Lead Trustee receives additional compensation
for his or her services. 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 Advisor. 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 1999 from the Trust and from all of the Scudder funds as a group.
Name Scudder Securities All Scudder Funds
Trust*
Henry P. Becton, Jr. ** $ 0 $140,000 (30 funds)
Dawn-Marie Driscoll** 0 150,000 (30 funds)
Edgar R. Fiedler**+ 945.81 73,230 (29 funds)
Keith R. Fox 36,375 160,325 (23 funds)
Joan E. Spero 39,625 175,275 (23 funds)
Jean Gleason Stromberg** 0 40,935 (16 funds)
Jean C. Tempel** 0 140,000 (30 funds)
* Scudder Securities Trust consists of five funds: Scudder Development Fund,
Scudder Health Care Fund, Scudder Technology Fund, Scudder Small Company
Value Fund and Scudder 21st Century Growth Fund.
** Newly-elected Trustee. On July 13, 2000, shareholders of each Fund of the
Trust elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly constituted Board of Trustees.
+ Mr. Fielder's compensation includes the $9,900 accrued but not received,
through the deferred compensation program.
46
<PAGE>
Members of the Board of Trustees who are employees of the Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
SHAREHOLDER RIGHTS
The Fund is an open-end diversified series of Scudder Securities Trust, a
Massachusetts business trust established under a Declaration of Trust dated
October 16, 1985, as amended from time to time. The Trust's authorized capital
consists of an unlimited number of shares of beneficial interest, par value
$0.01 per share. The Trust's shares are currently divided into four classes
Class A, Class B, Class C and Class S Shares.
The Trust may issue an unlimited number of shares of beneficial interest
in one or more series or "Portfolios," all having a par value of $.01, which may
be divided by the Board of Trustees into classes of shares. The Board of
Trustees of the Fund may authorize the issuance of additional classes and
additional Portfolios if deemed desirable, each with its own investment
objective, policies and restrictions. Since the Trust may offer multiple
Portfolios, it is known as a "series company." Currently, the Trust offers four
classes of shares of the Fund. These are Class A, Class B, Class C and Class S
Shares. Shares of a Portfolio have equal noncumulative voting rights except that
Class B and Class C shares have separate and exclusive voting rights with
respect to each such class' Rule 12b-1 Plan. Shares of each class also have
equal rights with respect to dividends, assets and liquidation of the Fund
subject to any preferences (such as resulting from different Rule 12b-1
distribution fees), rights or privileges of any classes of shares of the Fund.
Shares are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights. If shares of more than
one Portfolio are outstanding, shareholders will vote by Portfolio and not in
the aggregate or by class except when voting in the aggregate is required under
the 1940 Act, such as for the election of trustees, or when voting by class is
appropriate.
The Fund generally is not required to hold meetings of its shareholders.
Under the Agreement and Declaration of Trust of the Fund ("Declaration of
Trust"), however, shareholder meetings will be held in connection with the
following matters: (a) the election or removal of trustees if a meeting is
called for such purpose; (b) the adoption of any contract for which approval by
shareholders is required by the 1940 Act; (c) any termination of the Fund or a
class to the extent and as provided in the Declaration of Trust; (d) any
amendment of the Declaration of Trust (other than amendments changing the name
of the Fund, supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision thereof); and (e) such
additional matters as may be required by law, the Declaration of Trust, the
By-laws of the Fund, or any registration of the Fund with the SEC or any state,
or as the trustees may consider necessary or desirable. The shareholders also
would vote upon changes in fundamental policies or restrictions.
Any matter shall be deemed to have been effectively acted upon with
respect to a Fund if acted upon as provided in Rule 18f-2 under the 1940 Act, or
any successor rule, and in the Trust's Declaration of Trust. As used in the
Prospectuses and in this Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with general matters affecting the Fund and all additional portfolios
(e.g., election of directors), means the vote of the lesser of (i) 67% of the
Trust's Shares represented at a meeting if the holders of more than 50% of the
outstanding Shares are present in person or by proxy, or (ii) more than 50% of
the Trust's outstanding Shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the Shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding Shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding Shares of the portfolio.
Each Trustee serves until the next meeting of shareholders, if any, called
for the purpose of electing trustees and until the election and qualification of
a successor or until such trustee sooner dies, resigns, retires or is removed by
a majority vote of the Shares entitled to vote (as described below) or a
majority of the trustees. In accordance with the 1940 Act (a) the Fund will hold
a shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Any of the Trustees may be removed (provided the aggregate number of
Trustees after such removal shall not be less than one) with cause, by the
action of two-thirds of the remaining Trustees. Any Trustee may be removed at
any meeting of shareholders by vote of two-thirds of the Outstanding Shares. The
Trustees shall promptly call a meeting of the shareholders for the purpose of
voting upon the question of removal of any such Trustee or Trustees when
requested
47
<PAGE>
in writing to do so by the holders of not less than ten percent of the
Outstanding Shares, and in that connection, the Trustees will assist shareholder
communications to the extent provided for in Section 16(c) under the 1940 Act.
The Fund's Declaration of Trust specifically authorizes the Board of
Trustees to terminate the Fund or any Portfolio or class by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for obligations of
the Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by the Advisor remote and
not material, since it is limited to circumstances in which a disclaimer is
inoperative and the Fund itself is unable to meet its obligations.
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.
Further, the Fund's Board of Trustees may determine, without prior
shareholder approval, in the future that the objectives of the Fund would be
achieved more effectively by investing in a master fund in a master/feeder fund
structure.
The Fund's activities are supervised by the Trust's Board of Trustees. The
Trust has adopted a plan pursuant to Rule 18f-3 (the "Plan") under the 1940 Act
to permit the Trust to establish a multiple class distribution system.
Under the Plan, shares of each class represent an equal pro rata interest
in the Fund and, generally, shall have identical voting, dividend, liquidation,
and other rights, preferences, powers, restrictions, limitations, qualifications
and terms and conditions, except that: (1) each class shall have a different
designation; (2) each class of shares shall bear its own "class expenses;" (3)
each class shall have exclusive voting rights on any matter submitted to
shareholders that relates to its administrative services, shareholder services
or distribution arrangements; (4) each class shall have separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class; (5) each class may have separate
and distinct exchange privileges; (6) each class may have different conversion
features, and (7) each class may have separate account size requirements.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
Additional Information
Other Information
The CUSIP numbers of the classes are:
Class A 811196807
Class B 811196872
Class C 811196880
The Fund has a fiscal year ending July 31. On September 16, 1998, the
Board of the Fund changed the fiscal year end from August 31 to July 31.
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
48
<PAGE>
decisions made by the Advisor in light of the Fund's investment objectives and
policies, its other portfolio holdings and tax considerations, and should not be
construed as recommendations for similar action by other investors.
Costs of $23,340 incurred by the Fund in conjunction with its organization
are amortized over the five-year period beginning September 9, 1996.
Portfolio securities of the Fund are held separately pursuant to a
custodian agreement, by the Fund's custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert Price & Rhoads is counsel to the Fund.
The name "Scudder Securities Trust" is the designation of the Trust 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, shareholders nor other series of the
Trust assume any personal liability for obligations entered into on behalf of
the Fund. No other series of the Trust assumes any liabilities for obligations
entered into on behalf of the Fund. Upon the initial purchase of Shares, the
shareholder agrees to be bound by the Fund'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's Shares prospectus and this Statement of Additional Information
omit certain information contained in the Registration Statement and its
amendments 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. The
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 the 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 July 31, 2000, are incorporated herein by reference and are hereby
deemed to be a part of this Statement of Additional Information.
49
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SCUDDER DEVELOPMENT FUND
A series of Scudder Securities Trust
A Mutual Fund Which Seeks to Provide
Long-Term Capital Appreciation by Investing Primarily in
U.S. Companies with the Potential for
Above-Average Earnings Growth
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
October 1, 2000
--------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of Scudder Development Fund dated
October 1, 2000, as amended from time to time, a copy of which may be obtained
without charge by writing to Scudder Investor Services, Inc., Two International
Place, Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders for Scudder Development Fund, for the
fiscal year ended July 31, 2000 , is incorporated by reference and is hereby
deemed to be a part of this Statement of Additional Information.
<PAGE>
TABLE OF CONTENTS
Page
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES...................................1
General Investment Objective and Policies................................1
Master/feeder structure..................................................2
Investments Involving Above-Average Risk.................................2
Investments and Investment Techniques....................................2
Investment Restrictions.................................................14
PURCHASES.....................................................................15
Additional Information About Opening An Account.........................15
Minimum Balances........................................................15
Additional Information About Making Subsequent Investments..............16
Additional Information About Making Subsequent Investments by
QuickBuy............................................................16
Checks..................................................................17
Wire Transfer of Federal Funds..........................................17
Share Price.............................................................17
Share Certificates......................................................17
Other Information.......................................................18
EXCHANGES AND REDEMPTIONS.....................................................18
Exchanges...............................................................18
Redemption by Telephone.................................................19
Redemption by QuickSell.................................................20
Redemption by Mail or Fax...............................................20
Redemption-In-Kind......................................................20
Other Information.......................................................21
FEATURES AND SERVICES OFFERED BY THE FUND.....................................21
The No-Load Concept.....................................................21
Internet access.........................................................21
Dividends and Capital Gains Distribution Options........................22
Reports to Shareholders.................................................22
Transaction Summaries...................................................22
THE SCUDDER FAMILY OF FUNDS...................................................23
SPECIAL PLAN ACCOUNTS.........................................................25
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension
Plans for Corporations and Self-Employed Individuals................25
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations
and Self-Employed Individuals.......................................25
Scudder IRA: Individual Retirement Account.............................26
Scudder Roth IRA: Individual Retirement Account........................26
Scudder 403(b) Plan.....................................................26
Automatic Withdrawal Plan...............................................27
Group or Salary Deduction Plan..........................................27
Automatic Investment Plan...............................................27
Uniform Transfers/Gifts to Minors Act...................................28
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.....................................29
PERFORMANCE INFORMATION.......................................................30
Average Annual Total Return.............................................30
Cumulative Total Return.................................................30
Total Return............................................................31
Comparison of Fund Performance..........................................31
FUND ORGANIZATION.............................................................32
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TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISER............................................................33
Investment Adviser......................................................33
AMA InvestmentLink(SM) Program..........................................35
Code of Ethics..........................................................35
TRUSTEES AND OFFICERS.........................................................36
REMUNERATION..................................................................38
Responsibilities of the Board -- Board and Committee Meetings...........38
Compensation of Officers and Trustees...................................38
DISTRIBUTOR...................................................................38
Administrative Fee......................................................40
TAXES ........................................................................40
PORTFOLIO TRANSACTIONS........................................................44
Brokerage Commissions...................................................44
Portfolio Turnover......................................................45
NET ASSET VALUE...............................................................45
ADDITIONAL INFORMATION........................................................46
Experts.................................................................46
Shareholder Indemnification.............................................46
Other Information.......................................................46
FINANCIAL STATEMENTS..........................................................47
ii
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THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
Scudder Development Fund (the "Fund") is a 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.
The Fund is an open-end management investment company which continuously
offers and redeems shares at net asset value. The Fund is a company of the type
commonly known as a mutual fund. The prospectus and this Statement of Additional
Information for the Fund each offer two classes of shares to provide investors
with different purchase options. The two classes are: the Class S and the Class
AARP. Each class has its own important features and policies. On October 2,
2000, shares of the Fund were redesignated Class S shares of their respective
funds. Shares of the AARP class are especially designed for members of the
American Association of Retired Persons ("AARP").
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage (such as hedging,
etc.) or a financial instrument which the Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Adviser"), in its
discretion, might, but is not required to, use in managing the Fund's portfolio
assets. The Adviser may, in its discretion, at any time employ such practice,
technique or instrument for the Fund, but not for all funds advised by it.
Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
the Fund, but, to the extent employed, could from time to time have a material
impact on the Fund's performance.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
General Investment Objective and Policies
Scudder Development Fund seeks long-term capital appreciation by investing
primarily in U.S. companies believed by the Adviser to have the potential for
above-average growth.
The Fund generally invests in equity securities, including common stocks
and convertible securities, of companies that the Fund's investment adviser,
Scudder Kemper Investments, Inc. (the "Adviser"), believes have the potential
for above-average revenue, earnings, business value and/or cash flow growth.
These factors are 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. The management
team pursues a flexible investment strategy in the selection of securities, not
limited to any particular investment sector, industry or company size. The Fund
may, depending upon market circumstances, emphasize securities of small-,
medium- or large-sized companies from time to time.
To help reduce risk, the Fund allocates its investments among many
companies. In selecting industries and companies for investment, the Adviser may
consider many factors, including overall growth prospects, financial condition,
competitive position, technology, research and development, 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, management and other factors.
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. In such cases, the Fund may invest
without limit in cash, and may invest in high-quality debt securities without
equity features, U.S. Government securities and money market instruments which
are rated in the two highest categories by Moody's Investor Services, Inc.
("Moody's") or Standard & Poor's Ratings Services, a Division of The McGraw-Hill
Companies, Inc. ("S&P"), or, if unrated, are deemed by the Adviser to be of
equivalent quality. It is impossible to accurately predict how long such
alternative strategies may be utilized.
In addition, the Fund may invest in preferred stocks when management
anticipates that the capital appreciation is likely to equal or exceed that of
common stocks over a selected time. The Fund may enter into repurchase
agreements, reverse repurchase agreements and invest in warrants, illiquid
securities, foreign securities, convertible bonds, and may
<PAGE>
engage in the lending of portfolio securities and strategic transactions. The
Fund may also invest in Standard & Poor's Depositary Receipts ("SPDRs").
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. The Fund is intended to be an investment
vehicle for that portion of an investor's assets which can appropriately accept
above-average risk and is not intended to provide a balanced investment program
to meet all requirements of every investor.
There is no assurance that the Fund will achieve its objective.
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 Involving Above-Average Risk
As opportunities for greater gain frequently involve a correspondingly
large risk of loss, the Fund may purchase securities carrying above-average
risk. The Fund's shares are believed by the Adviser to be 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 substantial long-term rewards.
As stated above, the Fund may purchase securities involving above-average
risk. The Fund's portfolio may include the securities of little-known companies,
that the Adviser believes have above-average earnings growth potential and/or
may receive greater market recognition. Both factors are believed to offer
significant opportunity for capital appreciation. Investment risk for these
companies is higher than that normally associated with larger, older companies
due to the greater business risks associated with small size, frequently narrow
product lines and relative immaturity. To help reduce risk, the Fund allocates
its investments among many companies and different industries.
The Fund may invest in securities of small companies. The securities of
smaller companies are often traded over-the-counter and may not be traded in the
volumes typical of trades 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. 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.
Investments and 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 stock also offers greater potential for
long-term gain on investment, compared to other classes of financial assets such
as bonds or cash equivalents.
2
<PAGE>
Illiquid Securities. The 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. This investment
practice, therefore, could have the effect of increasing the level of
illiquidity of the Fund. It is the Fund's policy that illiquid securities
(including repurchase agreements of more than seven days duration, certain
restricted securities, and other securities which are not readily marketable)
may not constitute, at the time of purchase, more than 15% of the value of the
Fund's net assets.
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 the
Fund's decision to sell a restricted or illiquid security and the point at which
the Fund is permitted or able to sell such security, the Fund might obtain a
price less favorable than the price that prevailed when it decided to sell.
Where a registration statement is required for the resale of restricted
securities, the Fund may be required to bear all or part of the registration
expenses. The 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.
The Fund will not invest more than 15% of its net assets in illiquid
securities.
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 or 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 Investment Company Act of 1940, as amended ("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
3
<PAGE>
deliver additional securities so that the market value of all securities subject
to the repurchase agreement will equal or exceed the repurchase price.
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 a 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 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.
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
4
<PAGE>
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.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Adviser. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent a Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging), except that the Fund may engage in reverse repurchase
agreements and dollar rolls for any purpose.
Real Estate Investment Trusts ("REITs"). The Fund may invest in REITs. REITs are
sometimes informally characterized as equity REITs, mortgage REITs and hybrid
REITs. Investment in REITs may subject the Fund to risks associated with the
direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of
the Fund's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalization, which may tend
to increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended, and to maintain exemption from the registration requirements of the
Investment Company Act of 1940. By investing in REITs indirectly through the
Fund, a shareholder will bear not only his or her proportionate share of the
expenses of the Fund, but also, indirectly, similar expenses of the REITs. In
addition, REITs depend generally on their ability to generate cash flow to make
distributions to shareholders.
5
<PAGE>
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies. For example, the Fund may invest in a variety of
investment companies which seek to track the composition and performance of
specific indexes or a specific portion of an index. These index-based
investments hold substantially all of their assets in securities representing
their specific index. Accordingly, the main risk of investing in index-based
investments is the same as investing in a portfolio of equity securities
comprising the index. The market prices of index-based investments will
fluctuate in accordance with both changes in the market value of their
underlying portfolio securities and due to supply and demand for the instruments
on the exchanges on which they are traded (which may result in their trading at
a discount or premium to their NAVs). Index-based investments may not replicate
exactly the performance of their specified index because of transaction costs
and because of the temporary unavailability of certain component securities of
the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
IPO risk. Securities issued through an initial public offering (IPO) can
experience an immediate drop in value if the demand for the securities does not
continue to support the offering price. Information about the issuers of IPO
securities is also difficult to acquire since they are new to the market and may
not have lengthy operating histories. The Fund may engage in short-term trading
in connection with its IPO investments, which could produce higher trading costs
and adverse tax consequences. The number of securities issued in an IPO is
limited, so it is likely that IPO securities will represent a smaller component
of the Fund's portfolio as the Fund's assets increase (and thus have a more
limited effect on the Fund's performance).
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 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
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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 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 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
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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 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.
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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. The Fund will not purchase call options unless the aggregate premiums
paid on all options held by the Fund at any time do not exceed 20% of its total
assets. 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 Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
on securities, indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
purchase put options unless the aggregate premiums paid on all options held by
the Fund at any time do not exceed 20% of its total assets 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, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the 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
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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 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. 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 or cross 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, the Fund will comply with the
asset segregation requirements described below.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the 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 its portfolio, to protect against currency fluctuations, 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. 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 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 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.
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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 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.
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 assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid 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 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.
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
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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.
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 equal or 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 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 will involve 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
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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.
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.
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 a 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 that 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 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
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<PAGE>
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.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Fund.
PURCHASES
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Class S
and $1,000 for Class AARP through Scudder Investor Services, Inc. by letter,
fax, or telephone. Shareholders of other Scudder funds who have submitted an
account application and have 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-SCUDDER 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 for Class S
and $1,000 for Class AARP), name of bank or trust company from which the wire
will be sent, the exact registration of the new account, the 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. Investors
interested in investing in Class AARP should call 800-253-2277 for further
instructions.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum Balances
Shareholders should maintain a share balance worth at least $2,500 for
Class S and $1,000 for Class AARP. For fiduciary accounts such as IRAs, and
custodial accounts such as Uniform Gift to Minor Act, and Uniform Trust to Minor
Act accounts, the minimum balance is $1,000 for Class S and $500 for Class AARP.
These amounts may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for Class AARP and
fiduciary/custodial accounts) is
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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.
The minimum initial purchase amount is less than $2,500 for Class S under
certain plan accounts and is $1,000 for Class AARP.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. 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
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
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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.
Investors interested in making subsequent investments in Class AARP should
call 800-253-2277 or 1-800-SCUDDER for Class S for further instruction.
Checks
A certified check is not necessary, but checks are only accepted subject
to collection at full face value in U.S. funds and must be drawn on, or payable
through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser may be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge for
the service. Presently, the Distributor pays a fee for receipt by State Street
Bank and Trust Company (the "Custodian") of "wired funds," but the right to
charge investors for this service is reserved.
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 the receipt of a purchase request 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.
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Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for its shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of Fund shares 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 Fund shares 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 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
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder Fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500 for Class S and
$1,000 for Class AARP. When an exchange represents an additional investment into
an existing account, the account receiving the exchange proceeds must have
identical registration, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more for Class S.
If the account receiving the exchange proceeds is to be different in any
respect, the exchange request must be in writing and must contain an original
signature guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at 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
(except for exchanges from funds which impose a redemption fee on shares held
less than a year). An exchange into another Scudder fund is a redemption of
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shares, and therefore may result in tax consequences (gain or loss) to the
shareholder and the proceeds of such exchange may be subject to backup
withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange by
telephone, automatically without having to elect it. The Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Fund
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time. The Scudder funds into
which investors may make an exchange are listed under "THE SCUDDER FAMILY OF
FUNDS" herein. Before making an exchange, shareholders should obtain from 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-SCUDDER (for
Class S) or 1-800-253-2277 (Class AARP).
Scudder retirement plans may have different exchange requirements. Please
refer to appropriate plan literature.
Redemption by Telephone
Shareholders currently receive the right, automatically without having to
elect it, to redeem by telephone up to $100,000 and have the proceeds mailed to
their address of record. Shareholders may also request 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.
Telephone redemption is not available with respect to shares represented
by share certificates or shares held in certain retirement accounts.
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
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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 4:00 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
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).
It is suggested that shareholders holding share certificates or 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 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-SCUDDER.
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.
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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. The Fund does not
impose a redemption or repurchase charge, although 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 during which (a) the
Exchange is closed, other than customary weekend and holiday closings, (b)
trading on the Exchange is restricted for any reason, (c) an emergency exists as
a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) the SEC 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) or (c)
exist.
FEATURES AND SERVICES OFFERED BY THE FUND
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of mutual
fund fee structures, and of how Scudder distinguishes its Scudder Family of
Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for the
sale and distribution of fund shares. There are three types of loads: front-end
loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of the
amount invested. A back-end load is a contingent deferred sales charge, which
can be as high as 8.50% of either the amount invested or redeemed. The maximum
front-end or back-end load varies, and depends upon whether or not 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 and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish Scudder funds and classes from other no-load funds. Scudder
pioneered the no-load concept when it created the nation's first no-load fund in
1928, and later developed the nation's first family of no-load mutual funds.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for Class AARP of shares is aarp.scudder.com. These sites offer
guidance on global investing and developing strategies to help meet financial
goals and provide access to the Scudder investor relations department via
e-mail. The sites also enable users to
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access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
Account Access -- 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.
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 may be given to the Transfer Agent in writing at least five days prior
to a dividend record date. Shareholders may change their dividend option by
calling 1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP or by
sending written instructions to the Transfer Agent. Please include your account
number with your written request.
Reinvestment is usually made at the closing net asset value determined on
the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's Direct
Distributions Program. Shareholders who elect to participate in the Direct
Distributions Program, and whose predesignated checking account of record is
with a member bank of Automated Clearing House Network (ACH) can have income and
capital gain distributions automatically deposited to their personal bank
account usually within three business days after a Fund pays its distribution. A
Direct Distributions request form can be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277 for Class AARP. Confirmation Statements will be
mailed to shareholders as notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal Plan
must reinvest any dividends or capital gains. For most retirement plan accounts,
the reinvestment of dividends and capital gains is also required.
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 the Fund account are available to
shareholders. The summaries may be obtained by calling 1-800-SCUDDER for Class S
and 1-800-253-2277 for Class AARP.
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THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds and
the nation's oldest family of no-load mutual funds; a list of Scudder's family
of funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
TAX FREE MONEY MARKET
Scudder 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*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
----------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
Scudder Small Company Value Fund
Growth
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund***
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
----------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
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Scudder Technology Fund
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890 for Class S shares or 1-800-253-2277 for Class
AARP shares.
Certain Scudder funds or classes thereof may not be available for purchase
or exchange. For more information, please call 1-800-SCUDDER.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit sharing
and pension plans and IRAs other than those offered by the Fund's distributor
depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a plan
in the form of a Scudder Profit-Sharing Plan (including a version of the Plan
which includes a cash-or-deferred feature) or a Scudder Money Purchase Pension
Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a plan
in the form of a Scudder 401(k) Plan adopted by a corporation, a self-employed
individual or a group of self-employed individuals (including sole proprietors
and partnerships), or other qualifying organization. This plan has been approved
as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
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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, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000 per
year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment for
tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
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
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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 -- Redeeming
shares -- 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-SCUDDER for Class S and 1-800-253-2277 for Class AARP.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where satisfactory
arrangements have been made with Scudder Investor Services, Inc. for forwarding
regular investments through a single source. The minimum annual investment is
$240 per investor which may be made in monthly, quarterly, semiannual or annual
payments. The minimum monthly deposit per investor is $20. Except for trustees
or custodian fees for certain retirement plans, at present there is no separate
charge for maintaining group or salary deduction plans; however, the Trust and
its agents reserve the right to establish a maintenance charge in the future
depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments in all classes
through automatic deductions from checking accounts by completing the
appropriate form and providing the necessary documentation to establish this
service. The minimum investment is $50 for Class R and Class S shares.
Shareholders may arrange to make periodic investments in Class AARP of
each Fund through automatic deductions from checking accounts. The minimum
pre-authorized investment amount is $50. New shareholders who open a Gift to
Minors Account pursuant to the Uniform Gift to Minors Act (UGMA) and the Uniform
Transfer to Minors Act (UTMA) and who sign up for the Automatic Investment Plan
will be able to open a Fund account for less than $500 if they agree to increase
their investment to $500 within a 10 month period. Investors may also invest in
any Class AARP for $500 a month if they establish a plan with a minimum
automatic investment of at least $100 per month. This feature is only available
to Gifts to Minors Account investors. The Automatic Investment Plan may be
discontinued at any time without prior notice to a shareholder if any debit from
their bank is not paid, or by written notice to the shareholder at least thirty
days prior to the next scheduled payment to the Automatic Investment Plan.
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.
FEATURES AND SERVICES OFFERED BY THE AARP INVESTMENT PROGRAM
o Experienced Professional Management: The Adviser provides investment
advice to the Funds.
o AARP's Commitment: the Program was designed with AARP's active
participation to provide strong, ongoing representation of the members'
interests and to help ensure a high level of service.
o Diversification: you may benefit from investing in one or more large
portfolios of carefully selected securities.
o No Sales Commissions: the AARP Funds are no-load funds, so you pay no
sales charges to purchase, transfer or redeem shares, nor do you pay Rule
12b-1 (i.e., distribution) fees.
o Automatic Dividend Reinvestment: you may receive dividends by check or
arrange to have them automatically reinvested.
o Readily Available Account, Price, Yield and Total Return Information: You
may dial our automated Easy-Access Line, toll-free, 1-800-631-4636 for
recorded account information, share price, yield and total return
information, 7 days a week.
o Convenience and Efficiency: simplified investment procedures save you time
and help your money work harder for you.
o Direct Deposit Program: you may have your Social Security or other checks
received from the U.S. Government or any other regular income checks, such
as pension, dividend, interest, and even payroll checks automatically
deposited directly to your account.
o Direct Payment of Regular Fixed Bills: with a minimum qualifying balance
of $10,000 in one Fund, you may arrange to have your regular bills that
are of fixed amounts, such as rent, mortgage, or other obligations of $50
or more sent directly from your account at the end of the month.
o Personal Service and Information: professionally trained service
representatives are available to help you whenever you have questions
through our toll-free number, 1-800-253-2277.
o Consolidated Statements: in addition to receiving a confirmation statement
of each transaction in your account, you receive, without extra charge, a
convenient monthly consolidated statement. (Retirement Plan statements are
mailed quarterly.) This statement contains the market value of all your
holdings in the Funds and a complete listing of your transactions for the
statement period.
o Shareholder Handbook: the Shareholder Handbook was created to help answer
many of the questions you may have about investing in the Program.
o IRA Shareholder Handbook: the IRA Shareholder Handbook was created to help
answer many of the questions you may have about investing in the no-fee
AARP IRA.
o A Glossary of Investment Terms: the Glossary of Investment Terms defines
commonly used financial and investment terms.
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o Newsletter: every month, shareholders receive our newsletter, Financial
Focus (retirement plan shareholders receive a special edition of Financial
Focus on a quarterly basis) which is designed to help keep you up-to-date
on economic and investment developments, and any new financial services
and features of the Program.
Distributions Direct
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through the AARP Funds'
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-253-2277. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Reports to Shareholders
The AARP Funds send to shareholders semiannually financial statements,
which are examined annually by independent accountants, including a list of
investments held and statements of assets and liabilities, operations, changes
in net assets, and financial highlights.
Investors receive a brochure entitled Your Guide to Simplified Investment
Decisions when they order an investment kit for the Funds which also contains a
prospectus. The Shareholder's Handbook is sent to all new shareholders to help
answer any questions they may have about investing. Similarly, an IRA Handbook
is sent to all new IRA shareholders. Every month, shareholders will be sent the
newsletter, Financial Focus. Retirement plan shareholders will be sent a special
edition of Financial Focus on a quarterly basis. The newsletters are designed to
help you keep up to date on economic and investment developments, and any new
financial services and features of the Program.
Direct Payment of Regular Fixed Bills
Shareholders who own or purchase $10,000 or more of shares of an AARP Fund
may arrange to have regular fixed bills such as rent, mortgage or other payments
of more than $50 made directly from their account. The arrangements are
virtually the same as for an Automatic Withdrawal Plan (see above). For more
information concerning this plan, write to the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free,
1-800-253-2277.
Direct Deposit Program
Investors can have Social Security or other checks from the U.S.
Government or any other regular income checks such as pension, dividends, and
even payroll checks automatically deposited directly to their accounts.
Investors may allocate a minimum of 25% of their income checks into any AARP
Fund. Information may be obtained by contacting the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll
free, 1-800-253-2277.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
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. In
the past, the Fund has followed 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
such 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 substantially all of its investment company
taxable income and any net realized capital gains resulting from Fund investment
activity in December although an additional distribution may be made, if
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necessary. 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
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 are 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, five years and ten years. 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:
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 July 31, 2000
One year Five years Ten years
29.22% 13.87% 15.53%
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.
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Cumulative Total Return for the periods ended July 31, 2000
One year Five years Ten years
29.22% 91.43% 323.61%
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 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.
Comparison of Fund Performance
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
From time to time, in advertising and marketing literature, the Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Fund, the Fund's portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Fund. In addition, the amount of assets that the Adviser has under management in
various geographical areas may be quoted in advertising and marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond 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
31
<PAGE>
for less return than growth funds. In addition, international equity funds
usually are considered more risky than domestic equity funds but generally offer
the potential for greater return.
Evaluation of Fund performance or other relevant statistical information
made by independent sources may also be used in advertisements concerning the
Fund, including reprints of, or selections from, editorials or articles about
the Fund.
FUND ORGANIZATION
The Fund is a 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 five series, Scudder
Development Fund, Scudder Health Care Fund, Scudder Small Company Value Fund,
Scudder Technology Fund and Scudder 21st Century Growth Fund. Each Fund's shares
are currently divided into two classes: Class AARP and Class S.
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.
32
<PAGE>
INVESTMENT ADVISER
Investment Adviser
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 December 31, 1997, Zurich
Insurance Company ("Zurich") acquired a majority interest in the Adviser, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Adviser. The Adviser's name changed to Scudder Kemper Investments, Inc. On
September 7, 1998, the businesses of Zurich (including Zurich's 70% interest in
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. By way of a dual holding
company structure, former Zurich shareholders initially owned approximately 57%
of Zurich Financial Services Group, with the balance initially owned by former
B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Adviser's income is professional fees received
from providing continuous investment advice. Today, it provides investment
counsel for many individuals and institutions, including insurance companies,
colleges, industrial corporations, and financial and banking organizations as
well as providing investment advice to over 280 open and closed-end mutual
funds.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser's international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Funds 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 a fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a fund. Purchase and sale orders for a fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to that fund.
In certain cases, the investments for the Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser,
that have similar names, objectives and investment styles. You should be aware
that the Fund is likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of the
Fund can be expected to vary from those of these other mutual funds.
The present investment management agreement (the "Agreement") was approved by
the Trustees on July 10, 2000, and became effective October 2, 2000. The
Agreement will continue in effect until September 30, 2001 and from year to year
thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreement or interested
persons of the Adviser or the Trust, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Trust's Trustees
or of a majority of the outstanding voting securities
33
<PAGE>
of the respective Fund. The Agreement may be terminated at any time without
payment of penalty by either party on sixty days' written notice and
automatically terminate in the event of its assignment.
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 Fund's Declaration of
Trust and By-Laws, the 1940 Act and the Internal Revenue Code of 1986, as
amended 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 also 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 (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 Trustees, 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.
Until October 1, 2000, the Fund paid the Adviser a fee equal to an annual
rate of 1% of the Fund's first $500 million of average daily net assets, 0.95 of
1% of the next $500 million of such net assets, and 0.90 of 1% on such net
assets in excess of $1 billion. The investment advisory fees for the fiscal
years ended June 30, 1998, 1999, the one-month period ended July 31, 1999, and
2000, were $8,554,028, $7,200,092, $630,937 and $7,883,702, respectively. This
was equivalent to an annual effective rate of 0.98% of the Fund's average daily
net assets for the fiscal year ended July 31, 2000.
As of October 2, 2000, the Fund pays the Adviser of fee equal to an annual
rate of 0.85% of the Fund's first $1 billion of average daily net assets, 0.80%
of 1% of the next $500 million of such net assets, and 0.75% of 1% of such net
assets in excess ot$1.5 billion. The fee is 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.
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.
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<PAGE>
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 & 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 Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the Trustees or officers of the Trust 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.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Code of Ethics
The Fund, the Adviser and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Fund and employees of the Adviser and principal underwriter are permitted
to make personal securities transactions, including transactions in securities
that may be purchased or held by the Fund, subject to requirements and
restrictions set forth in the applicable Code of Ethics. The Adviser's Code of
Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
35
<PAGE>
TRUSTEES AND OFFICERS FOR BOTH TRUSTS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
Linda C. Coughlin (48)+* Trustee and President Managing Director of Scudder Kemper Director and Senior
Investments, Inc. Vice President
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board,
Chapel Hill, NC Inc.(not-for-profit business research
organization)
Keith R. Fox (45) Trustee Private Equity Investor, General --
10 East 53rd Street Partner, Exeter Group of Funds
New York, NY 10022
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation Foundation; Department of State -
650 Fifth Avenue Undersecretary of State for Economic,
New York, NY 10128 Business and Agricultural Affairs
(March 1993 to January 1997)
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski Law
Firm (1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place 23rd Floor Capital, LLC (venture capital firm)
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
Thomas V. Bruns (43)# Vice President Managing Director of Scudder Kemper __
Investments, Inc.
James M. Eysenbach (38)@ Vice President Managing Director of Scudder Kemper __
Investments, Inc.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
William F. Glavin (41)# Vice President Managing Director of Scudder Kemper Vice President
Investments, Inc.
James E. Masur (40)+ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Ann M. McCreary (43) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Kathryn L. Quirk (47)+ Vice President and Managing Director of Scudder Kemper Director, Senior Vice
Assistant Secretary Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
Howard S. Schneider (43)# Vice President Managing Director of Scudder Kemper --
Investments, Inc.
John R. Hebble (42)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Scudder
Kemper Investments, Inc.
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
John Millette (37)+ Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
</TABLE>
ADDITIONAL OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Peter Chin (58)++ Vice President Senior Vice President of --
Scudder Kemper Investments, Inc.
J. Brooks Dougherty (41)++ Vice President Managing Director of --
Scudder Kemper Investments, Inc.
James E. Fenger (41)# Vice President Managing Director of --
Scudder Kemper Investments, Inc.
Sewall Hodges (__)++ Vice President Senior Vice President of --
Scudder Kemper Investments, Inc.
</TABLE>
37
<PAGE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and its
counsel to be persons who are "interested persons" of the Adviser or of
the Trust, within the meaning of the Investment Company Act of 1940, as
amended.
** Unless otherwise stated, all of the Trustees and officers have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
The Trustees and Officers of the Trusts also serve in similar capacities
with other Scudder Funds.
To the knowledge of the Trust, as of September 30, 2000, 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) less than 1% of the
shares of the Fund outstanding on such date.
Certain accounts for which the Adviser acts as investment adviser owned
________ shares in the aggregate, or ___% of the outstanding shares on September
30, 2000. The Adviser may be deemed to be the beneficial owner of such shares
but disclaims any beneficial ownership in such shares.
To the knowledge of the Trust, as of September 30, 2000, no person owned
beneficially more than 5% of the Fund's outstanding shares .
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
Each Independent Trustee receives compensation for his or her services,
which includes an annual retainer and an attendance fee for each meeting
attended. The Independent Trustee who serves as lead trustee receives additional
compensation for his or her service. 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.
38
<PAGE>
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 1999 from each Trust and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
Name Scudder Securities Trust* Investment Trust** All Scudder Funds
---- ------------------------- ------------------ -----------------
<S> <C> <C> <C>
Henry P. Becton, Jr.*** $ 0 $31,155 $140,000 (30 funds)
Dawn-Marie Driscoll*** 0 33,218 150,000 (30 funds)
Edgar R. Fiedler+ 945.81 0 73,230 (29 funds)
Keith R. Fox*** 36,375 0 160,325 (23 funds)
Joan E. Spero*** 39,625 0 175,275 (23 funds)
Jean Gleason Stromberg 0 0 40,935 (16 funds)
Jean C. Tempel*** 0 31,025 140,000 (30 funds)
</TABLE>
* Scudder Securities Trust consists of five funds: Scudder Development Fund,
Scudder Health Care Fund, Scudder Technology Fund, Scudder Small Company
Value Fund and Scudder 21st Century Growth Fund.
** Investment Trust consists of five funds:. Scudder Large Company Growth
Fund, Scudder Growth and Income Fund, Scudder S&P 500 Index Fund, Classic
Growth Fund, and Scudder Dividend & Growth Fund
*** Newly elected Trustee. On July 13, 2000, shareholders of the Fund elected
a new Board of Trustees. See the "Trustees and Officers" section for the
newly-constituted Board of Trustees.
+ Mr. Fiedler's total compensation includes the $9,900 accrued, but not
received, through the deferred compensation program.
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. (the "Distributor"), a Massachusetts corporation, which is a subsidiary of
the Adviser, a Delaware corporation. The Trust's underwriting agreement dated
May 8, 2000 will remain in effect until September 2001 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.
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
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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.
Administrative Fee
The Fund has entered into administrative services agreements with Scudder
Kemper (the "Administration Agreements"), pursuant to which Scudder Kemper will
provide or pay others to provide substantially all of the administrative
services required by the Fund (other than those provided by Scudder Kemper under
its investment management agreements with the Fund, as described above) in
exchange for the payment by the Fund of an administrative services fee (the
"Administrative Fee") of 0.45% of average daily net assets for the Fund. One
effect of these arrangements is to make the Fund's future expense ratio more
predictable. The details of the proposal (including expenses that are not
covered) are set out below.
Various third party service providers (the "Service Providers"), some of
which are affiliated with Scudder Kemper, provide certain services to the Fund
pursuant to separate agreements with the Fund. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Fund and maintains their accounting records. Scudder Service Corporation, also a
subsidiary of Scudder Kemper, is the transfer, shareholder servicing and
dividend-paying agent for the shares of the Funds. Scudder Trust Company, an
affiliate of Scudder Kemper, provides subaccounting and recordkeeping services
for shareholders in certain retirement and employee benefit plans. As custodian,
State Street Bank and Trust Company holds the portfolio securities of the Funds,
pursuant to a custodian agreement. PricewaterhouseCoopers LLP audits the
financial statements of the Fund and provides other audit, tax, and related
services.
Scudder Kemper will pay the Service Providers for the provision of their
services to the Fund and will pay other Funds' expenses, including insurance,
registration, printing and postage fees. In return, the Fund will pay Scudder
Kemper an Administrative Fee.
The Administration Agreement has an initial term of three years, subject
to earlier termination by the Fund's Board. The fee payable by the Fund to
Scudder Kemper pursuant to the Administration Agreements is reduced by the
amount of any credit received from the Fund's custodian for cash balances.
Certain expenses of the Fund will not be borne by Scudder Kemper under the
Administration Agreements, such as taxes, brokerage, interest and extraordinary
expenses; and the fees and expenses of the Independent Trustees (including the
fees and expenses of their independent counsel). In addition, the Fund will
continue to pay the fees required by its investment management agreement with
Scudder Kemper
TAXES
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code or a predecessor statute, and has qualified as such
since its inception. 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.
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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 a pro rata share of 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 ($52,000 for married individuals
filing a joint return, with a phase-out of the deduction for adjusted gross
income between $52,000 and $62,000; $32,000 for a single individual, with a
phase-out for adjusted gross income between $32,000 and $42,000). However, an
individual not permitted to make a deductible contribution to an IRA for any
such taxable year may nonetheless make nondeductible contributions up to $2,000
to an IRA (up to $2,000 per individual for married couples if only one spouse
has earned income) for that year. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable. Also, annual contributions may
be made to a spousal IRA even if the spouse has
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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.
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 a Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the Fund's holding period for the underlying
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"
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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 (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
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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.
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 routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, with out any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and not all such information is used by the Adviser
in connection with the Fund. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Fund.
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For the fiscal years ended June 30, 1998, 1999, the one-month period ended
July 31, 1999, and 2000, the Fund paid total brokerage commissions of $632,294,
$12,443,955, $22,699 and ____________, respectively. For the fiscal year ended
June 30, 2000, $_________ (___% 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 $____________, of which
$____________ (__% 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 June
30, 1999, the one-month period ended July 31, 1999, and the fiscal year ended
July 31, 2000 were 96.5%, 3.9% and 100%, respectively. A higher rate involves
greater brokerage and transaction expenses to the Fund and may result in the
realization of net capital gains, which would be taxable to shareholders when
distributed. Purchases and sales are made for the Fund's portfolio whenever
necessary, in management's opinion, to meet the Fund's objective.
NET ASSET VALUE
The net asset value of shares for each class of the Fund is computed as of
the close of regular trading on the Exchange on each day the Exchange is open
for trading (the "Value Time"). The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively. Net asset value per share
is determined by dividing the value of the total assets of the Fund, less all
liabilities, by the total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale price
on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An equity
security which is traded on the Nasdaq Stock Market Inc. system will be valued
at its most recent sale price on such system as of the Value Time. Lacking any
sales, the security will be valued at the most recent bid quotation as of the
Value Time. The value of an equity security not quoted on the Nasdaq system, but
traded in another over-the-counter market, is its most recent sale price if
there are any sales of such security on such market as of the Value Time.
Lacking any sales, the security is valued at the Calculated Mean quotation for
such security as of the Value Time. Lacking a Calculated Mean quotation the
security is valued at the most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less maturing at par shall be valued
at amortized cost, which the Board believes approximates market value. If it is
not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
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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.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Fund included in the Fund's prospectus and
the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, 160 Federal Street,
Boston, Massachusetts 02110, independent accountants, given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers, LLP
audits the financial statements and financial highlights of the Fund and
provides other audit, tax, and related services.
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's Class S shares is 811196-10-4.
The CUSIP number of the Fund's Class AARP shares is 811196-82-3.
The Fund employs State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 as custodian.
The firm of Dechert of Boston is counsel to the Trust.
46
<PAGE>
On June 7, 1999, the Board of Trustees of the Fund changed the fiscal year
end for financial reporting and federal income tax purposes to July 31 from June
30.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net asset value
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, 0.0045% of such assets in excess of $1
billion, plus holding and transaction charges for this service. The fees
incurred by the Fund for the fiscal years ended June 30, 1998 and 1999, the
one-month period ended July 31, 1999 and 2000 amounted to $121,851, $96,545,
$7,758 and $105,995, respectively. At the fiscal year ended July 31, 2000,
$9,905 was unpaid.
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. The fees incurred by the Fund for the fiscal years ended June
30, 1998, 1999, the one-month period ended July 31, 1999 and 2000, amounted to
$1,402,341, $1,214,414, $96,232 and $1,102,679, respectively. At the fiscal year
ended July 31, 2000, $109,908 was unpaid.
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 generally
held in an omnibus account.
Scudder Trust Company ("STC"), an affiliate of the Adviser, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Annual service fees are paid by the Fund
to STC, Two International Place, Boston, Massachusetts 02110-4103 for such
accounts. The Fund pays STC an annual fee of $29.00 per shareholder account. The
fees incurred by the Fund for the fiscal years ended June 30, 1998, 1999, the
one-month period ended July 31, 1999 and 2000, amounted to $1,221,754,
$1,319,745, $102,903 and $1,183,775 respectively. At the fiscal year ended July
31, 2000, $93,373 was unpaid.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
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 the 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 July 31, 2000, are incorporated herein by reference and attached
hereto, and are hereby deemed to be a part of this Statement of Additional
Information.
47
<PAGE>
SCUDDER
INVESTMENTS (SM)
[LOGO]
--------------------------------------------------------------------------------
SECTOR
--------------------------------------------------------------------------------
Scudder Choice Series
Class AARP and Class S Shares
Scudder Health Care Fund
Scudder Technology Fund
Prospectus
October 1, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder Choice Series
How the funds work
2 Scudder Health Care Fund
6 Scudder Technology Fund
10 Other Policies and Risks
11 Who Manages and Oversees the Funds
15 Financial Highlights
How to invest in the funds
18 How to Buy, Sell and Exchange
Class AARP Shares
20 How to Buy, Sell and Exchange
Class S Shares
22 Policies You Should Know About
26 Understanding Distributions and Taxes
<PAGE>
How the funds work
On the next few pages, you'll find information about each fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in a fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
This prospectus offers two classes of shares for each of the funds described.
Class AARP shares have been created especially for AARP members. Class S shares
are available to all investors. Unless otherwise noted, all information in this
prospectus applies to both classes.
You can find prospectuses on the Internet for Class AARP shares at
aarp.scudder.com and for Class S shares at www.scudder.com.
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class S SCHLX fund number | Class AARP 152
| Class S 352
Scudder Health Care Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks long-term growth of capital by investing at least 80% of total
assets in common stocks of companies in the health care sector. The fund will
invest in securities of U.S. companies, but may invest in foreign companies as
well; the companies may be of any size and commit at least half of their assets
to the health care sector, or derive at least half of their revenues or net
income from that sector. The industries in the health care sector are
pharmaceuticals, biotechnology, medical products and supplies, and health care
services.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with innovative,
cost-effective products and services, new tests or treatments, the ability to
take advantage of demographic trends, and strong management.
Growth orientation. The managers prefer companies that offer the potential for
sustainable above-average earnings growth and whose market value appears
reasonable in light of their business prospects.
Top-down analysis. The managers intend to divide the fund's holdings among the
industries in the health care sector, although, depending on their outlook, they
may increase or reduce the fund's exposure to a given industry.
The fund will normally sell a stock when it reaches a target price, when its
fundamental factors have changed, when the managers believe other investments
offer better opportunities, or in the course of adjusting its emphasis on a
given health care industry.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
While the fund invests mainly in common stocks, it may also invest up to 20% of
total assets in U.S. Treasury and agency debt securities.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies, or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
--------------------------------------------------------------------------------
2 | Scudder Health Care Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may be of interest to investors who want to gain exposure to
the health care sector and are comfortable with the higher risks of a
fund that focuses on an often-volatile sector.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform. When stock prices fall, you should expect the value of your
investment to fall as well. The fact that the fund concentrates its investments
in the industries of the health care sector increases this risk, because factors
affecting that sector could affect fund performance. For example, health care
companies could be hurt by such factors as rapid product obsolescence and the
unpredictability of winning government approvals.
Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given company than a diversified fund, factors affecting that
company could affect fund performance. Because a stock represents ownership in
its issuer, stock prices can be hurt by poor management, shrinking product
demand, and other business risks. These may affect single companies as well as
groups of companies.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies,
industries, economic trends, geographical areas, or other matters
o growth stocks may be out of favor for certain periods
o foreign stocks tend to be more volatile than their U.S. counterparts,
for reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
3 | Scudder Health Care Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows the total returns for the fund's Class S shares' first
complete calendar year. The table shows average annual total returns for the
fund's Class S shares and a broad-based market index (which, unlike the fund,
does not have any fees or expenses). The performance of both the fund and the
index varies over time. All figures on this page assume reinvestment of
dividends and distributions.
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31/1999 Class S
--------------------------------------------------------------------------------
11.41
--------------------------------------------------------------------------------
`90 `91 `92 `93 `94 `95 `96 `97 `98 `99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: 47.14%
Best Quarter: 18.52%, Q4 1999 Worst Quarter: -6.21%, Q3 1999
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year Since Inception
--------------------------------------------------------------------------------
Fund -- Class S* 11.41 13.11**
--------------------------------------------------------------------------------
Index 21.03 19.24***
--------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged, capitalization-weighted index that includes 500 large-cap stocks.
* Performance for Class AARP shares is not provided because this class does
not have a full calendar year of performance.
** Since 3/2/1998.
*** Index comparison begins 3/31/1998.
In the chart, total returns for 1999 would have been lower if operating expenses
hadn't been reduced.
In the table, total returns from inception through 1999 would have been lower if
operating expenses hadn't been reduced.
4 | Scudder Health Care Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees, other than a
short-term redemption/exchange fee. The fund does have annual operating
expenses, and as a shareholder of either Class AARP or Class S shares, you pay
them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Redemption/Exchange Fee, on shares owned less than a year
(as a % of amount redeemed, if applicable) 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.85%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.36%
----------------------
--------------------------------------------------------------------------------
Total Annual Operating Expenses 1.21%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.35%.
Information in the table has been restated to reflect a new fixed rate
administrative fee.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. This example assumes the expenses above remain the
same. It also assumes that you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions and sold your shares at the end of
each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$123 $384 $665 $1,466
--------------------------------------------------------------------------------
5 | Scudder Health Care Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class S SCUTX fund number | Class AARP 151
| Class S 351
Scudder Technology Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks long-term growth of capital by investing at least 80% of total
assets in common stocks of companies in the technology sector. The fund will
invest in securities of U.S. companies, but may invest in foreign companies as
well; the companies may be of any size and commit at least half of their assets
to the technology sector, or derive at least half of their revenues or net
income from that sector. The industries in the technology sector are computers
(including software, hardware, and internet-related businesses), computer
services, telecommunications, and semi-conductors.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with innovative
products and services, good business models, strong management, and solid
positions in their core markets.
Growth orientation. The managers prefer companies that offer the potential for
sustainable above-average earnings growth and whose market value appears
reasonable in light of their business prospects.
Top-down analysis. The managers intend to divide the fund's holdings among the
industries in the technology sector, although, depending on their outlook, they
may increase or reduce the fund's exposure to a given industry.
The fund will normally sell a stock when its earnings growth rate slows, when
the managers believe other investments offer better opportunities, or in the
course of adjusting its emphasis on a given technology industry.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
While the fund invests mainly in common stocks, it may also invest up to 20% of
total assets in U.S. Treasury and agency debt securities.
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies, or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
--------------------------------------------------------------------------------
6 | Scudder Technology Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund may be suitable for investors who want to gain exposure to
the technology sector and who understand the risks of investing in a
single sector that has shown above-average volatility.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform. When stock prices fall, you should expect the value of your
investment to fall as well. The fact that the fund concentrates its investments
in the industries of the technology sector increases this risk, because factors
affecting that sector could affect fund performance. For example, technology
companies could be hurt by such factors as market saturation, price competition
and rapid product obsolescence.
Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given company than a diversified fund, factors affecting that
company could affect fund performance. Because a stock represents ownership in
its issuer, stock prices can be hurt by poor management, shrinking product
demand, and other business risks. These may affect single companies as well as
groups of companies. Many technology companies are smaller companies which may
have limited business lines and financial resources, making them especially
vulnerable to business risks and economic downturns.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends, geographical areas, or other matters
o growth stocks may be out of favor for certain periods
o foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
7 | Scudder Technology Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows the total returns for the fund's Class S shares' first
complete calendar year. The table shows average annual total returns for the
fund's Class S shares and two broad-based market indices (which, unlike the
fund, do not have any fees or expenses). The performance of both the fund and
the indices varies over time. All figures on this page assume reinvestment of
dividends and distributions.
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31/1999 Class S
--------------------------------------------------------------------------------
167.06
--------------------------------------------------------------------------------
`90 `91 `92 `93 `94 `95 `96 `97 `98 `99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: 17.27%
Best Quarter: 71.61%, Q4 1999 Worst Quarter: 11.34%, Q3 1999
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year Since Inception
--------------------------------------------------------------------------------
Fund -- Class S* 167.06 98.86**
--------------------------------------------------------------------------------
Index 1 21.26 4.15***
--------------------------------------------------------------------------------
Index 2 105.07 51.74***
--------------------------------------------------------------------------------
Index 1: Russell 2000 Index, an unmanaged capitalization-weighted measure of
approximately 2,000 small U.S. stocks.
Index 2: Russell 2000 Technology Index, an unmanaged capitalization-weighted
index of companies that serve the electronics and computer industries or that
manufacture products based on the latest applied science.
* Performance for Class AARP shares is not provided because this class does
not have a full calendar year of performance.
** Since 3/2/1998.
*** Index comparison begins 3/31/1998.
In the chart, total returns for 1999 would have been lower if operating expenses
hadn't been reduced.
8 | Scudder Technology Fund
<PAGE>
In the table, total returns from inception through 1999 would have been lower if
operating expenses hadn't been reduced.
How Much Investors Pay
This fund has no sales charges or other shareholder fees, other than a
short-term redemption/exchange fee. The fund does have annual operating
expenses, and as a shareholder of either Class AARP or Class S shares, you pay
them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Redemption/Exchange Fee, on shares owned less than a year
(as a % of amount redeemed, if applicable) 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.85%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.35%
----------------------
--------------------------------------------------------------------------------
Total Annual Operating Expenses 1.20%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.35%.
Information in the table has been restated to reflect a new fixed rate
administrative fee.
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. This example assumes the expenses above remain the
same. It also assumes that you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions and sold your shares at the end of
each period. This is only an example; actual expenses will be different.
--------------------------------------------------------------------------------
Expense Example
--------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$122 $381 $660 $1,455
--------------------------------------------------------------------------------
9 | Scudder Technology Fund
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could
change that fund's investment goal without seeking shareholder approval.
o As a temporary defensive measure, each fund could shift up to 100% of its
assets into investments such as money market securities. This could prevent
losses, but would mean that the fund was not pursuing its goal.
o These funds may trade securities actively. This could raise transaction
costs (thus lowering performance) and could mean higher taxable
distributions.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the funds' allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
10
<PAGE>
--------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for managing
the funds, takes a team approach to asset management.
--------------------------------------------------------------------------------
Who Manages and Oversees the Funds
The investment adviser
The funds' investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, New York. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
Scudder Kemper's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates paid by each fund for
the 12 months through the most recent fiscal year end, as a percentage of each
fund's average daily net assets.
Fund Name Fee Paid
--------------------------------------------------------------------------------
Scudder Health Care Fund 0.85%
--------------------------------------------------------------------------------
Scudder Technology Fund 0.85%
--------------------------------------------------------------------------------
11
<PAGE>
Each fund has entered into a new investment management agreement with Scudder
Kemper. This table describes the new fee rates for each fund.
--------------------------------------------------------------------------------
Investment Management Fee
--------------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------------
Scudder Health Care Fund
--------------------------------------------------------------------------------
first $500 million 0.85%
--------------------------------------------------------------------------------
more than $500 million 0.80%
--------------------------------------------------------------------------------
Scudder Technology Fund
--------------------------------------------------------------------------------
first $500 million 0.85%
--------------------------------------------------------------------------------
next $500 million 0.80%
--------------------------------------------------------------------------------
next $500 million 0.75%
--------------------------------------------------------------------------------
next $500 million 0.70%
--------------------------------------------------------------------------------
more than $2 billion 0.65%
--------------------------------------------------------------------------------
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in return
for services relating to investments by AARP members in AARP Class shares of
each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of the AARP Classes of all funds managed by Scudder Kemper.
The fee rates, which decrease as the aggregate net assets of the AARP Classes
become larger, are as follows: 0.07% for the first $6 billion in net assets,
0.06% for the next $10 billion and 0.05% thereafter.
12
<PAGE>
The portfolio managers
The following people handle the day-to-day management of each fund in this
prospectus.
Scudder Health Care Fund Scudder Technology Fund
James E. Fenger J. Brooks Dougherty
Lead Portfolio Manager Lead Portfolio Manager
o Began investment career o Began investment career in
in 1984 1984
o Joined the adviser in 1984 o Joined the adviser in 1993
o Joined the fund team in 1998 o Joined the fund team in 1998
Anne Carney Robert L. Horton
o Began investment career o Began investment career
in 1988 in 1993
o Joined the adviser in 1992 o Joined the adviser in 1996
o Joined the fund team in 1998 o Joined the fund team in 1998
Sally A. Yanchus Deborah L. Koch
o Began investment career o Began investment career
in 1992 in 1985
o Joined the adviser in 1997 o Joined the adviser in 1992
o Joined the fund team in 1998 o Joined the fund team in 1998
James Burkart
o Began investment career
in 1971
o Joined the adviser in 1998
o Joined the fund team in 1999
Patricia Hutchinson
o Began investment career
in 1993
o Joined the adviser in 1998
o Joined the fund team in 2000
13
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that each fund is
managed in the best interests of its shareholders.
The following people comprise each fund's Board.
Linda C. Coughlin Joan E. Spero
o Managing Director, Scudder o President, Doris Duke
Kemper Investments, Inc. Charitable Foundation
o President of each fund
Jean Gleason Stromberg
Henry P. Becton, Jr. o Consultant
o President, WGBH Educational
Foundation Jean C. Tempel
o Managing Director, First
Dawn-Marie Driscoll Light Capital, LLC (venture
o Executive Fellow, Center for capital firm)
Business Ethics, Bentley College
o President, Driscoll Associates Steven Zaleznick
(consulting firm) o President and Chief
Executive Officer, AARP
Edgar Fiedler Services, Inc.
o Senior Fellow and Economic
Counsellor, The Conference
Board, Inc. (not-for-profit
business research organization)
Keith R. Fox
o General Partner, The Exeter
Group of Funds
14
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance. The figures in the first part of each table are for a single share.
The total return figures represent the percentage that an investor in a
particular fund would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover).
Effective October 2, 2000 existing shares of each fund are redesignated as Class
S. Because Class AARP shares are available beginning October 2, 2000, there is
no financial data for these shares as of the date of this prospectus.
Scudder Health Care Fund -- Class S
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Years Ended May 31, 2000 1999 1998(b)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $12.93 $12.08 $12.00
--------------------------------
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income (loss) (a) (.17) (.11) (.01)
-------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions 5.54 .94 .09
--------------------------------
-------------------------------------------------------------------------------------
Total from investment operations 5.37 .83 .08
-------------------------------------------------------------------------------------
Redemption fees .02 .02 --***
-------------------------------------------------------------------------------------
Net asset value, end of period $18.32 $12.93 $12.08
--------------------------------
-------------------------------------------------------------------------------------
Total Return (%) (c) (d) 41.69 7.04 .67**
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 94 47 41
-------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.89(e) 1.95 3.68*
-------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.83(e) 1.75 1.75*
-------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (1.10) (.88) (.40)*
-------------------------------------------------------------------------------------
Portfolio turnover rate (%) 142 133 68*
-------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period March 2, 1998 (commencement of operations) to May 31, 1998.
(c) Total return would have been lower had certain expenses not been reduced.
(d) Shareholders redeeming shares held less than one year will have a lower
total return due to the effect of the 1% redemption fee.
(e) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.79% and
1.75%, respectively (see Financial Statements).
* Annualized
** Not annualized
*** Amount is less than one half of $.01.
15
<PAGE>
Scudder Technology Fund -- Class S
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Years Ended May 31, 2000 1999 1998(b)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $19.31 $12.07 $12.00
-----------------------------------
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income (loss) (a) (.34) (.17) (.03)
-------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions 21.81 7.37 .10
-----------------------------------
-------------------------------------------------------------------------------------
Total from investment operations 21.47 7.20 .07
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net realized gains on investment transactions (1.32) -- --
-------------------------------------------------------------------------------------
Redemption fees .09 .04 --***
-------------------------------------------------------------------------------------
Net asset value, end of period $39.55 $19.31 $12.07
-----------------------------------
-------------------------------------------------------------------------------------
Total Return (%) (d) 111.79 59.90(c) .58(c)**
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 668 119 37
-------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.31(e) 1.86 3.69*
-------------------------------------------------------------------------------------
Ratio of expenses after expense reductions(%) 1.30(e) 1.75 1.75*
-------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.91) (1.11) (.87)*
-------------------------------------------------------------------------------------
Portfolio turnover rate (%) 83 135 137*
-------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period March 2, 1998 (commencement of operations) to May 31, 1998.
(c) Total return would have been lower had certain expenses not been reduced.
(d) Shareholders redeeming shares held less than one year will have a lower
total return due to the effect of the 1% redemption fee.
(e) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.30% and
1.30%, respectively (see Financial Statements).
* Annualized
** Not annualized
*** Amount is less than one half of $.01.
16
<PAGE>
How to invest in the funds
The following pages tell you how to invest in these funds and what to expect as
a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket or financial adviser -- your provider may
have its own policies or instructions, and you should follow those.
As noted earlier, there are two classes of shares of each fund available through
this prospectus. The instructions for buying and selling each class are slightly
different.
Instructions for buying and selling Class AARP shares, which have been created
especially for AARP members, are found on the next two pages. These are followed
by instructions for buying and selling Class S shares. Be sure to use the
appropriate table when placing any orders to buy, exchange or sell shares in
your account.
<PAGE>
How to Buy, Sell and Exchange Class AARP Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The AARP Investment Program."
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class AARP First investment Additional investments
------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more for regular $50 or more with an Automatic
accounts Investment Plan, Payroll
$500 or more for IRAs Deduction or Direct Deposit
------------------------------------------------------------------------------------
By mail o For enrollment forms, call Send a personalized investment
1-800-253-2277 slip or short note that
o Fill out and sign an includes:
enrollment form o fund and class name
o Send it to us at the o account number
appropriate address, along o check payable to "The AARP
with an investment check Investment Program"
------------------------------------------------------------------------------------
By wire o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
------------------------------------------------------------------------------------
By phone -- o Call 1-800-253-2277 for
instructions
------------------------------------------------------------------------------------
With an automatic o Fill in the information o To set up regular investments
investment plan required on your enrollment from a bank checking account,
form and include a voided call 1-800-253-2277 (minimum
check $50)
------------------------------------------------------------------------------------
Payroll Deduction o Select either of these o Once you specify a dollar
or Direct Deposit options on your enrollment amount (minimum $50),
form and submit it. You will investments are automatic.
receive further instructions
by mail.
------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-253-2277
------------------------------------------------------------------------------------
On the Internet o Go to "services and forms-- o Call 1-800-253-2277 to ensure
How to Open an Account" at you have electronic services
aarp.scudder.com o Register at aarp.scudder.com
o Print out a prospectus and an o Follow the instructions for
enrollment form buying shares with money from
o Complete and return the your bank account
enrollment form with your
check
------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The AARP Investment Program, PO Box 2540, Boston, MA 02208-2540
Express, registered or certified mail:
The AARP Investment Program, 66 Brooks Drive, Braintree, MA
02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
18
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class AARP Exchanging into another fund Selling shares
------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account ($500 or more for IRAs) most for over $100,000, can
only be ordered in writing; if
you're in doubt, see page 24
------------------------------------------------------------------------------------
By phone o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
------------------------------------------------------------------------------------
Using Easy-Access o Call 1-800- 631-4636 and o Call 1-800-631-4636 and
Line follow the instructions follow the instructions
------------------------------------------------------------------------------------
By mail or fax Your instructions should Your instructions should
(see previous include: include:
page)
o your account number o your account number
o names of the funds, class and o names of the funds, class
number of shares or dollar number of shares or dollar
amount you want to exchange amount you want to redeem
------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from an account,
call 1-800-253-2277
--------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-253-2277
------------------------------------------------------------------------------------
On the Internet o Register at aarp.scudder.com --
o Go to "services and forms"
o Follow the instructions for
making on-line exchanges
------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Services For Class AARP Investors
---------------------------------------------------------------------------------------
<S> <C>
To reach us: o Web site aarp.scudder.com
o Program representatives 1-800-253-2277, M-F, 8 a.m. - 8 p.m. EST
o Confidential fax line 1-800-821-6234, always open
o TDD line 1-800-634-9454, M-F, 9 a.m. - 5 p.m. EST
Services for o AARP Lump Sum Service For planning and setting up a lump
participants: sum distribution.
o AARP Legacy Service For organizing financial documents and
planning the orderly transfer of assets to heirs.
o AARP Goal Setting and Asset Allocation Service For allocating
assets and measuring investment progress.
o For more information, please call 1-800-253-2277.
---------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
How to Buy, Sell and Exchange Class S Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class S First investment Additional investments
------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
------------------------------------------------------------------------------------
By mail or o Fill out and sign an Send a Scudder investment slip
express application or short note that includes:
(see below)
o Send it to us at the o fund and class name
appropriate address, along
with an investment check o account number
o check payable to "The Scudder
Funds"
------------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
------------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
------------------------------------------------------------------------------------
With an automatic o Fill in the information on o To set up regular investments
investment plan your application and include from a bank checking account,
a voided check call 1-800-SCUDDER
------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
------------------------------------------------------------------------------------
On the Internet o Go to "funds and prices" at o Call 1-800-SCUDDER to ensure
www.scudder.com you have electronic services
o Print out a prospectus and a o Register at www.scudder.com
new account application
o Follow the instructions for
o Complete and return the buying shares with money from
application with your check your bank account
------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
20
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class S Exchanging into another fund Selling shares
------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 or more for most for over $100,000, can
IRAs) only be ordered in writing; if
you're in doubt, see page 24
$100 or more for exchanges
between existing accounts
------------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
------------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
------------------------------------------------------------------------------------
By mail, Your instructions should Your instructions should
express or fax include: include:
(see previous
page) o the fund, class, and account o the fund, class and account
number you're exchanging out of number from which you want to
sell shares
o the dollar amount or number
of shares you want to exchange o the dollar amount or number
of shares you want to sell
o the name and class of the
fund you want to exchange into o your name(s), signature(s)
and address, as they appear
o your name(s), signature(s), on your account
and address, as they appear on
your account o a daytime telephone number
o a daytime telephone number
------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
------------------------------------------------------------------------------------
On the Internet o Register at www.scudder.com --
o Follow the instructions for
making on-line exchanges
------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8 a.m.
and 8 p.m. Eastern time on any fund business day by calling
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
--------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
22
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. To get up-to-date information, review balances or
even place orders for exchanges, go to aarp.scudder.com (Class AARP)
or www.scudder.com (Class S).
--------------------------------------------------------------------------------
Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.
For Class AARP shares
--------------------------------------------------------------------------------
Call Easy-Access Line, the AARP Investment Program Automated Information
Line, at 1-800-631-4636
--------------------------------------------------------------------------------
For Class S shares
--------------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------------
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The funds
can only accept wires of $100 or more.
Exchanges among Scudder funds are an option for shareholders who bought their
fund shares directly from Scudder and many other investors as well. Exchanges
are a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
23
<PAGE>
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
How the funds calculate share prices
For each share class, the price at which you buy shares is the net asset value
per share, or NAV. To calculate NAV, each share class of each fund uses the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
The price at which you sell shares of each fund is also that fund's NAV, minus a
1.00% redemption/exchange fee on shares owned less than one year. You won't be
charged this fee if you're investing in an employer-sponsored retirement plan
that is set up directly with Scudder. Certain other types of accounts may also
be eligible for this waiver. If your employer-sponsored retirement plan is
through a third-party investment provider, or if you are investing through an
IRA or other individual retirement account, the fee will apply.
24
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
Because the funds may invest in securities that are traded primarily in foreign
markets, the value of their holdings could change at a time when you aren't able
to buy or sell fund shares. This is because some foreign markets are open on
days when the funds don't price their shares.
Other rights we reserve
For each fund in this prospectus, you should be aware that we may do any of the
following:
o withhold 31% of your distributions as federal income tax if you have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o for Class AARP and Class S shareholders, close your account and send you
the proceeds if your balance falls below $1,000; for Class S shareholders,
charge you $10 a year if your account balance falls below $2,500; in either
case, we will give you 60 days notice so you can either increase your
balance or close your account (these policies don't apply to retirement
accounts, to investors with $100,000 or more in Scudder fund shares or in
any case where a fall in share price created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash; the fund generally won't make a redemption
in kind unless your requests over a 90-day period total more than $250,000
or 1% of the value of the fund's net assets, whichever is less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
25
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
Each fund intends to pay dividends and distributions to its shareholders in
November or December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
26
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o taxable income dividends you receive from the fund
--------------------------------------------------------------------------------
o short-term capital gains distributions you receive from the fund
--------------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions you receive from the fund
--------------------------------------------------------------------------------
Each fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
27
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call 1-800-253-2277 (Class
AARP) or 1-800-SCUDDER (Class S).
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, please contact Scudder or
the SEC (see below). If you're a shareholder and have questions, please contact
Scudder. Materials you get from Scudder are free; those from the SEC involve a
copying fee. If you like, you can look over these materials at the SEC's Public
Reference Room in Washington, DC or request them electronically at
[email protected].
AARP Investment
Program from Scudder Scudder Funds SEC
PO Box 2540 PO Box 2291 450 Fifth Street, N.W.
Boston, MA Boston, MA Washington, D.C.
02208-2540 02107-2291 20549-0102
1-800-253-2277 1-800-SCUDDER 1-202-942-8090
aarp.scudder.com www.scudder.com www.sec.gov
SEC File Number 811-2021
<PAGE>
SCUDDER HEALTH CARE FUND
SCUDDER TECHNOLOGY FUND
Each a series of Scudder Securities Trust
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
October 1, 2000
--------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus and should
be read in conjunction with the combined prospectus of Scudder Health Care Fund
and Scudder Technology Fund dated October 1, 2000, as amended from time to time,
copies of which may be obtained without charge by writing to Scudder Investor
Services, Inc., Two International Place, Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders of Scudder Health Care Fund and Scudder
Technology Fund dated May 31, 2000 is incorporated by reference and is hereby
deemed to be part of this Statement of Additional Information. Please call
1-800-SCUDDER to request a copy of the Annual Report.
This Statement of Additional Information is incorporated by reference into the
combined prospectus.
<PAGE>
<TABLE>
TABLE OF CONTENTS
Page
<S> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objective and Policies....................................................................1
Scudder Health Care Fund.....................................................................................1
Scudder Technology Fund......................................................................................2
Master/feeder structure......................................................................................2
Interfund Borrowing and Lending Program......................................................................2
Specialized Investment Techniques............................................................................3
Investment Restrictions.....................................................................................13
PURCHASES............................................................................................................14
Additional Information About Opening an Account.............................................................14
Additional Information About Making Subsequent Investments..................................................15
Minimum Balances............................................................................................15
Additional Information About Making Subsequent Investments By Quickbuy......................................15
Checks......................................................................................................16
Wire Transfer of Federal Funds..............................................................................16
Share Price.................................................................................................16
Share Certificates..........................................................................................17
Other Information...........................................................................................17
EXCHANGES AND REDEMPTIONS............................................................................................18
Exchanges...................................................................................................18
Redemption By Telephone.....................................................................................18
Redemption By Quicksell.....................................................................................19
Redemption By Mail Or Fax...................................................................................20
Redemption-in-Kind..........................................................................................20
Special Redemption and Exchange Information.................................................................20
Other Information...........................................................................................21
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................21
The No-Load Concept.........................................................................................21
Internet Access.............................................................................................21
Dividends and Capital Gains Distribution Options............................................................22
Transaction Summaries.......................................................................................22
THE SCUDDER FAMILY OF FUNDS..........................................................................................22
SPECIAL PLAN ACCOUNTS................................................................................................25
Scudder Retirement Plans: Profit-Sharing and Money Purchase.................................................25
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals.........................................................26
Scudder IRA: Individual Retirement Account..................................................................26
Scudder Roth IRA: Individual Retirement Account.............................................................26
Scudder 403(b) Plan.........................................................................................27
Automatic Withdrawal Plan...................................................................................27
Group or Salary Deduction Plan..............................................................................27
Automatic Investment Plan...................................................................................27
Uniform Transfers/Gifts to Minors Act.......................................................................28
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................29
PERFORMANCE INFORMATION..............................................................................................29
Average Annual Total Return.................................................................................29
Cumulative Total Return.....................................................................................30
Total Return................................................................................................30
Comparison of Fund Performance..............................................................................31
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
ORGANIZATION OF THE FUNDS............................................................................................31
INVESTMENT ADVISER...................................................................................................32
AMA InvestmentLink(SM) Program..............................................................................35
Code of Ethics..............................................................................................35
TRUSTEES AND OFFICERS................................................................................................36
REMUNERATION.........................................................................................................38
Responsibilities of the Board -- Board and Committee Meetings...............................................38
Compensation of Officers and Trustees.......................................................................39
DISTRIBUTOR..........................................................................................................39
Administrative Fee..........................................................................................40
TAXES................................................................................................................41
PORTFOLIO TRANSACTIONS...............................................................................................44
Brokerage Commissions.......................................................................................44
Portfolio Turnover..........................................................................................46
NET ASSET VALUE......................................................................................................46
ADDITIONAL INFORMATION...............................................................................................47
Experts.....................................................................................................47
Other Information...........................................................................................47
FINANCIAL STATEMENTS.................................................................................................48
</TABLE>
ii
<PAGE>
iii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
Scudder Health Care Fund and Scudder Technology Fund (each a "Fund,"
collectively the "Funds") are each a non-diversified series of Scudder
Securities Trust (the "Trust"), an open-end management investment company, which
continuously offers and redeems shares at net asset value ("NAV"). Each Fund is
a company of the type commonly known as a mutual fund. The combined prospectus
and this Statement of Additional Information for the Funds each offer two
classes of shares to provide investors with different purchase options. The two
classes are Class S and Class AARP. Each class has its own important features
and policies. On October 2, 2000, shares of Scudder Health Care Fund and Scudder
Technology Fund were redesignated as Class S shares of their respective funds.
Shares of Class AARP are especially designed for members of AARP.
Except as otherwise indicated, each Fund's objective and policies are
not fundamental and may be changed without a shareholder vote. There can be no
assurance that either Fund will achieve its objective. If there is a change in a
Fund's investment objective, shareholders should consider whether that Fund
remains an appropriate investment in light of their then current financial
position and needs.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which a Fund may engage (such as
short selling, hedging, etc.) or a financial instrument which a Fund may
purchase (such as options, etc.) are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Adviser"), in its
discretion, might, but is not required to, use in managing a Fund's assets. The
Adviser may, in its discretion, at any time employ such practice, technique or
instrument for one or more funds, but not for all funds advised by it.
Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
a Fund, but, to the extent employed, could from time to time have a material
impact on a Fund's performance.
General Investment Objective and Policies
Scudder Health Care Fund
Scudder Health Care Fund's ("Health Care Fund") investment objective is
to seek long-term growth of capital primarily through investment in common
stocks of companies that are engaged primarily in the development, production or
distribution of products or services related to the treatment or prevention of
diseases and other medical problems. These include companies that operate
hospitals and other health care facilities; companies that design, manufacture
or sell medical supplies, equipment and support services; and pharmaceutical
firms. Health Care Fund may also invest in companies engaged in medical,
diagnostic, biochemical and biotechnological research and development.
Health Care Fund invests in the equity securities of health care
companies located throughout the world. In the opinion of the Adviser,
investments in the health care industry offer potential for significant growth
due to favorable demographic trends, technological advances in the industry, and
innovations by companies in the diagnosis and treatment of illnesses.
Under normal circumstances, the Fund will invest at least 80% of its
total assets in common stocks of companies in a group of related industries as
described below. The Fund will invest in securities of U.S. companies, but may
invest in foreign companies as well. A security will be considered appropriate
for the Fund if at least 50% of its total assets, revenues, or net income is
related to or derived from the industry or industries designated for the Fund.
The industries in the health care sector are pharmaceuticals, biotechnology,
medical products and supplies, and health care services. While the Fund invests
predominantly in common stocks, the Fund may purchase convertible securities,
rights, warrants and illiquid securities. The Fund 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. Securities may be listed on national exchanges or traded
over-the-counter. The Fund may invest up to 20% of its total assets in U.S.
Treasury securities, and agency and instrumentality obligations. 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 predict accurately how long
such alternative strategies may be utilized.
<PAGE>
The Fund may not borrow money in an amount greater than 5% of its total
assets, except for temporary or emergency purposes, as determined by the
Trustees. The Fund may engage up to 5% of its total assets in reverse repurchase
agreements or dollar rolls.
Scudder Technology Fund
Scudder Technology Fund's ("Technology Fund") investment objective is
to seek long-term growth of capital primarily through investment in common
stocks of companies engaged in the development, production or distribution of
technology-related products or services. These types of products and services
currently include computer hardware and software, semi-conductors, office
equipment and automation, and Internet-related products and services.
Under normal circumstances, the Fund will invest at least 80% of its
total assets in common stocks of companies in a group of related industries as
described below. The Fund will invest in securities of U.S. companies, but may
invest in foreign companies as well. A security will be considered appropriate
for the Fund if at least 50% of its total assets, revenues, or net income is
related to or derived from the industry or industries designated for the Fund.
The industries in the technology sector are computers (including software,
hardware and internet-related businesses), computer services, telecommunications
and semi-conductors. While the Fund invests predominantly in common stocks, the
Fund may purchase convertible securities, rights, warrants and illiquid
securities. The Fund 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. Securities may be listed on
national exchanges or traded over-the-counter. The Fund may invest up to 20% of
its total assets in U.S. Treasury securities, and agency and instrumentality
obligations. 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 predict accurately
how long such alternative strategies may be utilized.
The Fund may not borrow money in an amount greater than 5% of its total
assets, except for temporary or emergency purposes, as determined by the
Trustees. The Fund may engage up to 5% of its total assets in reverse repurchase
agreements or dollar rolls.
Master/feeder structure.
The Board of Trustees has the discretion to retain the current
distribution arrangement for a Fund while investing in a master fund in a
master/feeder 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.
Interfund Borrowing and Lending Program
The Funds have received exemptive relief from the SEC, which permits
the Funds to participate in an interfund lending program among certain
investment companies advised by the Adviser. The interfund lending program
allows the participating funds to borrow money from and loan money to each other
for temporary or emergency purposes. The program is subject to a number of
conditions designed to ensure fair and equitable treatment of all participating
funds, including the following: (1) no fund may borrow money through the program
unless it receives a more favorable interest rate than a rate approximating the
lowest interest rate at which bank loans would be available to any of the
participating funds under a loan agreement; and (2) no fund may lend money
through the program unless it receives a more favorable return than that
available from an investment in repurchase agreements and, to the extent
applicable, money market cash sweep arrangements. In addition, a fund may
participate in the program only if and to the extent that such participation is
consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
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an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Funds are actually engaged in borrowing
through the interfund lending program, the Funds, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging), except that the Funds may engage in reverse repurchase
agreements and dollar rolls for any purpose.
Specialized Investment Techniques
Concentration. Each Fund "concentrates," for purposes of the Investment Company
Act of 1940 (the "1940 Act"), its assets in securities related to a particular
industry (see list on page 1 for Health Care Fund and page 2 for Technology
Fund), which means that at least 25% of its net assets will be invested in these
assets at all times. As a result, each Fund may be subject to greater market
fluctuation than a fund which has securities representing a broader range of
investment alternatives. For a more detailed discussion of the risks associated
with a particular industry, please see "THE FUNDS' INVESTMENT OBJECTIVES AND
POLICIES."
Common Stocks. Under normal circumstances, each 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, a
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 stock also offers greater potential for
long-term gain on investment, compared to other classes of financial assets such
as bonds or cash equivalents.
IPO risk: Securities issued through an initial public offering (IPO) can
experience an immediate drop in value if the demand for the securities does not
continue to support the offering price. Information about the issuers of IPO
securities is also difficult to acquire since they are new to the market and may
not have lengthy operating histories. The Fund may engage in short-term trading
in connection with its IPO investments, which could produce higher trading costs
and adverse tax consequences. The number of securities issued in an IPO is
limited, so it is likely that IPO securities will represent a smaller component
of the Fund's portfolio as the Fund's assets increase (and thus have a more
limited effect on the Fund's performance).
Debt Securities. When the Adviser believes that it is appropriate to do so in
order to achieve a Fund's objective of long-term capital appreciation, each Fund
may invest up to 20% of that Fund's total assets 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. Each Fund may purchase
"investment-grade" bonds, rated Aaa, Aa, A or Baa by Moody's Investor Services,
Inc. ("Moody's") or AAA, AA, A or BBB by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P") or, if unrated, judged to be
of equivalent quality as determined by the Adviser.
Convertible Securities. Each 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 a 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
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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. Each 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 a
Fund may purchase.
A repurchase agreement provides a means for a Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., a 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 a Fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price upon repurchase. In either case, the income to a 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.
For purposes of the 1940 Act a repurchase agreement is deemed to be a
loan from a Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to a Fund's investment restriction applicable
to loans. It is not clear whether a court would consider the Obligation
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a 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, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in price of the
Obligation. If the court characterizes the transaction as a loan and a Fund has
not perfected a security interest in the Obligation, a 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, a 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 a 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 a Fund
may incur a loss if the proceeds to a 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), a 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 a 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
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foreign jurisdiction, and such repurchase agreements involve risks similar to
repurchase agreements with U.S. entities.
Reverse Repurchase Agreements. Each Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which a Fund, as the seller of
the securities, agrees to repurchase them at an agreed upon time and price. A
Fund maintains a segregated account in connection with outstanding reverse
repurchase agreements. Each 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.
Borrowing. It is a fundamental policy of each Fund not to 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 a Fund's volatility
and the risk of loss in a declining market. Borrowing by a Fund will involve
special risk considerations. Although the principal of a Fund's borrowings will
be fixed, a Fund's assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
As a matter of non-fundamental policy, a Fund may not borrow money in
an amount greater than 5% of total assets, except for temporary or emergency
purposes, although a Fund may engage up to 5% of total assets in reverse
repurchase agreements or dollar rolls.
Illiquid Securities. Each 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," "not readily
marketable," or "illiquid" restricted securities, i.e., which cannot be sold to
the public without registration under the Securities Act of 1933 (the "1933
Act") 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. This investment practice, therefore, could have the
effect of increasing the level of illiquidity of a Fund. It is each 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 a Fund's net assets.
Lending of Portfolio Securities. Each 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. A 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 of good standing,
and will not be made unless, in the judgment of the Adviser, the consideration
to be earned from such loans would justify their risks. The value of the
securities loaned will not exceed 5% of the value of a Fund's total assets at
the time any loan is made.
Real Estate Investment Trusts. The Health Care Fund may invest in REITs. REITs
are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs. Investment in REITs may subject the Fund to risks associated with
the direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of
the Fund's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986, as amended (the "Code") and to maintain exemption from the registration
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requirements of the 1940 Act. By investing in REITs indirectly through the Fund,
a shareholder will bear not only his or her proportionate share of the expenses
of the Fund, but also, indirectly, similar expenses of the REITs. In addition,
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders.
Short Sales Against the Box. Each Fund may make short sales of common stocks if,
at all times when a short position is open, the applicable Fund owns the stock
or owns preferred stocks or debt securities convertible or exchangeable, without
payment of further consideration, into the shares of common stock sold short.
Short sales of this kind are referred to as short sales "against the box." The
broker/dealer that executes a short sale generally invests cash proceeds of the
sale until they are paid to a Fund. Arrangements may be made with the
broker/dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds.
Depository Receipts. Each Fund may invest indirectly in securities of foreign
issuers through sponsored or unsponsored American Depository Receipts ("ADRs"),
Global Depository Receipts ("GDRs"), International Depository Receipts ("IDRs")
and other types of Depository Receipts (which, together with ADRs, GDRs and IDRs
are hereinafter referred to as "Depository Receipts"). Prices of unsponsored
Depositary Receipts may be more volatile than if the issuer of the underlying
securities sponsored them. Depository 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
Depository 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 Depository Receipts. ADRs are Depository
Receipts which are bought and sold in the United States and are typically issued
by a U.S. bank or trust company which evidence ownership of underlying
securities by a foreign corporation. GDRs, IDRs and other types of Depository
Receipts are typically issued by foreign banks or trust companies, although they
may also 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 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 each Fund's investment policies, a 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. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. However, certain
Depositary Receipts may not be listed on an exchange and therefore may be
illiquid securities.
Investment Company Securities. Each Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. Each Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, a Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). Index-based
investments may not replicate exactly the performance of their specified index
because of transaction costs and because of the temporary unavailability of
certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
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Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Warrants. Each Fund may invest in warrants up to 5% of the value of its
respective total assets. The holder of a warrant has the right, until the
warrant expires, to purchase a given number of shares of a particular issuer at
a specified price. Such investments can provide a greater potential for profit
or loss than an equivalent investment in the underlying security. Prices of
warrants do not necessarily move, however, in tandem with the prices of the
underlying securities and are, therefore, considered speculative investments.
Warrants pay no dividends and confer no rights other than a purchase option.
Thus, if a warrant held by a Fund were not exercised by the date of its
expiration, the Fund would lose the entire purchase price of the warrant.
When-Issued Securities. Each 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 a Fund. To the extent that assets of a Fund are held
in cash pending the settlement of a purchase of securities, that Fund would earn
no income; however, it is a 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, a Fund
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time a 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 Funds do
not believe that their net asset value or income will be adversely affected by
its purchase of securities on a when-issued or forward delivery basis.
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in each Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, each Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limitations imposed by the 1940 Act) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect a 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 a Fund's portfolio, or to establish a position in the derivatives
markets as a substitute for purchasing or selling particular securities. Some
Strategic Transactions may also be used to enhance potential gain although no
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more than 5% of a 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 a Fund to utilize these Strategic Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. Each Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions will not be used to alter fundamental
investment purposes and characteristics of a Fund, and a Fund will segregate
assets (or as provided by applicable regulations, enter into certain offsetting
positions) to cover its obligations under options, futures and swaps to limit
leveraging of a 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 a 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 a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a 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 a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a 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, a
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, a 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
a 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. Each Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a 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. Each 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.
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Each 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. A Fund
will only sell OTC options (other than OTC currency options) that are subject to
a buy-back provision permitting a Fund to require the Counterparty to sell the
option back to the Fund at a formula price within seven days. 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 a 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. A 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 a Fund, and portfolio securities "covering" the amount of a
Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
a Fund's limitation on investing no more than 15% of its net assets in illiquid
securities.
If a 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 a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments 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 a Fund
must be "covered" (i.e., a 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 a Fund will receive the
option premium to help protect it against loss, a call sold by a 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 a Fund to hold a security or instrument which it
might otherwise have sold.
Each Fund may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. A 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 a Fund
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may be required to buy the underlying security at a disadvantageous price above
the market price.
General Characteristics of Futures. Each Fund may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a 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.
Each Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires a 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 a Fund. If a 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.
Neither Fund will 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. Each 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. Each Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of 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. A 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.
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Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of a 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.
Each Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
Each 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, each Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a 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 a 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 a 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"),
a 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 a 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 a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, a Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a 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. Each 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 a 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
each Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. A Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. A Fund will not sell interest rate caps or floors where it does not own
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securities or other instruments providing the income stream a Fund may be
obligated to pay. Interest rate swaps involve the exchange by a 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.
Each 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 a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as a Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Adviser and a 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. A 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, a 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. Each 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. A 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 a 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 each 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 a 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 assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by a Fund will require a 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 a Fund on an index will require a 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 a Fund requires a Fund to segregate cash or liquid assets
equal to the exercise price.
Except when each 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 a Fund to buy or sell currency
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will generally require a Fund to hold an amount of that currency or liquid
assets denominated in that currency equal to a Fund's obligations or to
segregate cash or liquid assets equal to the amount of a Fund's obligation.
OTC options entered into by each 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 a
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 a Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when a Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, a 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 a Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and a 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, each 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, each 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 a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each 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, a 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 a Fund. Moreover, instead of segregating cash or liquid assets if a 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 restrictions may not be
changed without the approval of a majority of the outstanding voting securities
of a 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 a Fund are present or
represented by proxy, or (2) more than 50% of the outstanding voting securities
of a Fund. Each Fund has elected to be classified as a non-diversified series of
an open-end investment company. Each Fund's policy to "concentrate" its assets
in securities related to a particular industry is a fundamental policy.
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, a Fund.
As a matter of fundamental policy, each Fund may not:
(1) borrow money, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
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(3) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(4) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(5) purchase physical commodities or contracts related to physical
commodities; or
(6) make loans to other persons, except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests
in indebtedness in accordance with the Fund's investment
objective and policies may be deemed to be loans.
Each Fund may not, as a matter of nonfundamental policy:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) 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.
PURCHASES
Additional Information About Opening an Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and members of their immediate
families, members of the National Association of Securities Dealers, Inc.
("NASD") and banks may, if they prefer, subscribe initially for at least $2,500
for Class S and $1,000 for Class AARP through Scudder Investor Services, Inc. by
letter, fax, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have 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,
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and banks may open an account by wire. Investors interested in investing in
Class S must call 1-800-SCUDDER to get an account number. During the call the
investor will be asked to indicate the Fund name, class name, amount to be wired
($2,500 minimum for Class S and $1,000 for Class AARP), name of bank or trust
company from which the wire will be sent, the exact registration of the new
account, the tax identification number or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, Boston, MA 02101, ABA Number 011000028, DDA
Account 9903-5552. The investor must give the Scudder fund name, class name,
account name and the new account number. Finally, the investor must send a
completed and signed application to the Fund promptly. Investors interested in
investing in Class AARP should call 1-800-253-2277 for further instructions.
The minimum initial purchase amount is less than $2,500 for Class S
under certain plan accounts and is $1,000 for Class AARP.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Contact the Distributor at 1-800-SCUDDER for additional
information. A confirmation of the purchase will be mailed out promptly
following receipt of a request to buy. Federal regulations require that payment
be received within three business days. If payment is not received within that
time, the order is subject to cancellation. In the event of such cancellation or
cancellation at the purchaser's request, the purchaser will be responsible for
any loss incurred by the Fund or the principal underwriter by reason of such
cancellation. If the purchaser is a shareholder, the Trust shall have the
authority, as agent of the shareholder, to redeem shares in the account in order
to reimburse a 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 a Fund.
Minimum Balances
Shareholders should maintain a share balance worth at least $2,500 for
Class S and $1,000 for Class AARP. For fiduciary accounts such as IRAs, and
custodial accounts such as Uniform Gift to Minor Act, and Uniform Trust to Minor
Act accounts, the minimum balance is $1,000 for Class S and $500 for Class AARP.
These amounts may be changed by each Fund's Board of Trustees. A shareholder may
open an account with at least $1,000 ($500 for fiduciary/custodial accounts), if
an automatic investment plan (AIP) of $100/month ($50/month for Class AARP and
fiduciary/custodial accounts) is established. Scudder group retirement plans and
certain other accounts have similar or lower minimum share balance requirements.
The Funds reserve the right, following 60 days'
written notice to applicable shareholders, to:
o for Class S, 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 By Quickbuy
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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 a 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, a Fund may hold the
redemption proceeds for a period of up to seven business days. If you purchase
shares and there are insufficient funds in your bank account, the purchase will
be canceled and you will be subject to any losses or fees incurred in the
transaction. QuickBuy transactions are not available for most retirement plan
accounts. However, QuickBuy transactions are available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing an QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 15 days for this service to be available.
Each 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 Funds do not follow such procedures, they may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
Investors interested in making subsequent investments in Class AARP
should call 1-800-253-2277 for further instruction.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately,
and the purchaser may be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse a 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 a Fund.
Share Price
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Purchases will be filled without sales charge at the net asset value
per share next computed after receipt of the application in good order. Net
asset value normally will be computed for each class as of the close of regular
trading on each day during which the Exchange is open for trading. Orders
received after the close of regular trading on the Exchange will be executed at
the next business day's net asset value. If the order has been placed by a
member of the NASD, other than the Distributor, it is the responsibility of that
member broker, rather than a Fund, to forward the purchase order to Scudder
Service Corporation (the "Transfer Agent") in Boston by the close of regular
trading on the Exchange.
There is no sales charge in connection with the purchase of shares of
any class of the Funds.
Share Certificates
Due to the desire of each Fund's management to afford ease of
redemption, certificates will not be issued to indicate ownership in a Fund.
Share certificates now in a shareholder's possession may be sent to a Fund's
Transfer Agent for cancellation and credit to such shareholder's account.
Shareholders who prefer may hold the certificates in their possession until they
wish to exchange or redeem such shares.
Other Information
Each Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for its shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on a Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a Fund and the
broker, ordinarily orders will be priced at a class' net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of a Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also a 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 a Fund at any time for any reason.
The "Tax Identification Number" section of the Application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations a certification of exempt status), will be
returned to the investor. The Funds reserve the right, following 30 days'
notice, to redeem all shares in accounts without a correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
redemption by providing the Fund with a tax identification number during the
30-day notice period.
The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
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EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder Fund and a
purchase into another Scudder Fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500 for Class S and
$1,000 for Class AARP. When an exchange represents an additional investment into
an existing account, the account receiving the exchange proceeds must have
identical registration, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more for Class S.
If the account receiving the exchange proceeds is to be different in any
respect, the exchange request must be in writing and must contain an original
signature guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's 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.
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 Funds employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. A Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Funds
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder Funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated. The exchange
privilege may not be available for certain Scudder Funds or classes of Scudder
Funds. For more information, please call 1-800-SCUDDER (for Class S) or
1-800-253-2277 (Class AARP).
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption By Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may also request by telephone to have
the proceeds mailed or wired to their predesignated bank account. In order to
request wire redemptions by telephone, 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.
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(a) NEW INVESTORS wishing to establish the telephone redemption
privilege must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder pension and profit-sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form
(available upon request), or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for a redemption to a shareholder's bank account is made
by telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A Fund will not be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
Redemption requests by telephone (technically a repurchase agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption By Quicksell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of a Fund by telephone. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4 p.m. Eastern time, Shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing the following business day. QuickSell
transactions are not available for Scudder IRA accounts and most other
retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account 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 for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A Fund will not be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
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Redemption By Mail Or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays of more
than seven (7) days of payment for shares tendered for repurchase or redemption
may result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information call 1-800-SCUDDER.
Redemption-in-Kind
The Funds reserve 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
each Fund and valued as they are for purposes of computing each 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 Funds are 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 that Fund at the beginning of the
period.
Special Redemption and Exchange Information
In general, shares of each Fund may be exchanged or redeemed at net
asset value. However, shares of each 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. Each 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) shares purchased
through certain wrap fee programs; (d) a redemption of reinvestment shares
(i.e., shares purchased through the reinvestment of dividends or capital gains
distributions paid by the Fund); (e) 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 (f) 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
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date the shares were originally purchased, and not from the date of transfer
between shareholders
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. A wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including redemptions undertaken to effect an exchange for
shares of another Scudder fund, may result in tax consequences (gain or loss) to
the shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefore may be
suspended at times during which (a) the Exchange is closed, other than customary
weekend and holiday closings, (b) trading on the Exchange is restricted for any
reason, (c) an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
the SEC has by order permitted such a suspension for the protection of the
Trust's shareholders, provided that applicable rules and regulations of the SEC
(or any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b) or (c) exist.
FEATURES AND SERVICES OFFERED BY THE FUND
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not 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 and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish Scudder funds and classes from other no-load funds. Scudder
pioneered the no-load concept when it created the nation's first no-load fund in
1928, and later developed the nation's first family of no-load mutual funds.
Internet Access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for Class AARP shares is aarp.scudder.com. These sites offer
guidance on global investing and developing strategies to help meet financial
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goals and provide access to the Scudder investor relations department via
e-mail. The sites also enable users to access or view fund prospectuses and
profiles with links between summary information in Profiles and details in the
Prospectus. Users can fill out new account forms on-line, order free software,
and request literature on funds.
Account Access -- The Adviser is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web sites. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional Shares of a Fund. A change of instructions for the method of
payment may be given to the Transfer Agent in writing at least five days prior
to a dividend record date. Shareholders may change their dividend option by
calling 1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP or by
sending written instructions to the Transfer Agent. Please include your account
number with your written request.
Reinvestment is usually made at the closing net asset value of the
class determined on the business day following the record date. Investors may
leave standing instructions with the Transfer Agent designating their option for
either reinvestment or cash distribution of any income dividends or capital
gains distributions. If no election is made, dividends and distributions will be
invested in additional shares of the same class of the Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's Direct
Distributions Program. Shareholders who elect to participate in the Direct
Distributions Program, and whose predesignated checking account of record is
with a member bank of Automated Clearing House Network (ACH) can have income and
capital gain distributions automatically deposited to their personal bank
account usually within three business days after a Fund pays its distribution. A
Direct Distributions request form can be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277 for Class AARP. Confirmation Statements will be
mailed to shareholders as notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277 for Class AARP.
THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds; a list of Scudder's
family of funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
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Scudder Cash Investment Trust
Scudder Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
TAX FREE
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund **
Scudder California Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
-----------------------------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Pathway Series: Growth Portfolio
U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
Scudder Small Company Stock Fund
Scudder Small Company Value Fund
Growth
Scudder Capital Growth Fund
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Fund***
Scudder Global Discovery Fund**
-----------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
24
<PAGE>
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Fund
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 for Class S shares or 1-800-253-2277 for Class
AARP shares.
Certain Scudder funds or classes thereof may not be available for
purchase or exchange. For more information, please call 1-800-SCUDDER.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of a Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by a 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
Shares of a 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
25
<PAGE>
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 a 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 a 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, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
Scudder Roth IRA: Individual Retirement Account
Shares of a Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
26
<PAGE>
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 a 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). Any
such requests must be received by a 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 a 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-SCUDDER for Class S and 1-800-253-2277 for Class AARP.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments in Class S shares
through automatic deductions from checking accounts by completing the
appropriate form and providing the necessary documentation to establish this
service. The minimum investment is $50 for Class S shares.
Shareholders may arrange to make periodic investments in Class AARP of
each Fund through automatic deductions from checking accounts. The minimum
pre-authorized investment amount is $50. New shareholders who open a Gift to
Minors Account pursuant to the Uniform Gift to Minors Act (UGMA) and the Uniform
Transfer to Minors Act (UTMA) and who sign up for the Automatic Investment Plan
will be able to open a Fund account for less than $500 if they agree to increase
their investment to $500 within a 10 month period. Investors may also invest in
any Class AARP for $500 a month if they establish a plan with a minimum
27
<PAGE>
automatic investment of at least $100 per month. This feature is only available
to Gifts to Minors Account investors. The Automatic Investment Plan may be
discontinued at any time without prior notice to a shareholder if any debit from
their bank is not paid, or by written notice to the shareholder at least thirty
days prior to the next scheduled payment to the Automatic Investment Plan.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
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.
28
<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each 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. Each 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, a
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 a 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, a 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 a Fund, to the extent permissible, as part of that
Fund's deduction for dividend paid on its federal tax return.
The Trust intends to distribute a 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 a 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 a Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
From time to time, quotations of a 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 a Fund, ended on the last day
of a recent calendar quarter. Average annual total return quotations reflect
changes in the price of a Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. 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):
29
<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 the period ended May 31, 2000
<TABLE>
<CAPTION>
One Year Life of Fund
<S> <C> <C>
Scudder Health Care Fund - Class S ^(1)* 41.69% 20.69%
Scudder Technology Fund - Class S ^(1)* 111.79% 72.44%
</TABLE>
^(1) For the period beginning March 2, 1998 (commencement of operations).
* Since Class AARP is a new class of each Fund, no performance
information is available. However, Class AARP shares will have
substantially similar annual returns because the shares are invested in
the same portfolio of securities, and the annual returns would differ
only to the extent that expenses differ.
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 a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
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 period ended May 31, 2000
<TABLE>
<CAPTION>
One Year Life of Fund
-------- ------------
<S> <C> <C>
Scudder Health Care Fund^(1)* 41.69% 52.67%
Scudder Technology Fund^(1)* 111.79% 240.63%
</TABLE>
(1) For the period beginning March 2, 1998 (commencement of operations).
* The Adviser maintained expenses for each Fund for the fiscal period
ended May 31, 1999. The cumulative total return for the life of each
Fund, had the Adviser not maintained Fund expenses, would have been
lower.
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 a 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 a Fund will vary based on
changes in market conditions and the level of a Fund's expenses.
30
<PAGE>
Comparison of Fund Performance
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Trust, a 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
Funds. 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 Funds may be advertised as an investment choice in Scudder's
college planning program.
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 Funds. The
description may include a "risk/return spectrum" which compares the Funds 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 Funds 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 the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds.
ORGANIZATION OF THE FUNDS
The combined prospectus and this Statement of Additional Information
for the Funds each offer two classes of shares to provide investors with
different purchase options. The two classes are Class S and Class AARP. Each
class has its own important features and policies. On October 2, 2000, shares of
Scudder Health Care Fund and Scudder Technology Fund were redesignated as Class
S shares of their respective funds.
31
<PAGE>
The Funds are non-diversified 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 have equal rights as to voting, dividends and liquidation.
The Trust's shares are currently divided into five series: Scudder Development
Fund, Scudder Small Company Value Fund, Scudder 21st Century Growth Fund,
Scudder Health Care Fund and Scudder Technology 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 the Funds (or class thereof) has equal rights with each
other share of that Fund (or class) as to voting, dividends and liquidation. 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
the Funds' 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 Funds (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 Declaration of Trust provides that obligations of a Fund are not
binding upon the Trustees individually but only upon the property of a Fund,
that a Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law and that a 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 a 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 Funds. Nothing in the Declaration of Trust, however, protects
or indemnifies a Trustee or officer against any liability to which that person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of that
person's office.
INVESTMENT ADVISER
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 December 31, 1997, Zurich
Insurance Company ("Zurich") acquired a majority interest in the Adviser, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Adviser. The Adviser's name changed to Scudder Kemper Investments, Inc. On
September 7, 1998, the businesses of Zurich (including Zurich's 70% interest in
32
<PAGE>
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. By way of a dual holding
company structure, former Zurich shareholders initially owned approximately 57%
of Zurich Financial Services Group, with the balance initially owned by former
B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, 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, as well as providing investment advice to over 280 open- and
closed-end mutual funds.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser's international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which a Fund may invest, the conclusions and
investment decisions of the Adviser with respect to a Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for the Funds 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 a Fund. Purchase and sale orders for a Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to a Fund.
In certain cases, the investments for the Funds are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser,
that have similar names, objectives and investment styles. You should be aware
that the Funds are likely to differ from other mutual funds in size, cash flow
pattern and tax matters. Accordingly, the holdings and performance of the Funds
can be expected to vary from those of these other mutual funds.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
33
<PAGE>
Upon consummation of this transaction, the Funds' existing investment
management agreements with Scudder Kemper were deemed to have been assigned and,
therefore, terminated. The Board has approved new investment management
agreements with Scudder Kemper, which are substantially identical to the current
investment management agreements, except for the date of execution and
termination. These agreements became effective on September 7, 1998 upon the
termination of the then current investment management agreements and were
approved at a shareholder meeting held on December 15, 1998.
The Agreements dated October 2, 2000 will continue in effect until
September 30, 2001 and from year to year thereafter only if their continuance is
approved annually by the vote of a majority of those Trustees who are not
parties to such Agreements or interested persons of the Adviser or the Trust,
cast in person at a meeting called for the purpose of voting on such approval,
and either by a vote of the Trust's Trustees or of a majority of the outstanding
voting securities of the respective Fund. The Agreements may be terminated at
any time without payment of penalty by either party on sixty days' written
notice and automatically terminate in the event of their assignment.
Under the Agreements, the Adviser regularly provides a Fund with
continuing investment management for a Fund's portfolio consistent with each
Fund's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of a Fund's assets
shall be held uninvested, subject to the Trust's Declaration of Trust, By-Laws,
the 1940 Act, the Code and to a Fund's investment objective, policies and
restrictions, and subject, further, to such policies and instructions as the
Board of Trustees of the Trust may from time to time establish. The Adviser also
advises and assists the officers of the Trust in taking such steps as are
necessary or appropriate to carry out the decisions of its Trustees and the
appropriate committees of the Trustees regarding the conduct of the business of
each Fund.
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
Funds, 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 Funds' office
space and facilities.
For these services, Health Care Fund and Technology Fund will each pay
the Adviser an annual fee equal to 0.85% of the relevant Fund's average daily
net assets payable monthly, provided each 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. The Adviser had agreed until
September 30, 2000 to maintain the total annualized expenses of each of the
Health Care Fund and Technology Fund at no more than 1.75%, of the average daily
net assets of each Fund. For the year ended May 31, 2000, the Adviser did not
impose a portion of its management fee for Health Care Fund, which amounted to
$16,645, and the amount imposed aggregated $492,222. For the year ended May 31,
2000, the management fee for Technology Fund amounted to $3,470,232.
Under the Agreements, the Funds are 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 Funds' 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 Funds 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 Funds may
34
<PAGE>
arrange to have third parties assume all or part of the expenses of sale,
underwriting and distribution of shares of a Fund. The Funds are 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 Funds with respect thereto.
The Agreements identify 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 Funds, 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 Agreements and in discussions with the
Adviser concerning such Agreements, the Trustees of the Trust who are not
"interested persons" of the Adviser are represented by independent counsel at
the Funds' expense.
The Agreements provide that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with matters to which the Agreements relate, 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 Agreements.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Funds' 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 a
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of that Fund.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in
return for services relating to investments by AARP members in AARP Class shares
of each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of AARP Classes of all funds managed by Scudder Kemper. The
fee rates, which decrease as the aggregate net assets of the AARP Classes become
larger, are as follows: 0.07% for the first $6 billion in net assets, 0.06% for
the next $10 billion and 0.05% thereafter.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Code of Ethics
The Fund, the Adviser and principal underwriter have each adopted codes
of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Fund and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
35
<PAGE>
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
Linda C. Coughlin (48)+* President and Trustee Managing Director of Scudder Kemper Director and Senior
Investments, Inc. Vice President
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board, Inc.
Chapel Hill, NC
Keith R. Fox (45) Trustee General Partner, Exeter Group of --
10 East 53rd Street Funds
New York, NY 10022
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation Foundation; Department of State -
650 Fifth Avenue Undersecretary of State for Economic,
New York, NY 10128 Business and Agricultural Affairs
(March 1993 to January 1997)
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski (law
firm) (1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place 23rd Floor Capital (venture capital firm)
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
Ann M. McCreary (43) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
John R. Hebble (42)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
36
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
John Millette (37)+ Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
Thomas V. Bruns (43)*** Vice President Managing Director of Scudder Kemper --
Investments, Inc.
William F. Glavin (41) + Vice President Managing Director of Scudder Kemper Vice President
Investments, Inc.
James E. Masur (40) + Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Kathryn L. Quirk (47) ++ Vice President and Managing Director of Scudder Kemper Senior Vice President,
Assistant Secretary Investments, Inc. Director, Chief Legal
Officer and Assistant
Clerk
Howard Schneider (43) + Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Brenda Lyons (37) + Assistant Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
Peter Chin (58) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
J. Brooks Dougherty (41) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
James M. Eysenbach (38) # Vice President Managing Director of Scudder Kemper --
Investments, Inc.
James E. Fenger (41) ***_ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Sewall Hodges (45) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Funds and
their counsel to be persons who are "interested persons" of the
Adviser or of the Trust, within the meaning of the Investment
Company Act of 1940, as amended.
** Unless otherwise stated, all of the Trustees and officers have
been associated with their respective companies for more than five
years, but not necessarily in the same capacity.
+ Address: Two International Place, Boston,
Massachusetts
++ Address: 345 Park Avenue, New York, New York
*** Address: 222 South Riverside Plaza, Chicago, Illinois
# Address: 101 California Street Suite 4100 San Francisco,
California
37
<PAGE>
The Trustees and officers of the Funds also serve in similar capacities
with other Scudder Funds.
As of August 31, 2000, all Trustees and officers of the Funds, as a
group, owned beneficially (as that term is defined in Section 13 (d) of the
Securities and Exchange Act of 1934) less than 1% of the outstanding shares of
any class of Scudder Technology Fund and Scudder Health Care Fund.
As of August 31, 2000, all Trustees and officers of the Funds, as a
group owned beneficially, as that term is defined in Section 13 (d) of the
Securities Exchange Act of 1934) less than 1% the outstanding shares of any
class of Scudder Technology Fund and Scudder Health Care Fund.
To the best of the Trust's knowledge, except at stated below, no person
owned of record more than 5% or more of the outstanding shares of any class of
any Fund. They may be deemed to be the beneficial owner of certain of these
shares.
<TABLE>
<CAPTION>
---------------------------- -------------------------- -------------- ---------------------- ------------------------
NAME FUND CLASS SHARES PERCENTAGE
---------------------------- -------------------------- -------------- ---------------------- ------------------------
<S> <C> <C> <C>
Charles Schwab & Co. Technology Fund S 1,585,306 8.96%
101 Montgomery Street
San Francisco, CA 94101
---------------------------- -------------------------- -------------- ---------------------- ------------------------
Charles Schwab & Co. Health Care Fund S 1,870,692 23.2%
101 Montgomery Street
San Francisco, CA 94101
---------------------------- -------------------------- -------------- ---------------------- ------------------------
</TABLE>
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with the
Adviser. These "Independent Trustees" have primary responsibility for assuring
that each Fund is managed in the best interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designated to assure 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, each
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 Funds' independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of 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 each Fund's independent public
38
<PAGE>
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
Each Independent Trustee receives compensation for his or her services,
which includes an annual retainer and an attendance fee for each meeting
attended. The Independent Trustee who serves as lead trustee receives additional
compensation for his or her service. No additional compensation is paid to any
Independent Trustee for travel time to meetings, attendance at trustee's
educational seminars or conferences, service on industry or association
committees, participation as speakers at trustees' 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 1999 from the Trust and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
Name Scudder All Scudder Funds
---- ------- -----------------
Securities
----------
Trust*
------
<S> <C> <C>
Henry P. Becton, Jr. ** $0 $140,000 (30 funds)
Dawn-Marie Driscoll** $0 $150,000 (30 funds)
Edgar R. Fiedler** $945 $73,230 (29 funds)+
Keith R. Fox $36,375 $160,325 (23 funds)
Joan E. Spero $39,625 $175,275 (23 funds)
Jean Gleason Stromberg** $0 $40,935 (16 funds)
Jean C. Tempel** $0 $140,000 (30 funds)
</TABLE>
* Scudder Securities Trust consists of five funds: Scudder Development
Fund, Scudder Health Care Fund, Scudder Technology Fund, Scudder Small
Company Value Fund and Scudder 21st Century Growth Fund.
** Newly-elected Trustee. On July 11, 2000, shareholders of each Fund
elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly constituted Board of Trustees.
+ Mr. Fielder's compensation includes the $9,900 accrued but not
received, through the deferred compensation program.
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 each Fund.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc., a Massachusetts corporation, which is a subsidiary of the Adviser, a
Delaware corporation. The Trust's underwriting agreement dated May 8, 2000 will
remain in effect until September 30, 2001 and from year to year thereafter only
if their continuance is approved annually by a majority of the members of the
Board of Trustees who are not parties to such agreement or interested persons of
39
<PAGE>
any such party and either by vote of a majority of the Board of Trustees or a
majority of the outstanding voting securities of a Fund. The underwriting
agreement was last approved by the Trustees on July 10, 2000.
Under the underwriting agreement, the Funds are 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 each Fund as a broker or dealer in
various states, as required; the fees and expenses of preparing, printing and
mailing prospectuses annually to existing shareholders (see below for expenses
relating to prospectuses paid by the Distributor); notices, proxy statements,
reports or other communications to shareholders of a 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 Funds 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 Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Funds to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
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 Funds, unless a Rule 12b-1 Plan is in effect
which provides that the Funds shall bear some or all of such expenses.
Note: Although the Funds do not currently have a 12b-1 Plan, and the
Trustees have no current intention of adopting one, the Funds
would also pay those fees and expenses permitted to be paid or
assumed by the Funds pursuant to a 12b-1 Plan, if any, were
adopted by a Fund, notwithstanding any other provision to the
contrary in the underwriting agreement.
As agent, the Distributor currently offers shares of the Funds on a
continuous basis to investors in all states in which shares of a 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 Funds.
Administrative Fee
Each Fund has entered into administrative services agreements with
Scudder Kemper (the "Administration Agreements"), pursuant to which Scudder
Kemper will provide or pay others to provide substantially all of the
administrative services required by a Fund (other than those provided by Scudder
Kemper under its investment management agreements with the Funds, as described
above) in exchange for the payment by each Fund of an administrative services
fee (the "Administrative Fee") 0.35% of its average daily net assets for each
Fund. One effect of these arrangements is to make each Fund's future expense
ratio more predictable. The Administrative Fee became effective on October 2,
2000 for each of the Funds. The details of the proposal (including expenses that
are not covered) are set out below.
40
<PAGE>
Various third party service providers (the "Service Providers"), some
of which are affiliated with Scudder Kemper, provide certain services to the
Funds pursuant to separate agreements with the Funds. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Funds and maintains their accounting records. Scudder Service Corporation, also
a subsidiary of Scudder Kemper, is the transfer, shareholder servicing and
dividend-paying agent for the shares of the Funds. Scudder Trust Company, an
affiliate of Scudder Kemper, provides subaccounting and recordkeeping services
for shareholders in certain retirement and employee benefit plans. As custodian,
State Street Bank holds the portfolio securities of the Funds, pursuant to a
custodian agreement. PricewaterhouseCoopers LLP audits the financial statements
of the Funds and provides other audit, tax, and related services.
Scudder Kemper will pay the Service Providers for the provision of
their services to the Funds and will pay other fund expenses, including
insurance, registration, printing and postage fees. In return, each Fund will
pay Scudder Kemper an Administrative Fee.
Each Administration Agreement has an initial term of three years,
subject to earlier termination by the Fund's Board. The fee payable by a Fund to
Scudder Kemper pursuant to the Administration Agreements is reduced by the
amount of any credit received from the Fund's custodian for cash balances.
Certain expenses of the Funds will not be borne by Scudder Kemper under
the Administration Agreements, such as taxes, interest and extraordinary
expenses; and the fees and expenses of the Independent Trustees (including the
fees and expenses of their independent counsel). In addition, each Fund will
continue to pay the fees required by its investment management agreement with
Scudder Kemper.
TAXES
Each 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. They intend 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 percent of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.
Each 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 a 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 generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of a Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, that Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a proportionate share of federal income taxes paid
by a Fund on such gains as a credit against the shareholder's federal income tax
liability, and will be entitled to increase the adjusted tax basis of the
shareholder's Fund shares by the difference between such reported gains and the
shareholder's tax credit. If a Fund makes such an election, it may not be
treated as having met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
If any such dividends constitute a portion of a Fund's gross income, a
portion of the income distributions of a Fund may be eligible for the 70%
deduction for dividends received by corporations. Shareholders will be informed
of the portion of dividends which so qualify. The dividends-received deduction
41
<PAGE>
is reduced to the extent the shares of a 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 a 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 gains, regardless of the length of time the shares of a 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 declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares, 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 of up to
$2,000 or, if less, the amount of the individual's earned income (up to $2,250
per individual for married couples if only one spouse has earned income) for any
taxable year only if (i) neither the individual nor his or her spouse (unless
filing separate returns) is an active participant in an employer's retirement
plan, or (ii) the individual (and his or her spouse, if applicable) has an
adjusted gross income below a certain level ($52,000 for married individuals
filing a joint return, with a phase-out of the deduction for adjusted gross
income between $52,000 and $62,000; $32,000 for a single individual, with a
phase-out for adjusted gross income between $32,000 and $42,000). However, an
individual not permitted to make a deductible contribution to an IRA for any
such taxable year may nonetheless make nondeductible contributions up to $2,000
to an IRA 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. (Different provisions may apply to Roth IRAs. See discussion above under
Special Plan Accounts.)
Distributions by a 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 written on portfolio
stock) and over-the-counter options on debt securities written or purchased by a
Fund will be subject to tax under Section 1234 of the Code. In general, no loss
will be recognized by a Fund upon payment of a premium in connection with the
purchase of a put or call option. The character of any gain or loss recognized
(i.e. long-term or short-term) will generally depend, in the case of a lapse or
sale of the option, on the Fund's holding period for the option, and in the case
of the exercise of a put option, on a Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of any property
in the Fund's portfolio similar to the property underlying the put option. If a
Fund writes an option, no gain is recognized upon its receipt of a premium. If
the option lapses or is closed out, any gain or loss is treated as short-term
capital gain or loss. If the option is exercised, the character of the gain or
loss depends on the holding period of the underlying stock.
Positions of a Fund which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes the 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,
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<PAGE>
the operation of which may cause deferral of losses, adjustments in the holding
periods of stocks or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for
certain "qualified covered call options" on stock written by a Fund.
Many futures and forward contracts entered into by a Fund and listed
nonequity options written or purchased by a Fund (including options on debt
securities, options on futures contracts, options on securities indices and
options on currencies), will be governed by Section 1256 of the Code. Absent a
tax election to the contrary, gain or loss attributable to the lapse, exercise
or closing out of any such position generally will be treated as 60% long-term
and 40% short-term capital gain or loss. Moreover, on the last trading day of a
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 capital gain or loss. Under Section 988 of the Code,
discussed below, gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
acquired by a Fund will be treated as ordinary income or loss.
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures or forward contract or nonequity option
or other position governed by Section 1256 which substantially diminishes a
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, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses, certain tax elections exist for
them which reduce or eliminate the operation of these rules. Each Fund will
monitor its transactions in options, foreign currency futures and forward
contracts and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may
require a 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, or 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.
Gains or losses attributable to fluctuations in exchange rates which
occur between the time a Fund accrues receivables or liabilities denominated in
a foreign currency and the time the Fund actually collects such receivables or
pays such liabilities are treated are ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain futures contracts, forward contracts and options,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition are also treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of a Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
A portion of the difference between the issue price of zero coupon
securities and their face value (the "original issue discount") is considered to
be income to a Fund each year, even thought the Fund will not receive cash
interest payments from the securities. This original issue discount imputed
income will comprise a part of the investment company taxable income of the
Funds which must be distributed to shareholders in order to maintain the
qualification of the Funds as regulated investment companies and to avoid
federal income tax at the Fund's level.
If a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of a Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of a Fund, other than the taxable year of the
excess distribution or deposition, would be taxed to a Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of a foreign company's stock. Any amount of
distribution or gain allocated to the taxable year of the distribution or
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<PAGE>
disposition would be included in a Fund's investment company taxable income and,
accordingly, would not be taxable to that Fund to the extent distributed by the
Fund as a dividend to its shareholders.
Each 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, each
Fund would report as ordinary income the amount by which the fair market value
of the foreign company's stock exceeds a Fund's adjusted basis in these shares;
any mark-to-market losses and any loss from an actual disposition of shares
would be deductible as ordinary losses to the extent of any net mark-to-market
gains included in income in prior years. The effect of the election would be to
treat excess distributions and gains on dispositions as ordinary income which is
not subject to a fund-level tax when distributed to shareholders as a dividend.
Alternatively, the Funds may elect to include as income and gains their share of
the ordinary earnings and net capital gain of certain foreign investment
companies in lieu of being taxed in the manner described above.
Dividend and interest income received by a Fund from services outside
the United States 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 those foreign taxes, however, and foreign countries
generally do not impose taxes on capital gains in respect to investments by
foreign investors.
Each Fund will be required to report to the Internal Revenue Service
all distributions of investment company 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 investment company taxable income and
capital gains and proceeds from the redemption or exchange of the shares of a
regulated investment company may be subject to withholding of federal income tax
at the rate of 31% in the case of non-exempt shareholders who fail to furnish
the investment company with their taxpayer identification numbers and with
required certifications regarding their status under the federal income tax law.
Withholding may also be required if a 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 a Fund may be subject to state and local taxes on
distributions received from that Fund and on redemptions of the Fund's shares.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of a Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, with out any brokerage commission being paid by the Fund. Trading does,
44
<PAGE>
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and not all such information is used by the Adviser
in connection with the Fund. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Fund.
In the fiscal period ended May 31, 1999, Scudder Health Care Fund paid
brokerage commissions of $74,815 and Scudder Technology Fund paid brokerage
commissions of $75,697. In the fiscal period ended May 31, 2000, Scudder Health
Care Fund paid brokerage commissions of $107,532 and Scudder Technology Fund
paid brokerage commissions of $212,095.
For Scudder Health Care Fund, for the fiscal period ended May 31, 1999,
$39,415 (53% 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 information to the
Fund or the Adviser. The amount of such transactions aggregated $120,200,875
(53% of all transactions). For Scudder Health Care Fund, for the fiscal period
ended May 31, 2000, $68,820 (64% 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 information to the Fund or the Adviser. The amount of such transactions
aggregated $130,315,477 (67% of all transactions).
For Scudder Technology Fund, for the fiscal period ended May 31, 1999,
$53,131 (70% 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 information to the
Fund or the Adviser. The amount of such transactions aggregated $208,104,964
(72% of all transactions). For Scudder Technology Fund, for the fiscal period
ended May 31, 2000, $172,702 (81% 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 information to the Fund or the Adviser. The amount of such transactions
aggregated $688,292,450 (67% of all transactions).
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<PAGE>
The Trustees review from time to time whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by a Fund on portfolio transactions is legally permissible and advisable.
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 period ended May
31, 1999 for Scudder Health Care Fund and Scudder Technology Fund were 132.8%
and 134.9%, respectively. For the fiscal period ended May 31, 2000 the rates for
Scudder Health Care Fund and Scudder Technology Fund were 142% and 83%,
respectively. Higher levels of activity by a Fund result in higher transaction
costs and may also result in taxes on realized capital gains to be borne by the
Fund's shareholders. Purchases and sales are made for the Fund whenever
necessary, in management's opinion, to meet a Fund's objective.
NET ASSET VALUE
The net asset value of each class of each Fund is computed as of the
close of regular trading on the Exchange on each day the Exchange is open for
trading (the "Value Time"). The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas and on the preceding Friday or subsequent Monday when one of these
holidays falls on Saturday or Sunday, respectively. Net asset value per share is
determined separately for each class of shares by dividing the value of the
total assets of the Fund, less all liabilities attributable to that class, by
the total number of shares of that class outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An equity
security which is traded on the Nasdaq Stock Market Inc. ("Nasdaq") system will
be valued at its most recent sale price on such system as of the Value Time.
Lacking any sales, the security will be valued at the most recent bid quotation
as of the Value Time. The value of an equity security not quoted on the Nasdaq
system, but traded in another over-the-counter market, is its most recent sale
price if there are any sales of such security on such market as of the Value
Time. Lacking any sales, the security is valued at the Calculated Mean quotation
for such security as of the Value Time. Lacking a Calculated Mean quotation the
security is valued at the most recent bid quotation as of the Value Time.
Debt securities, other than money-market instruments, are valued at
prices supplied by the Funds' pricing agent(s) which reflect broker/dealer
supplied valuations and electronic data processing techniques. Money-market
instruments with an original maturity of sixty days or less maturing at par
shall be valued at amortized cost, which the Board believes approximates market
value. If it is not possible to value a particular debt security pursuant to
these valuation methods, the value of such security is the most recent bid
quotation supplied by a bona fide marketmaker. If it is not possible to value a
particular debt security pursuant to the above methods, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of a 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
46
<PAGE>
information. The value of other portfolio holdings owned by a 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 each Fund included in the Funds' prospectus
and the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, 160 Federal Street,
Boston, MA 02110, independent accountants, given on the authority of said firm
as experts in accounting and auditing. 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.
Other Information
Many of the investment changes in the Funds will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of a Fund. These transactions will reflect investment
decisions made by the Adviser in the light of its other portfolio holdings and
tax considerations and should not be construed as recommendations for similar
action by other investors.
The CUSIP number of Class S shares of Scudder Health Care Fund is
811196-60-9.
The CUSIP number of Class S shares of Scudder Technology Fund is
811196-70-8.
The CUSIP number of Class AARP shares of Scudder Health Care Fund is
811196-86-4.
The CUSIP number of Class AARP shares of Scudder Technology Fund is
811196-85-6.
Each Fund has a fiscal year end of May 31.
Dechert acts as counsel for the Funds.
The Funds employ State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 as Custodian.
Costs of $28,000 and $28,000 incurred by Health Care Fund and
Technology Fund, respectively, in conjunction with their organization are
amortized over the five-year period beginning January 5, 1998.
Scudder Service Corporation ("SSC"), P.O. Box 2291, Boston,
Massachusetts, 02107-2291, a subsidiary of the Adviser, is the transfer and
dividend disbursing agent for the Funds. SSC also serves as shareholder service
agent and provides subaccounting and recordkeeping services for shareholder
accounts in certain retirement and employee benefit plans. The Funds each pay
Service Corporation an annual fee for each account maintained for a participant.
For the year ended May 31, 1999, SSC imposed its fee for Scudder Health Care
Fund and Scudder Technology Fund aggregating $303,720 and $402,981,
respectively, of which $145,156 and $208,103, respectively, was unpaid at May
31, 1999. For the year ended May 31, 2000, SSC imposed its fee for Scudder
Health Care Fund and Scudder Technology Fund aggregating $334,505 and
$1,304,080, respectively, of which $33,571 and $250,338, respectively, was
unpaid at May 31, 2000.
The Fund(s), 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 Funds to Scudder Trust Company, Two
International Place, Boston, Massachusetts, 02110-4103, an affiliate of the
Adviser, for certain retirement plan accounts.
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<PAGE>
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110-4103, a subsidiary of the Adviser, computes net
asset values for the Funds. Each 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 May 31, 1999, SFAC imposed its fee for Scudder
Health Care Fund and Scudder Technology Fund aggregating $37,500 and $39,654,
respectively, of which $3,125, $3,125 and $3,517, respectively, was unpaid at
May 31, 1999. . For the year ended May 31, 2000, SFAC imposed its fee for
Scudder Health Care Fund and Scudder Technology Fund aggregating $43,815 and
$73,522, respectively, of which $6,889 and $15,984, respectively, was unpaid at
May 31, 2000.
The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Funds have
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 each 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 portfolios, of
Scudder Health Care Fund and Scudder Technology Fund, together with the Report
of Independent Accountants, Financial Highlights and notes to financial
statements in the Annual Report to the Shareholders of the Funds dated May 31,
2000 are incorporated herein by reference, and are hereby deemed to be a part of
this Statement of Additional Information.
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<PAGE>
SCUDDER
INVESTMENTS(SM)
[LOGO]
------------------------
EQUITY/VALUE
------------------------
Class AARP and Class S Shares
Scudder Small Company
Value Fund
Scudder Large Company
Value Fund
Prospectus
October 1, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
How the funds work
2 Scudder Small Company Value Fund
6 Scudder Large Company Value Fund
10 Other Policies and Risks
11 Who Manages and Oversees the Funds
14 Financial Highlights
How to invest in the funds
18 How to Buy, Sell and Exchange
Class AARP Shares
20 How to Buy, Sell and Exchange
Class S Shares
22 Policies You Should Know About
27 Understanding Distributions and Taxes
<PAGE>
How the funds work
On the next few pages, you'll find information about each fund's investment
goal, the main strategies it uses to pursue that goal, and the main risks that
could affect its performance.
Whether you are considering investing in a fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
This prospectus offers two classes of shares for each of the funds described.
Class AARP shares have been created especially for AARP members. Class S shares
are available to all investors. Unless otherwise noted, all information in this
prospectus applies to both classes.
You can find prospectuses on the Internet for Class AARP shares at
aarp.scudder.com and for Class S shares at www.scudder.com.
<PAGE>
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ticker symbol | Class S SCSUX fund number | Class S 078
Scudder Small Company Value Fund
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Investment Approach
The fund seeks long-term growth of capital by investing at least 90% of total
assets in undervalued common stocks of small U.S. companies. These are companies
that are similar in size to those in the Russell 2000 Index (typically less than
$2 billion in total market value).
The portfolio managers begin by searching for small companies, such as those in
the Russell 2000 Index, that appear to be undervalued. A quantitative stock
valuation model compares each company's stock price to the company's earnings,
book value, sales and other measures of performance potential. The managers also
look for factors that may signal a rebound for a company, whether through a
recovery in its markets, a change in business strategy or other factors.
The managers then assemble the fund's portfolio from among the qualifying
stocks, using a portfolio optimizer -- sophisticated portfolio management
software that analyzes the return and risk characteristics of each stock and the
overall portfolio.
The managers diversify the fund's investments among many industries and among
many companies (typically over 150).
The fund will normally sell a stock when it no longer qualifies as a small
company, when it is no longer considered undervalued or when the managers
believe other investments offer better opportunities.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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OTHER INVESTMENTS
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
2 | Scudder Small Company Value Fund
<PAGE>
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[ICON] This fund is designed for long-term investors who are looking for a
fund that takes a value approach to investing in small company stocks.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the small company portion of the U.S. market.
When small company stock prices fall, you should expect the value of your
investment to fall as well. Small company stocks tend to be more volatile than
stocks of larger companies, in part because small companies tend to be less
established than larger companies and more vulnerable to competitive challenges
and bad economic news. Because a stock represents ownership in its issuer, stock
prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect the value of portfolio securities. For example, a
rise in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends, geographical areas or other matters
o value stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
3 | Scudder Small Company Value Fund
<PAGE>
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[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know. This page
looks at fund performance two different ways: year by year and over
time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the total returns for the fund's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns for the fund's Class S shares and two broad-based
market indices (which, unlike the fund, do not have any fees or expenses). The
performance of both the fund and the indices varies over time. All figures on
this page assume reinvestment of dividends and distributions.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'96 23.84
'97 37.01
'98 -5.54
'99 -11.75
2000 Total Return as of June 30: -6.41%
Best Quarter: 17.56%, Q2 1997 Worst Quarter: -17.31%, Q3 1998
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year Since Inception
------------------------------------------------------------------------
Fund -- Class S* -11.75 9.68**
------------------------------------------------------------------------
Index 1 21.26 15.02***
------------------------------------------------------------------------
Index 2 -1.49 11.60***
------------------------------------------------------------------------
Index 1: The Russell 2000 Index, an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks.
Index 2: The Russell 2000 Value Index, which measures the performance of those
companies in the Russell 2000 Index with lower price-to-book ratios and lower
expected growth rates.
* Performance for Class AARP shares is not provided because this class
does not have a full calendar year of performance.
** Fund inception: 10/6/1995.
*** Index comparisons begin 10/31/1995.
In the chart, total returns from 1996 through 1997 and for 1999 would have been
lower if operating expenses hadn't been reduced.
In the table, total returns from inception through 1997 and for 1999 would have
been lower if operating expenses hadn't been reduced.
4 | Scudder Small Company Value Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees, other than a
short-term redemption/exchange fee. The fund does have annual operating
expenses, and as a shareholder of either Class AARP or Class S shares, you pay
them indirectly.
------------------------------------------------------------------------
Fee Table
------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
------------------------------------------------------------------------
Redemption/Exchange fee, on shares owned less than a year
(as a % of amount redeemed, if applicable) 1.00%
------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
------------------------------------------------------------------------
Management Fee 0.75%
------------------------------------------------------------------------
Distribution (12b-1) Fee None
------------------------------------------------------------------------
Other Expenses* 0.45%
------------
------------------------------------------------------------------------
Total Annual Operating Expenses 1.20%
------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.45%.
Information in the table has been restated to reflect a new fixed rate
administrative fee which became effective on August 28, 2000.
------------------------------------------------------------------------
Expense Example
------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses above remain the
same. It also assumes that you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions and sold your shares at the end of
each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------
$122 $381 $660 $1,455
------------------------------------------------------------------------
5 | Scudder Small Company Value Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class S SCDUX fund number | Class S 049
Scudder Large Company Value Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks maximum long-term capital appreciation through a value-oriented
investment approach. It does this by investing at least 65% of net assets in
common stocks and other equities of large U.S. companies (those with a market
value of $1 billion or more).
In choosing stocks, the portfolio managers begin by using a computer model.
Examining the companies in the Russell 1000 Index, the model seeks those whose
market values, when compared to factors such as earnings, book value and sales,
place them in the most undervalued 40% of companies in the index.
To further narrow the pool of potential stocks, the managers use bottom-up
analysis, looking for companies that seem poised for business improvement,
whether through a rebound in their markets, a change in business strategy or
other factors. The managers also draw on fundamental investment research to
assemble the fund's portfolio, looking at earnings, management and other factors
of the qualifying stocks. Additionally, the managers assess the economic
outlooks for various industries and the risk characteristics and potential
volatility of each stock.
The managers may favor securities from different industries and companies at
different times while still maintaining variety in terms of the industries and
companies represented.
The fund will normally sell a stock when it reaches a target price, when the
managers believe other investments offer better opportunities or in the course
of adjusting its exposure to a given industry.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
OTHER INVESTMENTS
While the fund invests mainly in common stocks, it may also invest up to 20% of
assets in debt securities, including convertible bonds and junk bonds, which are
those below the fourth credit grade (i.e., grade BB/Ba and below).
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
6 | Scudder Large Company Value Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] This fund is designed for long-term investors who favor a value
investment style and want broadly diversified exposure to large company
stocks.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. market.
Large company stocks at times may not perform as well as stocks of smaller or
mid-size companies. When large company stock prices fall, you should expect the
value of your investment to fall as well. Because a stock represents ownership
in its issuer, stock prices can be hurt by poor management, shrinking product
demand and other business risks. These may affect single companies as well as
groups of companies.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect the value of portfolio securities. For example, a
rise in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends, geographical areas or other matters
o value stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
7 | Scudder Large Company Value Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know. This page
looks at fund performance two different ways: year by year and over
time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how the total returns for the fund's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns for the fund's Class S shares and a broad-based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions.
------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'90 -16.98
'91 42.96
'92 7.09
'93 20.07
'94 -9.87
'95 31.64
'96 19.55
'97 32.54
'98 9.50
'99 4.66
2000 Total Return as of June 30: -2.16%
Best Quarter: 19.78%, Q1 1991 Worst Quarter: -22.26%, Q3 1990
------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
------------------------------------------------------------------------
1 Year 5 Years 10 Years
------------------------------------------------------------------------
Fund -- Class S* 4.66 19.04 12.64
------------------------------------------------------------------------
Index 7.35 23.07 15.60
------------------------------------------------------------------------
Index: The Russell 1000 Value Index, which consists of those stocks in the
Russell 1000 Index that have a less-than-average growth orientation.
* Performance for Class AARP shares is not provided because this class
does not have a full calendar year of performance.
8 | Scudder Large Company Value Fund
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
------------------------------------------------------------------------
Fee Table
------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
------------------------------------------------------------------------
Management Fee 0.59%
------------------------------------------------------------------------
Distribution (12b-1) Fee None
------------------------------------------------------------------------
Other Expenses* 0.30%
------------
------------------------------------------------------------------------
Total Annual Operating Expenses 0.89%
------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management fee rate.
------------------------------------------------------------------------
Expense Example
------------------------------------------------------------------------
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses above remain the
same. It also assumes that you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions and sold your shares at the end of
each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------
$91 $284 $493 $1,096
------------------------------------------------------------------------
9 | Scudder Large Company Value Fund
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could
change that fund's investment goal without seeking shareholder
approval.
o As a temporary defensive measure, each fund could shift up to 100% of
its assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the funds' allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
10
<PAGE>
--------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for managing
the funds, takes a team approach to asset management.
--------------------------------------------------------------------------------
Who Manages and Oversees the Funds
The investment adviser
The funds' investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, New York. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
Scudder Kemper's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates paid by each fund for
the 12 months through the most recent fiscal year end, as a percentage of each
fund's average daily net assets.
Fund Name Fee Paid
------------------------------------------------------------------------
Scudder Small Company Value Fund 0.25%*
------------------------------------------------------------------------
Scudder Large Company Value Fund 0.62%
------------------------------------------------------------------------
* Reflecting the effect of expense limitations and/or fee waivers then in
effect.
11
<PAGE>
Each fund has entered into a new investment management agreement with Scudder
Kemper. This table describes the fee rates for each fund and the effective date
of these agreements.
------------------------------------------------------------------------
Scudder Small Company Value Fund
------------------------------------------------------------------------
New Investment Management Fee as of August 28, 2000
------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
------------------------------------------------------------------------
first $500 million 0.75%
------------------------------------------------------------------------
more than $500 million 0.70%
------------------------------------------------------------------------
Scudder Large Company Value Fund
------------------------------------------------------------------------
New Investment Management Fee as of October 2, 2000
------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
------------------------------------------------------------------------
first $1.5 billion 0.600%
------------------------------------------------------------------------
next $500 million 0.575%
------------------------------------------------------------------------
more than $2 billion 0.550%
------------------------------------------------------------------------
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in return
for services relating to investments by AARP members in AARP Class shares of
each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of the AARP Classes of all funds managed by Scudder Kemper.
The fee rates, which decrease as the aggregate net assets of the AARP Classes
become larger, are as follows: 0.07% for the first $6 billion in net assets,
0.06% for the next $10 billion and 0.05% thereafter.
The portfolio managers
The following people handle the day-to-day management of each fund in this
prospectus.
Scudder Small Company Value Fund Scudder Large Company Value Fund
James M. Eysenbach Lois R. Roman
Lead Portfolio Manager Lead Portfolio Manager
o Began investment career o Began investment career
in 1984 in 1988
o Joined the adviser in 1991 o Joined the adviser in 1994
o Joined the fund team in 1995 o Joined the fund team in 1995
Calvin S. Young Jonathan Lee
o Began investment career o Began investment career
in 1987 in 1990
o Joined the adviser in 1990 o Joined the adviser in 1999
o Joined the fund team in 1998 o Joined the fund team in 1999
12
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that each fund is
managed in the best interests of its shareholders.
The following people comprise each fund's Board.
Linda C. Coughlin Keith R. Fox
o Managing Director, Scudder o General Partner, The Exeter
Kemper Investments, Inc. Group of Funds
o President of each fund
Joan E. Spero
Henry P. Becton, Jr. o President, Doris Duke
o President, WGBH Educational Charitable Foundation
Foundation
Jean Gleason Stromberg
Dawn-Marie Driscoll o Consultant
o Executive Fellow, Center for
Business Ethics, Bentley College Jean C. Tempel
o President, Driscoll Associates o Managing Director, First
(consulting firm) Light Capital, LLC (venture
capital firm)
Edgar Fiedler
o Senior Fellow and Economic Steven Zaleznick
Counsellor, The Conference o President and Chief
Board, Inc. (not-for-profit Executive Officer, AARP
business research organization) Services, Inc.
13
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance. The figures in the first part of each table are for a single share.
The total return figures represent the percentage that an investor in a
particular fund would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover). The existing shares of Scudder Small Company Value Fund and
Scudder Large Company Value Fund were redesignated as Class S on August 28, 2000
and October 2, 2000, respectively. Because Class AARP shares were not available
for either fund until October 2, 2000, there is no financial data for these
shares as of the date of this prospectus.
14
<PAGE>
Scudder Small Company Value Fund -- Class S
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
2000(b) 1999(c) 1998(d) 1997(d) 1996(e)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $19.40 $17.65 $19.58 $13.57 $12.00
---------------------------------------------------------------------------------------------
Income (loss) from investment operations:
---------------------------------------------------------------------------------------------
Net investment income (loss) (a) .02 .02 .07 .01 .07
---------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (2.83) 1.90 (1.71) 6.03 1.53
---------------------------------------------------------
---------------------------------------------------------------------------------------------
Total from investment operations (2.81) 1.92 (1.64) 6.04 1.60
---------------------------------------------------------------------------------------------
Less distributions from:
---------------------------------------------------------------------------------------------
Net investment income (.02) (.05) (.02) (.03) (.05)
---------------------------------------------------------------------------------------------
Net realized gains on investment
transactions -- (.14) (.30) (.01) --
---------------------------------------------------------
---------------------------------------------------------------------------------------------
Total distributions (.02) (.19) (.32) (.04) (.05)
---------------------------------------------------------------------------------------------
Redemption fees .01 .02 .03 .01 .02
---------------------------------------------------------------------------------------------
Net asset value, end of period $16.58 $19.40 $17.65 $19.58 $13.57
---------------------------------------------------------
---------------------------------------------------------------------------------------------
Total Return (%) (14.43)(f) 10.96(f)(g) (8.45) 44.67(f) 13.54(f)(g)**
---------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 161 294 237 123 41
---------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 1.84(h) 1.59* 1.39 1.63 2.61*
---------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 1.32(h) 1.32* 1.39 1.50 1.50*
---------------------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%) .12 .11* .31 .07 .67*
---------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 29 34* 23 44 34*
---------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the year ended July 31, 2000.
(c) For the eleven months ended July 31, 1999. On September 16, 1998, the
Trustees of the Fund changed the fiscal year end from August 31 to July
31.
(d) For the year ended August 31.
(e) For the period of October 6, 1995 (commencement of operations) to
August 31, 1996.
(f) Total returns would have been lower had certain expenses not been
reduced.
(g) Total returns do not reflect the effect to the shareholder of the 1%
redemption fee on shares held less than one year.
(h) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.76%
and 1.25%, respectively (see Financial Statements).
* Annualized
** Not annualized
15
<PAGE>
Scudder Large Company Value Fund -- Class S
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
2000(a)(b)1999(a)(c)1998(a)(d)1997(a)(d)1996(d) 1995(d)
-------------------------------------------------------------------------------------
Net asset value, beginning of
<S> <C> <C> <C> <C> <C> <C>
period $30.05 $25.65 $28.98 $22.64 $22.92 $19.54
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income (loss) .33 .30(e) .36 .38 .36 .13
-------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions (1.73) 6.38 (1.59) 8.60 2.94 3.98
-------------------------------------------------------
-------------------------------------------------------------------------------------
Total from investment
operations (1.40) 6.68 (1.23) 8.98 3.30 4.11
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net investment income (.39) (.18) (.24) (.16) (.08) --
-------------------------------------------------------------------------------------
Net realized gains on
investment transactions (1.45) (2.10) (1.86) (2.48) (3.50) (.73)
-------------------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (1.84) (2.28) (2.10) (2.64) (3.58) (.73)
-------------------------------------------------------------------------------------
Net asset value, end
of period $26.81 $30.05 $25.65 $28.98 $22.64 $22.92
-------------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) (4.61) 26.79** (4.54) 43.06 15.94 21.96
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 2,078 2,555 1,997 2,213 1,651 1,492
-------------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) .95(f) .87* .88 .93 .92 .98
-------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) .94(f) .87* .88 .93 .92 .98
-------------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 1.20 1.25* 1.25 1.51 1.62 .62
-------------------------------------------------------------------------------------
Portfolio turnover rate (%) 46 35* 40 43 151 154
-------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the year ended July 31, 2000.
(c) For the ten months ended July 31, 1999. On June 7, 1999, the Trustees
of the Fund changed the fiscal year end from September 30 to July 31.
(d) For the year ended September 30.
(e) Net investment income per share includes non-recurring dividend income
amounting to $.05 per share.
(f) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were .94%
and .94%, respectively (see Financial Statements).
* Annualized
** Not annualized
16
<PAGE>
How to invest in the funds
The following pages tell you how to invest in these funds and what to expect as
a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket or financial adviser -- your provider may
have its own policies or instructions, and you should follow those.
As noted earlier, there are two classes of shares of each fund available through
this prospectus. The instructions for buying and selling each class are slightly
different.
Instructions for buying and selling Class AARP shares, which have been created
especially for AARP members, are found on the next two pages. These are followed
by instructions for buying and selling Class S shares. Be sure to use the
appropriate table when placing any orders to buy, exchange or sell shares in
your account.
17
<PAGE>
How to Buy, Sell and Exchange Class AARP Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The AARP Investment Program."
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Class AARP First investment Additional investments
--------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more for regular $50 or more with an Automatic
accounts Investment Plan
$500 or more for IRAs
--------------------------------------------------------------------------------------
By mail o For enrollment forms, call Send a personalized investment
1-800-253-2277 slip or short note that
includes:
o Fill out and sign an
enrollment form o fund and class name
o Send it to us at the o account number
appropriate address, along
with an investment check o check payable to "The AARP
Investment Program"
--------------------------------------------------------------------------------------
By wire o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
--------------------------------------------------------------------------------------
By phone -- o Call 1-800-253-2277 for
instructions
--------------------------------------------------------------------------------------
With an automatic o Fill in the information o To set up regular investments
investment plan required on your enrollment from a bank checking account,
form and include a voided check call 1-800-253-2277
--------------------------------------------------------------------------------------
Payroll Deduction o Select either of these o Once you specify a dollar
or Direct Deposit options on your enrollment form amount (minimum $50),
and submit it. You will receive investments are automatic.
further instructions by mail.
--------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-253-2277
--------------------------------------------------------------------------------------
On the Internet o Go to "services and forms - o Call 1-800-253-2277 to ensure
How to Open an Account" at you have electronic services
aarp.scudder.com
o Register at aarp.scudder.com
o Print out a prospectus and an
enrollment form o Follow the instructions for
buying shares with money from
o Complete and return the your bank account
enrollment form with your check
--------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The AARP Investment Program, PO Box 2540, Boston, MA 02208-2540
Express, registered or certified mail:
The AARP Investment Program, 66 Brooks Drive, Braintree, 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
18
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Class AARP Exchanging into another fund Selling shares
--------------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account ($500 or more for IRAs) most for over $100,000, can
only be ordered in writing; if
you're in doubt, see page 24
--------------------------------------------------------------------------------------------
By phone o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
--------------------------------------------------------------------------------------------
Using Easy-Access o Call 1-800- 631-4636 and o Call 1-800-631-4636 and
Line follow the instructions follow the instructions
--------------------------------------------------------------------------------------------
By mail or fax Your instructions should Your instructions should
(see previous include: include:
page)
o your account number o your account number
o names of the funds, class and o names of the funds, class and
number of shares or dollar number of shares or dollar
amount you want to exchange amount you want to redeem
--------------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from an account, call
1-800-253-2277
--------------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-253-2277
--------------------------------------------------------------------------------------------
On the Internet o Register at aarp.scudder.com --
o Go to "services and forms"
o Follow the instructions for
making on-line exchanges
--------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Services For Class AARP Investors
----------------------------------------------------------------------------------------
<S> <C>
To reach us: o Web site aarp.scudder.com
o Program representatives 1-800-253-2277, M-F, 8 a.m. - 8 p.m. EST
o Confidential fax line 1-800-821-6234, always open
o TDD line 1-800-634-9454, M-F, 9 a.m. - 5 p.m. EST
Services for o AARP Lump Sum Service For planning and setting up a lump
participants: sum distribution.
o AARP Legacy Service For organizing financial documents and
planning the orderly transfer of assets to heirs.
o AARP Goal Setting and Asset Allocation Service For allocating
assets and measuring investment progress.
o For more information, please call 1-800-253-2277.
---------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
How to Buy, Sell and Exchange Class S Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Class S First investment Additional investments
------------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
------------------------------------------------------------------------------------------
By mail or o Fill out and sign an Send a Scudder investment slip
express application or short note that includes:
(see below)
o Send it to us at the o fund and class name
appropriate address, along with
an investment check o account number
o check payable to "The Scudder
Funds"
------------------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
------------------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
------------------------------------------------------------------------------------------
With an automatic o Fill in the information on o To set up regular investments
investment plan your application and include a from a bank checking account,
voided check call 1-800-SCUDDER
------------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
------------------------------------------------------------------------------------------
On the Internet o Go to "funds and prices" at o Call 1-800-SCUDDER to ensure
www.scudder.com you have electronic services
o Print out a prospectus and a o Register at www.scudder.com
new account application
o Follow the instructions for
o Complete and return the buying shares with money from
application with your check your bank account
------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
20
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Class S Exchanging into another fund Selling shares
-----------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 or more for most for over $100,000, can
IRAs) only be ordered in writing; if
you're in doubt, see page 24
$100 or more for exchanges
between existing accounts
-----------------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
-----------------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
-----------------------------------------------------------------------------------------
By mail, Your instructions should Your instructions should
express or fax include: include:
(see previous
page) o the fund, class, and account o the fund, class and account
number you're exchanging out of number from which you want to
sell shares
o the dollar amount or number
of shares you want to exchange o the dollar amount or number
of shares you want to sell
o the name and class of the
fund you want to exchange into o your name(s), signature(s)
and address, as they appear on
o your name(s), signature(s), your account
and address, as they appear on
your account o a daytime telephone number
o a daytime telephone number
-----------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
-----------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
-----------------------------------------------------------------------------------------
On the Internet o Register at www.scudder.com --
o Follow the instructions for
making on-line exchanges
-----------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8 a.m. and
8 p.m. Eastern time on any fund business day by calling 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).
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Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
22
<PAGE>
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[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. To get up-to-date information, review balances or even
place orders for exchanges, go to aarp.scudder.com (Class AARP) or
www.scudder.com (Class S).
--------------------------------------------------------------------------------
Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.
For Class AARP shares
--------------------------------------------------------------------------
Call Easy-Access Line, the AARP Investment Program Automated Information
Line, at 1-800-631-4636
--------------------------------------------------------------------------
For Class S shares
--------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The funds
can only accept wires of $100 or more.
Exchanges among Scudder funds are an option for shareholders who bought their
fund shares directly from Scudder and many other investors as well. Exchanges
are a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
23
<PAGE>
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
24
<PAGE>
How the funds calculate share prices
For each share class of each fund, the share price at which you buy shares is
the net asset value per share, or NAV. To calculate NAV, each share class of
each fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
The price at which you sell shares of Small Company Value Fund is also the
fund's NAV, minus a 1.00% redemption/exchange fee on shares owned less than one
year. You won't be charged this fee if you're investing in an employer-sponsored
retirement plan that is set up directly with Scudder. Certain other types of
accounts may also be eligible for this waiver. If your employer-sponsored
retirement plan is through a third-party investment provider, or if you are
investing through an IRA or other individual retirement account, the fee will
apply.
25
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
Other rights we reserve
For each fund in this prospectus, you should be aware that we may do any of the
following:
o withhold 31% of your distributions as federal income tax if you have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o for Class AARP and Class S shareholders, close your account and send
you the proceeds if your balance falls below $1,000; for Class S
shareholders, charge you $10 a year if your account balance falls below
$2,500; in either case, we will give you 60 days notice so you can
either increase your balance or close your account (these policies
don't apply to retirement accounts, to investors with $100,000 or more
in Scudder fund shares or in any case where a fall in share price
created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash; the fund generally won't make a
redemption in kind unless your requests over a 90-day period total more
than $250,000 or 1% of the value of the fund's net assets, whichever is
less
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
26
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
Each fund intends to pay dividends and distributions to their shareholders in
November or December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
27
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------
o taxable income dividends you receive from a fund
--------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
28
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call 1-800-253-2277 (Class
AARP) or 1-800-SCUDDER (Class S).
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, please contact Scudder or
the SEC (see below). If you're a shareholder and have questions, please contact
Scudder (see below). Materials you get from Scudder are free; those from the SEC
involve a copying fee. If you like, you can look over these materials at the
SEC's Public Reference Room in Washington, DC or request them electronically at
[email protected].
AARP Investment Program
from Scudder Scudder Funds SEC
PO Box 2540 PO Box 2291 450 Fifth Street,
Boston, MA Boston, MA N.W. Washington, D.C.
02208-2540 02107-2291 20549-6009
1-800-253-2277 1-800-SCUDDER 1-202-942-8090
aarp.scudder.com www.scudder.com www.sec.gov
Fund SEC File Number
------------------------------------------------------------------------
Scudder Small Company Value Fund 811-2021
------------------------------------------------------------------------
Scudder Large Company Value Fund 811-1444
------------------------------------------------------------------------
<PAGE>
SCUDDER LARGE COMPANY VALUE FUND
A Series of Value Equity Trust
A Diversified Mutual Fund which Seeks Maximum
Long-Term Capital Appreciation Through a Value-Oriented Investment Approach
SCUDDER SMALL COMPANY VALUE FUND
A Series of Scudder Securities Trust
A 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
October 1, 2000
--------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus, and
should be read in conjunction with the combined prospectus of Scudder Small
Company Value Fund and Scudder Large Company Value Fund dated October 1, 2000,
as amended from time to time, a copy of which may be obtained without charge by
writing to Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103.
The Annual Report to Shareholders of each Fund dated July 31, 2000 is
incorporated by reference and is hereby deemed to be part of this Statement of
Additional Information. This may also be obtained without charge by calling
1-800-SCUDDER.
This Statement of Additional Information is incorporated by reference
into the combined prospectus.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objective and Policies....................................................................1
General Investment Objective and Policies of Scudder Large Company Value Fund................................2
Master/feeder structure......................................................................................3
Investments and Investment Techniques........................................................................4
Investment Restrictions.....................................................................................17
PURCHASES............................................................................................................19
Additional Information About Opening An Account.............................................................19
Minimum balances............................................................................................19
Additional Information About Making Subsequent Investments..................................................20
Additional Information About Making Subsequent Investments by QuickBuy......................................20
Checks......................................................................................................21
Wire Transfer of Federal Funds..............................................................................21
Share Price.................................................................................................21
Share Certificates..........................................................................................21
Other Information...........................................................................................21
EXCHANGES AND REDEMPTIONS............................................................................................22
Exchanges...................................................................................................22
Special Redemption and Exchange Information.................................................................23
Redemption by Telephone.....................................................................................23
Redemption by QuickSell.....................................................................................24
Redemption by Mail or Fax...................................................................................25
Redemption-In-Kind..........................................................................................25
Other Information...........................................................................................25
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................26
The No-Load Concept.........................................................................................26
Internet access.............................................................................................26
Dividends and Capital Gains Distribution Options............................................................27
Reports to Shareholders.....................................................................................27
Transaction Summaries.......................................................................................27
THE SCUDDER FAMILY OF FUNDS..........................................................................................27
SPECIAL PLAN ACCOUNTS................................................................................................29
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations
and Self-Employed Individuals..........................................................................30
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........30
Scudder IRA: Individual Retirement Account.................................................................30
Scudder Roth IRA: Individual Retirement Account............................................................30
Scudder 403(b) Plan.........................................................................................31
Group or Salary Deduction Plan..............................................................................31
Uniform Transfers/Gifts to Minors Act.......................................................................32
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................34
PERFORMANCE INFORMATION..............................................................................................35
Average Annual Total Return.................................................................................35
Cumulative Total Return.....................................................................................35
Total Return................................................................................................36
Comparison of Fund Performance..............................................................................36
INVESTMENT ADVISER...................................................................................................40
AMA InvestmentLinkSM Program................................................................................44
Personal Investments by Employees of the Adviser............................................................44
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
TRUSTEES AND OFFICERS....................................................................Error! Bookmark not defined.44
REMUNERATION.........................................................................................................45
Responsibilities of the Board-- Board and Committee Meetings................................................47
Compensation of Officers and Trustees.......................................................................47
DISTRIBUTOR..........................................................................................................48
TAXES ............................................................................................................49
PORTFOLIO TRANSACTIONS...............................................................................................53
Brokerage Commissions.......................................................................................53
Portfolio Turnover..........................................................................................55
NET ASSET VALUE......................................................................................................55
ADDITIONAL INFORMATION...............................................................................................56
Experts.....................................................................................................56
Shareholder Indemnification.................................................................................56
Other Information...........................................................................................57
Other Information for Small Company Value Fund..............................................................57
Other Information for Large Company Value Fund..............................................................58
FINANCIAL STATEMENTS.................................................................................................59
</TABLE>
ii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
The combined prospectus and this Statement of Additional Information
for Scudder Small Company Value Fund and for Scudder Large Company Value Fund
each offer two classes of shares to provide investors with different purchase
options. The two classes are Class S and Class AARP. Each class has its own
important features and policies. On October 2, 2000, shares of Scudder Small
Company Value Fund and Scudder Large Company Value Fund were redesignated Class
S shares of their respective funds and Class AARP shares will be available on
October 2, 2000. Shares of Class AARP are especially designed for members of
AARP.
Scudder Small Company Value Fund (the "Small Company Value Fund") is a
diversified series of Scudder Securities Trust. Scudder Large Company Value Fund
(the "Large Company Value Fund"), is a diversified series of Value Equity Trust
(together, the "Trusts"). Each is an open-end management company which
continuously offers and redeems shares at net asset value. Each is a company of
the type commonly known as a mutual fund.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which a Fund may engage (such as
hedging, etc.) or a financial instrument which a Fund may purchase (such as
options, forward foreign currency contracts, etc.) are meant to describe the
spectrum of investments that Scudder Kemper Investments, Inc. ("the Adviser"),
in its discretion, might, but is not required to, use in managing each Fund's
portfolio assets. The Adviser may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of a Fund, but, to the extent employed, could from time to time have
a material impact on a Fund's performance.
Except as otherwise indicated, each 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 either
Fund's objective will be met.
General Investment Objective and Policies
Small Company Value Fund invests for long-term growth of capital by
seeking out undervalued stocks of small U.S. companies. 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.
Small Company Value 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.
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. Small Company Value 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(R) Index, as necessary to
keep the Fund focused on smaller companies.
<PAGE>
Small Company Value 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 total 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, Small Company Value 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. In
such cases, the Fund may hold without limit cash, high grade debt securities,
without equity features, which are rated Aaa, A or A by Moody's Investors
Service, Inc. ("Moody's") or AAA, AA or A by Standard & Poor's Ratings Service,
a division of The McGraw-Hill Companies, Inc. ("S&P"), or, if unrated, are
deemed by the Adviser to be of equivalent quality, and may invest in U.S.
Government securities and money market instruments which are rated in the two
highest categories by 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. Small Company Value Fund may also borrow under reverse repurchase
agreements. The Investment Company Act of 1940, as amended (the "1940 Act")
requires borrowings to have 300% asset coverage.
General Investment Objective and Policies of Scudder Large Company Value Fund
Large Company Value Fund seeks maximum long-term capital appreciation
through a value-oriented investment approach. The Fund seeks to achieve its
objective by investing: (i) in marketable securities, principally common stocks;
(ii) up to 20% of its assets in debt securities where capital appreciation from
debt securities is expected to exceed the capital appreciation available from
common stocks; and (iii) for temporary defensive purposes, during periods when
market or economic conditions may warrant, in debt securities, short-term
indebtedness, cash and cash equivalents. Because this defensive policy differs
from the Fund's investment objective, the Fund may not achieve its goal during a
defensive period. The Fund may also invest in preferred stocks consistent with
its objective. Additionally, the Fund may invest in debt securities, repurchase
agreements and reverse repurchase agreements, convertible securities, rights,
warrants, illiquid securities, investment company securities, and may engage in
strategic transactions and derivatives.
Large Company Value Fund uses a value-based investment approach to
pursue a range of investment opportunities, principally among larger,
established U.S. companies. Given this approach, the Fund may be appropriate as
a core investment holding for retirement or other long-term goals.
In seeking capital appreciation, Large Company Value Fund looks for
companies whose securities appear to present a favorable relationship between
market price and opportunity. These may include securities of companies whose
fundamentals or products may be of only average promise.
Market misconceptions, temporary bad news, and other factors may cause
a security to be out of favor in the stock market and to trade at a price below
its potential value. Accordingly, the prices of such securities 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. These "undervalued" securities
can provide the opportunity for above-average market performance.
Investments in common stocks have a wide range of characteristics, and
the management of Large Company Value Fund believes that opportunity for
long-term capital appreciation may be found in all sectors of the market for
publicly traded equity securities. Thus the search for equity investments for
the Fund may encompass any sector of the market and companies of all sizes. It
is a fundamental policy of the Fund, which may not be changed without approval
of a majority of the Fund's outstanding shares, that the Fund will not
concentrate its investments in any particular industry. However, the Fund
reserves the right to invest up to, but less than, 25% of its total assets
2
<PAGE>
(taken at market value) in any one industry. The use of this tactic is, in the
opinion of management, consistent with the Fund's flexible approach of seeking
to maximize long-term growth of capital.
Large Company Value Fund will normally invest at least 65% of its net
assets in the equity securities of large U.S. companies, i.e. those with $1
billion or more in total market capitalization. The Fund's investment
flexibility enables it to pursue investment value in all sectors of the stock
market, including:
o companies that generate or apply new technologies, new and
improved distribution techniques or new services, such as those
in the business equipment, electronics, specialty merchandising
and health service industries;
o companies that own or develop natural resources, such as energy
exploration companies; o companies that may benefit from changing
consumer demands and lifestyles, such as financial service
organizations and telecommunications companies;
o foreign companies, including those in countries with more rapid
economic growth than the U.S; and
o companies whose earnings are temporarily depressed and are
currently out of favor with most investors.
Large Company Value Fund may purchase, for capital appreciation,
investment-grade debt securities including zero coupon bonds. Investment-grade
debt securities are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or
BBB by S & P or, if unrated, of equivalent quality as determined by the Fund's
investment adviser, Moody's considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics.
Large Company Value Fund may also purchase debt securities which are
rated below investment-grade, commonly referred to as "junk bonds," (that is,
rated below Baa by Moody's or below BBB by S&P), and unrated securities of
comparable quality in the Adviser's judgment, which usually entail greater risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of principal
and income, and may be less liquid and more difficult to value than securities
in the higher rating categories. The Fund may invest up to 20% of its net assets
in securities rated B or lower by Moody's or S&P and may invest in securities
which are rated as low as C by Moody's or D by S&P. Securities rated B or lower
involve a high degree of speculation with respect to the payment of principal
and interest and those securities rated C or D may be in default with respect to
payment of principal or interest. (See "High Yield, High Risk Securities.")
Large Company Value 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.
Large Company Value Fund may borrow money for temporary, emergency or
other purposes, including investment leverage purposes, as determined by the
Trustees. The Fund may also engage in reverse repurchase agreements.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
Master/feeder structure
The Trustees of each Fund have the discretion to retain the current
distribution arrangement for a 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
3
<PAGE>
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 Funds are 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 Funds typically
have attractive valuations relative to the Russell 2000(R) 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.
A 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 Funds involve above-average equity risk, the Funds'
value-oriented, systematic approach to investing is designed to mitigate
volatility of the Funds' 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 Funds focus 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 some investors with the patience and knowledge
to have sought them out.
Investments Involving Above-Average Risk. Small Company Value 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 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, each 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,
each 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 a greater potential
for gain on investment, compared to other classes of financial assets such as
bonds or cash equivalents.
Convertible Securities. Each 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 Funds 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
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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.
Real Estate Investment Trusts ("REITs"). Large Company Value Fund may invest in
REITs. REITs are sometimes informally characterized as equity REITs, mortgage
REITs and hybrid REITs. Investment in REITs may subject the Fund to risks
associated with the direct ownership of real estate, such as decreases in real
estate values, overbuilding, increased competition and other risks related to
local or general economic conditions, increases in operating costs and property
taxes, changes in zoning laws, casualty or condemnation losses, possible
environmental liabilities, regulatory limitations on rent and fluctuations in
rental income. Equity REITs generally experience these risks directly through
fee or leasehold interests, whereas mortgage REITs generally experience these
risks indirectly through mortgage interests, unless the mortgage REIT forecloses
on the underlying real estate. Changes in interest rates may also affect the
value of the Fund's investment in REITs. For instance, during periods of
declining interest rates, certain mortgage REITs may hold mortgages that the
mortgagors elect to prepay, which prepayment may diminish the yield on
securities issued by those REITs.
Certain REITs have relatively small market capitalizations, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986, as amended, and to maintain exemption from the registration
requirements of the 1940 Act. By investing in REITs indirectly through the Fund,
a shareholder will bear not only his or her proportionate share of the expenses
of the Fund's, but also, indirectly, similar expenses of the REITs. In addition,
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders.
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Illiquid Securities. Each 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.
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. Each 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). Neither Fund will invest more than 15% of total assets in
illiquid securities.
Repurchase Agreements. Each 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 or 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. It is possible
that a Fund will be unsuccessful in seeking to impose on the seller a
contractual obligation to deliver additional securities.
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Warrants. Each 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 to be 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. Each 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 upon time and price. Each
Fund maintains a segregated account in connection with outstanding reverse
repurchase agreements. Each 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. Such transactions may increase fluctuations in the
market value of a Fund's assets and may be viewed as a form of leverage.
Lending of Portfolio Securities. Each 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. Each 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, each 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 for a Fund to borrow for investment
leveraging 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.
Investment Company Securities. Each Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. Each Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, a Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). Index-based
investments may not replicate exactly the performance of their specified index
because of transaction costs and because of the temporary unavailability of
certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
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MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDSSM: DIAMONDS are based on the Dow Jones Industrial AverageSM. They are
issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio of
all the component common stocks of the Dow Jones Industrial Average and seeks to
closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBsSM: WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Foreign Securities. For Large Company Value, 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 a
Fund's performance. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may be
less publicly available information about a foreign company than about a
domestic company. Many foreign 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. Similarly, volume and
liquidity in most foreign bond markets is less than in the U.S. and at times,
volatility of price can be greater than in the U.S. 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 a possible
liability to the purchaser. Payment for securities without delivery may be
required in certain foreign markets. 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. In addition, with respect to certain foreign countries,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The management of the Fund
seeks to mitigate the risks associated with the foregoing considerations through
diversification and continuous professional management.
Because investments in foreign securities will usually involve
currencies of foreign countries, and because the Funds may hold foreign
currencies and forward foreign currency exchange contracts ("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
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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 the Fund desire to resell that
currency to the dealer. Each 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 contracts
(or options thereon) to purchase or sell foreign currencies. (See "Strategic
Transactions and Derivatives" below.)
Debt Securities. When the Adviser believes that it is appropriate to do so in
order to achieve the Large Company Value 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 or AAA, AA, A or
BBB 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.
High Yield, High Risk Securities. For Large Company Value Fund: Below
investment-grade securities (commonly referred to as "junk bonds") (rated below
Baa by Moody's and below BBB by S&P) or unrated securities of equivalent quality
in the Adviser's judgment, carry a high degree of risk (including the
possibility of default or bankruptcy of the issuers of such securities),
generally involve greater volatility of price and risk of principal and income,
may be less liquid and more difficult to value than securities in the higher
ratings categories and are considered speculative. The lower the ratings of such
debt securities the greater their risks render them like equity securities. See
the Appendix to this Statement of Additional Information for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.
The Fund may invest up to 20% of its assets in debt securities rated
below investment-grade but will invest no more than 10% of its assets in
securities rated B or lower by Moody's or by S&P and may not invest more than 5%
of its assets in securities which are rated C by Moody's or D by S&P or of
equivalent quality as determined by the Adviser.
An economic downturn could disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates could adversely affect the value of such obligations held by the
Fund. Prices and yields of high yield securities will fluctuate over time and
may affect the Fund's net asset value. In addition, investments in high yield
zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the value and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs.
Credit quality in the high-yield securities market can change suddenly
and unexpectedly and even recently issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
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independent and on-going review of credit quality. The achievement of the Fund's
investment objective may be more dependent on the Adviser's credit analysis than
is the case for higher quality bonds. Should the rating of a portfolio security
be downgraded the Adviser will determine whether it is in the best interest of
the Fund to retain or dispose of the security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation, which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities see
"TAXES."
Zero Coupon Securities. The Large Company Value Fund may invest in zero coupon
securities, which pay no cash income and are sold at substantial discounts from
their value at maturity. When held to maturity, their entire income, which
consists of accretion of discount, comes from the difference between the issue
price and their value at maturity. Zero coupon securities are subject to greater
market value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon 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 short 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.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holders of the underlying U.S. Government
securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program, as
established by the Treasury Department, is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, the Fund will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells.
(See "TAXES.")
IPO risk. Securities issued through an initial public offering (IPO) can
experience an immediate drop in value if the demand for the securities does not
continue to support the offering price. Information about the issuers of IPO
securities is also difficult to acquire since they are new to the market and may
not have lengthy operating histories. The Fund may engage in short-term trading
in connection with its IPO investments, which could produce higher trading costs
and adverse tax consequences. The number of securities issued in an IPO is
limited, so it is likely that IPO securities will represent a smaller component
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of the Fund's portfolio as the Fund's assets increase (and thus have a more
limited effect on the Fund's performance).
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in each Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, each Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limitations imposed by the 1940 Act) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets 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 fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. Each Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Funds, and
the Funds will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of 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."
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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. Each 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. Each 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.
Each 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. Each
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. Each
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
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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 a 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.
Each Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments 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 a Fund
must be "covered" (i.e., a 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 a Fund exposes a
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.
Each Fund may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. The Funds 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
Funds may be required to buy the underlying security at a disadvantageous price
above the market price.
General Characteristics of Futures. Each Fund may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of 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.
Each Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement 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.
Each 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
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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. Each 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. Each Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of 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 Funds 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.
Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the
Funds, 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.
Each Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
Each 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 a Fund has or in which a 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 Funds 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
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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 a Fund
enters into a currency hedging transaction, a Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the 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. Each 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
Funds may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Funds expect to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. The Funds will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Funds may be
obligated to pay. Interest rate swaps involve the exchange by the Funds 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 Funds 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 Funds receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as the Funds will
segregate assets (or enter into offsetting positions) to cover its obligations
under swaps, the Adviser and the Funds 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 Funds 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
Funds 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.
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Eurodollar Instruments. Each 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 Funds 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 a 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 Funds 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 Funds 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 assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Funds will require the Funds 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 Funds requires the Funds to
segregate cash or liquid assets equal to the exercise price.
Except when a 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 a Fund to buy or sell currency
will generally require a Fund to hold an amount of that currency or liquid
assets denominated in that currency equal to a Fund's obligations or to
segregate cash or liquid assets equal to the amount of a Fund's obligation.
OTC options entered into by the Funds, 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 a
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 Funds, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when a Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, a 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 Funds other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Funds 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, a 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, a 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
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equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each 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 Funds 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 Funds. 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 each 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 a Fund are present or represented by proxy, or (2) more
than 50% of the outstanding voting securities of a 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, a Fund. The Funds are
under no restriction as to the amount of portfolio securities which may be
bought or sold.
Each Fund has elected to be classified as a diversified series of an
open-end investment company. In addition, as a matter of fundamental policy,
each Fund will not:
(1) 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;
(2) issue senior securities, except as permitted under the 1940 Act,
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 1940 Act, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time.
Other Investment Policies. The Trustees of each Trust have voluntarily adopted
policies and restrictions which are observed in the conduct of a Fund's affairs.
These represent intentions of the Trustees based upon current circumstances.
They differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without prior notice to or approval of
shareholders.
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Nonfundamental policies may be changed by the Trustees of each Trust
and without shareholder approval. As a matter of nonfundamental policy, the
Funds do 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 a 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 a
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
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and members of their immediate
families, members of the National Association of Securities Dealers, Inc.
("NASD") and banks may, if they prefer, subscribe initially for at least $2,500
minimum for Class S and $1,000 for Class AARP shares through Scudder Investor
Services, Inc. (the "Distributor") by letter, fax, 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-SCUDDER
to get an account number. During the call, the investor will be asked to
indicate the Fund name, class name, amount to be wired ($2,500 minimum for Class
S and $1,000 for Class AARP), name of bank or trust company from which the wire
will be sent, the exact registration of the new account, the 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, class name, account name and the new account number. Finally, the
investor must send the completed and signed application to the Fund promptly.
Investors interested in investing in Class AARP should call 1-800-253-2277 for
further instructions.
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The minimum initial purchase amount is less than $2,500 for Class S
under certain special plan accounts and is $1,000 for Class AARP..
Minimum balances
Shareholders should maintain a share balance worth at least $2,500 for
Class S and $1,000 for Class AARP ($500 for Class AARP and $1,000 for Class S
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 each Fund's Trustees. A shareholder may open an account with at least
$1,000 ($500 for fiduciary/custodial accounts), if an automatic investment plan
(AIP) of $100/month ($50/month for Class AARP and fiduciary/custodial accounts)
is established. Scudder group retirement plans and certain other accounts have
similar or lower minimum share balance requirements.
Each Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o for Class S, 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 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.
Investors interested in making subsequent investments in Class AARP
should call 1-800-253-2277 or 1-800-SCUDDER for Class S for further information.
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 a 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 (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
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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, a 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.
Each 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 Funds do not follow such procedures, they may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
Investors interested in making subsequent investments in Class AARP of
a Fund should call 1-800-253-2277 for further instruction.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, each 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, a 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
per share next computed after receipt of the application in good order. Net
asset value normally will be computed for each class as of the close of regular
trading on each day during which the Exchange is open for trading. Orders
received after the close of regular trading on the Exchange will be executed at
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the next business day's net asset value. If the order has been placed by a
member of the NASD, other than the Distributor, it is the responsibility of that
member broker, rather than the Fund, to forward the purchase order to Scudder
Service Corporation (the "Transfer Agent") in Boston by the close of regular
trading on the Exchange.
Share Certificates
Due to the desire of the Funds' 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
Each Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Funds' shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Funds' behalf. Orders for purchase or redemption will be deemed to
have been received by 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 class' net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Funds' 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.
Each Board of Trustees and the Distributor, also the Funds' principal
underwriter, each has the right to limit the amount of purchases by, and to
refuse to sell to, any person. The Trustees and the Distributor may suspend or
terminate the offering of shares of the Funds at any time for any reason.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g., from exempt organizations, certification of exempt status)
will be returned to the investor. The Funds also reserve the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing a Fund with a tax identification number
during the 30-day notice period.
Each Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
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EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder Fund and a
purchase into another Scudder Fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other Fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500 for Class S and
$1,000 for Class AARP. When an exchange represents an additional investment into
an existing account, the account receiving the exchange proceeds must have
identical registration, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is to be different in any respect, the
exchange request must be in writing and must contain an original signature
guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at 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 Trusts employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that a Trust does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trusts will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trusts, the Funds and the Transfer Agent each reserves the right to
suspend or terminate the privilege of exchanging by telephone or fax at any
time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from 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-SCUDDER for Class S or 1-800-253-2277 for Class AARP.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Special Redemption and Exchange Information
In general, shares of the Funds may be exchanged or redeemed at net
asset value. However, shares of the Small Company Value 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
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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.
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.
Each 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
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that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A 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 a 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.
Telephone redemption is not available with respect to shares
represented by share certificates for Large Company Value Fund, formerly known
as Scudder Capital Growth Fund, or shares held in certain retirement accounts
for the Fund.
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 Funds 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.
Each 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 a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A Fund will not be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary, agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays in
payment of more than seven (7) 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-SCUDDER.
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Redemption-In-Kind
Each 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. Each
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which each 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 value of the net assets 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 FUNDS
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not 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.
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Because funds and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish Scudder funds and classes from other 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.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for Class AARP shares is aarp.scudder.com. These sites offer
guidance on global investing and developing strategies to help meet financial
goals and provide access to the Scudder investor relations department via
e-mail. The sites also enable users to access or view fund prospectuses and
profiles with links between summary information in Fund Summaries and details in
the Prospectus. Users can fill out new account forms on-line, order free
software, and request literature on funds.
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 that 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.
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 may be given to the Transfer Agent in writing at least five days prior
to a dividend record date. Shareholders may change their dividend option by
calling 1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP or by
sending written instructions to the Transfer Agent. Please include your account
number with your written request.
Reinvestment is usually made at the closing net asset value of the
class 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 class shares of a Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's Direct
Distributions Program. Shareholders who elect to participate in the Direct
Distributions Program, and whose predesignated checking account of record is
with a member bank of Automated Clearing House Network (ACH) can have income and
capital gain distributions automatically deposited to their personal bank
account usually within three business days after a Fund pays its distribution. A
Direct Distributions request form can be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277 for Class AARP. Confirmation Statements will be
mailed to shareholders as notification that distributions have been deposited.
Investors choosing to participate in the 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.
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<PAGE>
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.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-253-2277 for
Class AARP shares and 1-800-225-SCUDDER for Class S shares.
THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds; a list of Scudder's
funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
TAX FREE
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund**
Scudder California Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund**
----------
+ The institutional class of shares is not part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
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Scudder Select 500 Fund
Scudder S&P 500 Index Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
Scudder Small Company Stock Fund
Scudder Small Company Value Fund
Growth
Scudder Capital Growth Fund
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Fund***
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Fund
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 for Class S shares or 1-800-253-2277 for Class
AARP shares.
Certain Scudder funds or classes thereof may not be available for
purchase or exchange. For more information, please call 1-800-SCUDDER.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
----------
*** Only the International Shares are part of the Scudder Family of Funds.
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<PAGE>
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 Funds may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Funds'
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 Funds 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 Funds 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 Funds 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, such as a pension or profit sharing plan, a
governmental plan, a simplified employee pension plan, a simple retirement
account, 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. If an individual is an active participant,
the deductibility of his or her IRA contributions in 2000 is phased out if the
individual has gross income between $32,000 and $42,000 and is single, if the
individual has gross income between $52,000 and $62,000 and is married filing
jointly, or if the individual has gross income between $0 and $10,000 and is
married filing separately; the phase-out ranges for individuals who are single
or married filing jointly are subject to annual adjustment through 2005 and
2007, respectively. If an individual is married filing jointly and the
individual's spouse is an active participant but the individual is not, the
deductibility of his or her IRA contributions is phased out if their combined
gross income is between $150,000 and $160,000. 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. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
29
<PAGE>
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.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
Scudder Roth IRA: Individual Retirement Account
Shares of the Funds may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Funds 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). Any
such requests must be received by a Fund's transfer agent ten days prior to the
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<PAGE>
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 a 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-SCUDDER for Class S and 1-800-253-2277 for Class AARP.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, each Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.
Each Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments in Class S shares
through automatic deductions from checking accounts by completing the
appropriate form and providing the necessary documentation to establish this
service. The minimum investment is $50 for Class S shares.
Shareholders may arrange to make periodic investments in Class AARP of
each Fund through automatic deductions from checking accounts. The minimum
pre-authorized investment amount is $50. New shareholders who open a Gift to
Minors Account pursuant to the Uniform Transfer to Minors Act (UTMA) and the
Uniform Transfer to Minors Act (UTMA) and who sign up for the Automatic
Investment Plan will be able to open a Fund account for less than $500 if they
agree to increase their investment to $500 within a 10 month period. Investors
may also invest in any Class AARP for $500 if they establish a plan with a
minimum automatic investment of at least $100 per month. This feature is only
available to Gifts to Minors Account investors. The Automatic Investment Plan
may be discontinued at any time without prior notice to a shareholder if any
debit from their bank is not paid, or by written notice to the shareholder at
least thirty days prior to the next scheduled payment to the Automatic
Investment Plan.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
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.
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DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each 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.
Each 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 Funds 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 a 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, a Fund may be subject to that excise tax.
In certain circumstances, a Fund may determine that it is in the interest of
shareholders to distribute less than the required amount. (See "TAXES.")
Any dividends or capital gains distributions declared in October,
November, or December with a record date in that 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. If a
shareholder has elected to reinvest any dividends and/or other distributions,
such distributions will be made in shares of the Fund and confirmations will be
mailed to each shareholder. If a shareholder has chosen to receive cash, a check
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<PAGE>
will be sent. Distributions of investment company taxable income and net
realized capital gains are taxable, whether made in shares or cash (see
"TAXES").
Small Company Value 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. Large Company Value Fund intends to
declare in December any net realized capital gains resulting from its investment
activity and any dividend from investment company taxable income. The Fund
intends to distribute the December dividends and capital gains either in
December or in the following January.
PERFORMANCE INFORMATION
From time to time, quotations of a 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
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 July 31, 2000
<TABLE>
<CAPTION>
One year Five years Ten years Since Inception
-------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
Small Company Value Fund -14.43% N/A N/A 7.66%*
Large Company Value Fund -4.61% 14.74% 13.51% N/A
</TABLE>
* Small Company Value Fund commenced operations on October 6, 1995.
As described above, average annual total return is based on historical
earnings and is not intended to indicate future performance. Average annual
total return for the Funds vary based on changes in market conditions and the
level of a Fund's expenses.
In connection with communicating its average annual total return to
current or prospective shareholders, the Funds also may compare these figures to
the performance of other mutual funds tracked by mutual fund rating services or
to unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative Total Return is the 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
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<PAGE>
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 July 31, 2000
<TABLE>
<CAPTION>
One year Five years Ten years Since Inception
-------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
Small Company Value Fund -14.43% N/A N/A 42.77%*
Large Company Value Fund -4.61% 98.87% 255.25% N/A
</TABLE>
* Small Company Value Fund commenced operations on October 6, 1995.
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 Funds' 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 Funds 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.
From time to time, in advertisements, sales literature, and reports to
shareholders or prospective investors, figures relating to the growth in the
total net assets of the Fund apart from capital appreciation will be cited, as
an update to the information in this section, including, but not limited to: net
cash flow, net subscriptions, gross subscriptions, net asset growth, net account
growth, and subscription rates. Capital appreciation generally will be covered
by marketing literature as part of the Fund's and classes' performance data.
Comparison of Fund Performance
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. From time to time, in advertising and marketing literature, a
Fund's performance may be compared to the performance of broad groups of mutual
funds with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' 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 a
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.
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<PAGE>
The Funds may be advertised as an investment choice in Scudder's
college planning program. 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 a 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 the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning a Fund, including reprints of, or selections from, editorials or
articles about a Fund.
FUND ORGANIZATION
The combined prospectus and this Statement of Additional Information
for Small Company Value Fund and Large Company Value Fund each offers two
classes of shares to provide investors with different purchase options. The two
classes are Class S and Class AARP. On October 2, 2000, shares of Small Company
Value Fund and Large Company Value Fund were redesignated Class S shares of
their respective funds.
FUND ORGANIZATION FOR SMALL COMPANY VALUE FUND. 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. There are two classes, Class AARP and Class S,
which have equal rights as to voting, dividends and liquidation. The Trust's
shares are currently divided into five series, Scudder Development Fund, Scudder
Health Care Fund, Small Company Value Fund, Scudder Technology Fund and Scudder
21st Century Growth Fund.
The Fund's activities are supervised by the Trust's Board of Trustees.
The Trust has adopted a plan pursuant to Rule 18f-3 (the "Plan") under the 1940
Act to permit the Trust to establish a multiple class distribution system. The
Fund has two classes, Class AARP and Class S. The Trustees have the authority to
issue additional series of shares and to designate the relative rights and
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<PAGE>
preferences as between the different series. Each share of each series has equal
rights with each other share of that series 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 series' 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, or 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.
FUND ORGANIZATION FOR LARGE COMPANY VALUE FUND. The Fund is a series of Value
Equity Trust. Value Equity Trust, formerly Scudder Equity Trust, is a
Massachusetts business trust established under a Declaration of Trust dated
October 16, 1985, as amended. The Trust's authorized capital consists of an
unlimited number of shares of beneficial interest, par value $0.01 per share.
The Trustees have the authority to issue additional series of shares. If more
than one series of shares were issued and a series were unable to meet its
obligations, the remaining series might have to assume the unsatisfied
obligations of that series.
The Fund's activities are supervised by the Trust's Board of Trustees.
The Trust has adopted a plan pursuant to Rule 18f-3 (the "Plan") under the 1940
Act to permit the Trust to establish a multiple class distribution system. The
Fund has two classes, Class AARP and Class S, which have equal rights as to
voting, dividends and liquidation. 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 the Funds' combined prospectus.
Each share of each class of a Fund shall be entitled to one vote (or
fraction thereof in respect of a fractional share) on matters that such shares
(or class of shares) shall be entitled to vote. Shareholders of each Fund shall
vote together on any matter, except to the extent otherwise required by the 1940
Act, or when the Board of Trustees has determined that the matter affects only
the interest of shareholders of one or more classes of a Fund, in which case
only the shareholders of such class or classes of that Fund shall be entitled to
vote thereon. Any matter shall be deemed to have been effectively acted upon
37
<PAGE>
with respect to a Fund if acted upon as provided in Rule 18f-2 under the 1940
Act, or any successor rule, and in the Fund's Declaration of Trust. As used in
this Statement of Additional Information, the term "majority", when referring to
the approvals to be obtained from shareholders in connection with general
matters affecting the Fund and all additional portfolios (e.g., election of
directors), means the vote of the lesser of (i) 67% of the Fund's shares
represented at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (ii) more than 50% of the Fund's
outstanding shares. The term "majority", when referring to the approvals to be
obtained from shareholders in connection with matters affecting a single Fund or
any other single portfolio (e.g., annual approval of investment management
contracts), means the vote of the lesser of (i) 67% of the shares of the
portfolio represented at a meeting if the holders of more than 50% of the
outstanding shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the portfolio. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
Each share of a Fund represents an equal proportionate interest in that
Fund with each other share of the same Fund and is entitled to such dividends
and distributions out of the income earned on the assets belonging to that Fund
as are declared in the discretion of the Fund's Board of Trustees. In the event
of the liquidation or dissolution of the Fund, shares of the Fund are entitled
to receive the assets attributable to that Fund that are available for
distribution, and a proportionate distribution, based upon the relative net
assets of the Fund, of any general assets not attributable to the Fund that are
available for distribution.
The Trustees, in their discretion, may authorize the division of shares
of a 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.
Currently, the assets of Value Equity 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 Value Equity 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 Value Equity 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 Value Equity Trust, 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.
The Trust's predecessor was organized in 1966 as a Delaware corporation
under the name "Scudder Duo-Vest Inc." as a closed-end, diversified dual-purpose
investment company. Effective April 1, 1982, its original dual-purpose nature
was terminated and it became an open-end investment company with only one class
of shares outstanding. At a Special Meeting of Shareholders held May 18, 1982,
the shareholders voted to amend the investment objective to seek to maximize
long-term growth of capital and to change the name of the corporation to
"Scudder Capital Growth Fund, Inc." ("SCGF, Inc."). The fiscal year end of SCGF,
Inc. was changed from March 31 to September 30 by action of its Directors on May
18, 1982. Effective as of September 30, 1982, Scudder Special Fund, Inc. was
merged into SCGF, Inc. In October 1985, the Fund's form of organization was
changed to a Massachusetts business trust upon approval of the shareholders.
Shares of Value Equity Trust entitle their holders to one vote per
share; however, separate votes are taken by each series on matters affecting an
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. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The Trust has a Declaration of Trust which provides that obligations of
a Fund are not binding upon the Trustees individually but only upon the property
of that Fund, that the Trustees and officers will not be liable for errors of
judgment or mistakes of fact or law, and that a Fund involved will indemnify the
Trustees and officers against liabilities and expenses incurred in connection
38
<PAGE>
with litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner provided in the Declaration of
Trust that they have not acted in good faith in the reasonable belief that their
actions were in the best interests of the Fund involved. Nothing in the
Declaration of Trust, however, protects or indemnifies a Trustee or officer
against any liability to which that person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of that person's office.
No series of the Trust shall be liable for the obligations of any other
series.
INVESTMENT ADVISER
Scudder Kemper Investments, Inc., an investment counsel firm, acts as
investment adviser to the Funds. This organization, the predecessor of which is
Scudder, Stevens & Clark, Inc., is one of the most experienced investment
counsel firms in the U. S. It was established as a partnership in 1919 and
pioneered the practice of providing investment counsel to individual clients on
a fee basis. In 1928 it introduced the first no-load mutual fund to the public.
In 1953 the Adviser introduced Scudder International Fund, Inc., the first
mutual fund available in the U.S. investing internationally in securities of
issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On December 31, 1997, Zurich
Insurance Company ("Zurich") acquired a majority interest in the Adviser, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Adviser. The Adviser's name changed to Scudder Kemper Investments, Inc. On
September 7, 1998, the businesses of Zurich (including Zurich's 70% interest in
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. By way of a dual holding
company structure, former Zurich shareholders initially owned approximately 57%
of Zurich Financial Services Group, with the balance initially owned by former
B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations, as well as providing investment advice to over 280 open and
closed-end mutual funds. The Adviser maintains a large research department,
which conducts continuous studies of the factors that affect the position of
various industries, companies and individual securities. The Adviser receives
published reports and statistical compilations from issuers and other sources,
as well as analyses from brokers and dealers who may execute portfolio
transactions for the Adviser's clients. However, the Adviser regards this
information and material as an adjunct to its own research activities. The
Adviser's international investment management team travels the world,
researching hundreds of companies. In selecting the securities in which the Fund
may invest, the conclusions and investment decisions of the Adviser with respect
to the Funds are based primarily on the analyses of its own research department.
Certain investments may be appropriate for the Funds 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 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.
39
<PAGE>
In certain cases the investments for the Funds are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser
that have similar names, objectives and investment styles as the Fund. You
should be aware that a Fund is likely to differ from these other mutual funds in
size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Fund can be expected to vary from those of the other mutual
funds.
Small Company Value Fund's present investment management agreement (the
"Agreement") was approved by the Trustees on July 10, 2000, became effective
August 28, 2000. Large Company Value Fund's present investment management
agreement was approved by the Trustees on July 10, 2000 and becomes effective
October 2, 2000. The Agreement will continue in effect until September 30, 2001,
and from year to year thereafter only if its continuance is approved annually by
the vote of a majority of those Trustees who are not parties to such Agreement
or interested persons of the Adviser or the Trust, cast in person at a meeting
called for the purpose of voting on such approval, and either by a vote of the
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 Agreements, 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 also 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 (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 Small Company Value Fund pays the Adviser a fee
equal to an annual rate of 0.75% of the first $500 million of the average daily
net assets and 0.70% thereafter, 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. Prior to
August 28, 2000, the Fund paid 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 November 30, 2000 to maintain the total annualized
expenses of the Fund at no more than 1.25% of the average daily net assets of
the Fund. The investment advisory fees paid to the Adviser for the fiscal years
ending August 31, 1998 were$1,778,500. For the eleven months ended July 31,
1999, the Adviser did not impose a portion of its management fee which amounted
to $670,202, and the amount imposed amounted to $1,164,515. For the fiscal year
ended July 31, 2000, the Adviser did not impose a portion of its management fee
40
<PAGE>
which amounted to $1,067,391 and the amount imposed amounted to $521,792, which
was equivalent to an annualized effective rate of 0.25% of the Fund's average
daily net assets.
For the Adviser's services, prior to October 2, 2000, Large Company
Value Fund paid the Adviser a fee equal to 0.75 of 1% on the first $500 million
of average daily net assets; 0.65 of 1% on the next $500 million of such assets;
0.60 of 1% on the next $500 million of such assets, 0.55 of 1% on the next $500
million of such assets and 0.50 of 1% of such net assets in excess of $ 2
billion, 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. After October 2, 2000, the Fund
pays a fee equal to 0.60 of 1% on the first $1.5 billion of average daily net
assets; 0.575 of 1% on the next $500 million of such assets; 0.550 of 1% on the
next $500 million of such assets, 0.550 of 1% of such assets over $2 billion,
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
For the fiscal years ended September 30, 1997 and 1998, Large Company
Value Fund incurred aggregate fees pursuant to its then effective investment
advisory agreement of $12,187,280 and $14,296,878, respectively. For the ten
months ended July 31, 1999, Large Company Value Fund incurred aggregate fees
pursuant to its then effective investment advisory agreement of $12,261,953. For
the fiscal year ended July 31, 2000, fees were $13,995,880, which was equivalent
to an annual effective rate of 0.62% of the Fund's average daily net assets.
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 Trusts, with respect to each Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trusts' investment products and services.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning such Agreement, the Trustees 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 Funds 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 Funds.
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<PAGE>
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
Administrative Fee
Each Fund's Board of Trustees has approved the adoption of a new
administrative services agreement (an "Administrative Agreement"). Under each
Fund's Administrative Agreement, each share class of the Fund will pay a fixed
fee rate (the "Administrative Fee") to Scudder Kemper Investments, Inc., the
Fund's investment adviser ("Scudder Kemper"). In return, Scudder Kemper will
provide or pay others to provide substantially all services that a fund normally
requires for its operations, such as transfer agency fees, shareholder servicing
fees, custodian fees, and fund accounting fees, but not including expenses such
as taxes, brokerage, interest, extraordinary expenses and fees and expenses of
Board members not affiliated with Scudder Kemper (including fees and expenses of
their independent counsel). Each fund would continue to pay the fees required by
its investment management agreement with Scudder Kemper. Each Administrative
Agreement will have an initial term of three years, subject to earlier
termination by a fund's Board. Such an administrative fee would enable investors
to determine with greater certainty the expense level that the fund will
experience, and, for the term of the administrative agreement, would transfer
substantially all of the risk of increased cost to Scudder Kemper. The date upon
which each fund's Administrative Agreement will be implemented is set forth
below, along with the administrative fee rate that will be in effect under each
Administrative Agreement.
Each Fund has entered into administrative services agreements with
Scudder Kemper (the "Administration Agreements"), pursuant to which Scudder
Kemper will provide or pay others to provide substantially all of the
administrative services required by a Fund (other than those provided by Scudder
Kemper under its investment management agreements with the Funds, as described
above) in exchange for the payment by each Fund of an administrative services
fee (the "Administrative Fee") of 0.45% of its average daily net assets for
Small Company Value Fund and 0.30% of its average daily net assets for Large
Company Value Fund. One effect of these arrangements is to make each Fund's
future expense ratio more predictable. The Administrative Fee will become
effective on October 2, 2000 for each Fund. The details of the proposal
(including expenses that are not covered) are set out below.
Various third-party service providers (the "Service Providers"), some
of which are affiliated with Scudder Kemper, provide certain services to the
Funds pursuant to separate agreements with the Funds. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Funds and maintains their accounting records. Scudder Service Corporation, also
a subsidiary of Scudder Kemper, is the transfer, shareholder servicing and
dividend-paying agent for the shares of the Funds. Scudder Trust Company, an
affiliate of Scudder Kemper, provides subaccounting and recordkeeping services
for shareholders in certain retirement and employee benefit plans. As custodian,
State Street Bank holds the portfolio securities of the Funds, pursuant to a
custodian agreement. PricewaterhouseCoopers LLP audits the financial statements
of the Funds and provides other audit, tax, and related services.
Scudder Kemper will pay the Service Providers for the provision of
their services to the Funds and will pay other fund expenses, including
insurance, registration, printing and postage fees. In return, each Fund will
pay Scudder Kemper an Administrative Fee.
Each Administration Agreement has an initial term of three years,
subject to earlier termination by the Fund's Board. The fee payable by a Fund to
Scudder Kemper pursuant to the Administration Agreements is reduced by the
amount of any credit received from the Fund's custodian for cash balances.
Certain expenses of the Funds will not be borne by Scudder Kemper under
the Administration Agreements, such as taxes, interest and extraordinary
expenses; and the fees and expenses of the Independent Trustees (including the
fees and expenses of their independent counsel). In addition, each Fund will
continue to pay the fees required by its investment management agreement with
Scudder Kemper.
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<PAGE>
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in
return for services relating to investments by AARP members in AARP Class shares
of each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of AARP Classes of all funds managed by Scudder Kemper. The
fee rates, which decrease as the aggregate net assets of the AARP Classes become
larger, are as follows: 0.07% for the first $6 billion in net assets, 0.06% for
the next $10 billion and 0.05% thereafter.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
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.
Code of Ethics
The Funds, the Adviser and principal underwriter have each adopted
codes of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Funds and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Funds, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Funds. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
Linda C. Coughlin (48)+* President and Managing Director of Scudder Kemper Director and Senior
Trustee Investments, Inc. Vice President
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<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board, Inc.
Chapel Hill, NC (Not-for-profit business research
organization)
Keith R. Fox (46) Trustee General Partner, Exeter Group of Funds --
10 East 53rd Street
New York, NY 10022
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation Foundation; Department of State -
650 Fifth Avenue Undersecretary of State for Economic,
New York, NY 10128 Business and Agricultural Affairs
(March 1993 to January 1997)
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski (law
firm) (1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place 23rd Floor Capital, LLC (venture capital firm)
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
Ann M. McCreary (43) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
John R. Hebble (42)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm) 1989
- 1997
John Millette (37)+ Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
Thomas V. Bruns (43)*** 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.
---------------------- ------------------ -------------------- --------------
William F. Glavin (41) + Vice President Managing Director of Scudder Kemper Vice President
Investments, Inc.
James E. Masur (40) + Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Kathryn L. Quirk (47) ++ Vice President and Managing Director of Scudder Kemper Senior Vice President,
Assistant Secretary Investments, Inc. Director, Chief Legal
Officer and Assistant
Clerk
Howard Schneider (43) + Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Brenda Lyons (37) + Assistant Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
Peter Chin (58) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
J. Brooks Dougherty (41) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
James M. Eysenbach (38) # Vice President Managing Director of Scudder Kemper --
Investments, Inc.
James E. Fenger (41) ***_ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Sewall Hodges (45) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
Lois R. Roman (36) ++ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Robert D. Tymoczko (30) # Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Funds and
their counsel to be persons who are "interested persons" of the
Adviser or of the Trust, within the meaning of the Investment
Company Act of 1940, as amended.
** Unless otherwise stated, all of the Trustees and officers have
been associated with their respective companies for more than five
years, but not necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
*** Address: 222 South Riverside Plaza, Chicago, Illinois
# Address: 101 California Street Suite 4100 San Francisco, California
The Trustees and Officers of the Trust also serve in similar capacities
with respect to other Scudder Funds.
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<PAGE>
Certain accounts for which the Adviser acts as investment adviser owned
_________ shares in the aggregate, or ________18.42% of the outstanding shares
on _________. The Adviser may be deemed to be the beneficial owner of such
shares, but disclaims any beneficial ownership in such shares.
As of ______________2000,_________ shares in the aggregate, or ______%
of the outstanding shares of Small Company Value Fund were held in the name of
_____________who may be deemed to be the beneficial owner of certain of these
shares, but disclaims any beneficial ownership therein.
As of ______________2000,_________ shares in the aggregate, or ______%
of the outstanding shares of Large Company Value Fund were held in the name of
_____________who may be deemed to be the beneficial owner of certain of these
shares, but disclaims any beneficial ownership therein.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
Each Independent Trustee receives compensation for his or her services,
which includes an annual retainer and an attendance fee for each meeting
attended. The Independent Trustee who serves as lead trustee receives additional
compensation for his or her service. No additional compensation is paid to any
Independent Trustee for travel time to meetings, attendance at trustee's
educational seminars or conferences, service on industry or association
committees, participation as speakers at trustees' 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
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<PAGE>
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 1999 from the Trust and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
Name Scudder Value Equity
---- ------- ------------
Securities Trust* Trust** All Scudder Funds
---------------- ----- -----------------
<S> <C> <C> <C>
Henry P. Becton, Jr. *** $0 $ $140,000 (30 funds)
Dawn-Marie Driscoll*** $0 $ $150,000 (30 funds)
Edgar R. Fiedler** $945 $ $73,230 (29 funds)+
Keith R. Fox $36,375 $ $160,325 (23 funds)
Joan E. Spero $39,625 $ $175,275 (23 funds)
Jean Gleason Stromberg*** $0 $ $40,935 (16 funds)
Jean C. Tempel*** $0 $ $140,000 (30 funds)
</TABLE>
* Scudder Securities Trust consists of five funds: Scudder Development
Fund, Scudder Health Care Fund, Scudder Technology Fund, Small Company
Value Fund and Scudder 21st Century Growth Fund.
** Value Equity Trust consists of four funds: Large Company Value Fund,
Scudder Select 500 Fund, Scudder Select 1000 Growth Fund and Value
Fund.
*** Newly-elected Trustee. On July 11, 2000, shareholders of each Fund
elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly constituted Board of Trustees.
+ Mr. Fielder's compensation includes the $9,900 accrued but not
received, through the deferred compensation program.
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 each Fund.
DISTRIBUTOR
Each 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.
Small Company Value Fund. The Trust's underwriting agreement dated May 8, 2000
will remain in effect until September 30, 2001 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 July 10, 2000.
Large Company Value The Trust's underwriting agreement dated May 8, 2000 will
remain in effect until September 30, 2001 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 vote of a majority of the Trustees or a majority of the outstanding voting
securities of the Trust. The underwriting agreement was last approved by the
Trustees on July 10, 2000.
Under the underwriting agreement, the Funds are 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 Funds as a broker or dealer in the
various states as required; the fees and expenses of preparing, printing and
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<PAGE>
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 Funds; 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 Funds 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 Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares of the Funds to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
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 Funds, unless a 12b-1 Plan is in effect which
provides that the Funds shall bear some or all of such expenses.
NOTE: Although the Funds do not currently have 12b-1 Plans, the
Funds would also pay those fees and expenses permitted to be
paid or assumed by the Funds pursuant to a 12b-1 Plan, if any,
were adopted by the Funds, notwithstanding any other provision
to the contrary in the underwriting agreement.
As agent, the Distributor currently offers the Funds' 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
Each 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 the Fund's
earnings and profits, and would be eligible for the dividends received deduction
in the case of corporate shareholders.
Each 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, Large Company
Value Fund has no capital loss carryforwards. As of July 31, 2000, Small Company
Value Fund had a net tax basis capital loss carryforward of approximately
$2,744,000 which may be applied against any realized net taxable capital gains
of each succeeding year until fully realized or until July 31, 2007 ($135,000)
and July 31, 2008 ($2,609,000), the respective expiration dates or whichever
occurs first. In addition, from November 1, 1999 through July 31, 2000, the Fund
incurred approximately $11,871,000 of net realized capital losses. As permitted
by tax regulations, the Fund intends to elect to defer these losses and treat
them as arising in the fiscal year ending July 31, 2001.
48
<PAGE>
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a 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 each Fund's gross income. To the extent that such dividends
constitute a portion of a 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 a 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.
49
<PAGE>
Each Fund may invest in shares of certain foreign corporations which
may be classified under the Code as passive foreign investment companies
("PFICs"). If a 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.
Each 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 a Fund will
be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by a Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the Fund's holding period for the underlying
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 a
Fund writes a put or call option, no gain is recognized upon its receipt of a
premium. If the option lapses or is closed out, any gain or loss is treated as a
short-term capital gain or loss. If a call option 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
a Fund is not a taxable transaction for the Fund.
Many futures contracts and certain foreign currency forward contracts
entered into by a Fund and all listed non-equity options written or purchased by
a 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 a Fund will be treated as ordinary income or loss.
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 a 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 a 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. Each Fund intends to monitor its transactions in
options and futures and may make certain tax elections in connection with these
investments.
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<PAGE>
Notwithstanding any of the foregoing, recent tax law changes may
require a 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 a Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain futures
contracts, forward contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to a Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount imputed income will
comprise a part of the investment company taxable income of the Fund which must
be distributed to shareholders in order to maintain the qualification of the
Fund as a regulated investment company and to avoid federal income tax at the
Fund's level. In addition, if a Fund invests in certain high yield original
issue discount obligations issued by corporations, a portion of the original
issue discount accruing on the obligation may be eligible for the deduction for
dividends received by corporations. In such event, dividends of investment
company taxable income received from the Fund by its corporate shareholders, to
the extent attributable to such portion of accrued original issue discount, may
be eligible for this deduction for dividends received by corporations if so
designated by the Fund in a written notice to shareholders.
Each 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 a 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, each Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
Each 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 a Fund, including the possibility that
51
<PAGE>
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 a 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 routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and the Adviser in connection with the Fund uses
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<PAGE>
not all such information. 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.
Small Company Value Fund: For the fiscal years ended August 31, 1998,
the eleven-month period ended July 31, 1999 and the fiscal year ended July 31,
2000, the Fund paid brokerage commissions of $250,097, $263,729 and $_______,
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
$185996,842, of which $90,770,575 (49% of all brokerage transactions) were
transactions which included research commissions. For the eleven month period
ended July 31, 1999, $222,500 (84% 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 $187,405,537, of which
$161,418,902 (86% of all brokerage transactions) were transactions which
included research commissions. For the fiscal year ended July 31, 2000, $_______
(__% 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 $___________, of which $___________ (__% of all
brokerage transactions) were transactions which included research commissions.
Large Company Value Fund: In the fiscal years ended September 30, 1997
and 1998, Large Company Value Fund paid brokerage commissions of $2,188,295 and
$1,318,544 respectively. For the ten months ended July 31, 1999, Large Company
Value Fund paid brokerage commissions of $1,722,405. For the fiscal year ended
September 30, 1998, $1,260,550, (95.60% 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 services to the Trust or Adviser. For the ten months ended July 31,
1999, $1,365,362, (79.27% 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 services
to the Trust or Adviser. The total amount of brokerage transactions aggregated
for the fiscal year ended September 30, 1998 was $977,798,986 of which
$874,809,855 (89.47% of all brokerage transactions) were transactions which
included research commissions. The total amount of brokerage transactions
aggregated for the 10 months ended July 31, 1999 was $1,429,520,190 of which
$1,157,569,737 (80.98% of all brokerage transactions) were transactions which
included research commissions. For the fiscal year ended July 31, 2000, $_______
(__% 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 $___________, of which $___________ (__% 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 each fund is listed below.
Higher levels of activity by a Fund result in higher transaction costs and may
also result in taxes on realized capital gains to be borne by the Fund's
shareholders. Purchases and sales are made for each Fund whenever necessary, in
management's opinion, to meet the Fund's objectives.
Small Company Value Fund: For the fiscal year ended August 30, 1998,
and the eleven month period ended July 31, 1999, the fund's portfolio turnover
rates were 22.6%, and 33.7%, respectively. For the eleven-month period ended
July 31, 1999, the figure has been annualized. For the fiscal year ended July
31, 2000, the fund's portfolio turnover rate was 29.0%.
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Large Company Value Fund: For the fiscal year ended September 30,
1998, the fund's portfolio turnover rate was 39.5%. Large Company Value Fund's
average annualized portfolio turnover rate for the 10 months ended July 31, 1999
was 35.2%. For the fiscal year ended July 31, 2000, the fund's portfolio
turnover rate was 46.0%.
NET ASSET VALUE
The net asset value of shares of each class of the Fund is computed as
of the close of regular trading on the Exchange on each day the Exchange is open
for trading ("Value Time"). The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively. Net asset value per share
is determined separately for each class of shares by dividing the value of the
total assets of the Fund, less all liabilities attributable to that class, by
the total number of shares of that class outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation, the security is valued
at the most recent bid quotation on such exchange as of the Value Time. An
equity security which is traded on the Nasdaq Stock Market, Inc. ("Nasdaq")
system will be valued at its most recent sale price on such system as of the
Value Time. Lacking any sales, the security will be valued at the most recent
bid quotation as of the Value Time. The value of an equity security not quoted
on the Nasdaq System, but traded in another over-the-counter market, is its most
recent sale price, if there are any sales of such security on such market as of
the Value Time. Lacking any sales, the security is valued at the Calculated Mean
quotation for such security as of the Value Time. Lacking a Calculated Mean
quotation, the security is valued at the most recent bid quotation as of the
Value Time.
Debt securities, other than 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.
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ADDITIONAL INFORMATION
Experts
The financial highlights of the Fund included in the Fund's prospectus
and the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, 160 Federal Street,
Boston, MA 02110, independent accountants, and given on the authority of said
firm as experts in accounting and auditing. PricewaterhouseCoopers LLP is
responsible for performing annual audits of the financial statements and
financial highlights of the Funds in accordance with generally accepted auditing
standards and the preparation of federal tax returns.
Shareholder Indemnification
Each 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 Funds 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 each
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.
On September 16, 1998, the Board of the Small Company Value Fund
changed the fiscal year end from August 31 to July 31.
On June 7, 1999, the Board of Large Company Value Fund changed the
fiscal year end from September 30 to July 31.
The CUSIP number of Class AARP of the Small Company Value Fund is
811196-83-1.
The CUSIP number of Class S of the Small Company Value Fund is
811196-20-3.
The CUSIP number of Class S of the Large Company Value Fund is
920390-50-7.
The CUSIP number of Class AARP of the Large Company Value Fund is
920390-87-9.
Each Fund employs State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 as custodian.
The firm of Dechert is counsel to each Fund.
The Funds' combined prospectus and this Statement of Additional
Information omit certain information contained in the Registration Statement
which the Funds have 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 Funds 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.
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Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net
asset value for each Fund.
Each 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.
Other Information for Small Company Value Fund
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.
Costs incurred by the Small Company Value Fund in conjunction with its
organization are being amortized over the five-year period beginning October 6,
1995.
Prior to the implementation of the Administration Agreement, the Fund
paid SFAC an annual fee equal to 0.025% of the first $150 million of average
daily net assets, 0.0075% of the next $85 million of such assets, and, 0.0045%
of such assets in excess of $1 billion, plus holding and transaction charges for
this service. For the fiscal years ended August 31, 1997 and 1998, the amounts
charged to the Fund by SFAC aggregated $57,935 and $81,326, respectively. For
the eleven-month period ended July 31, 1999, the amount charged to the Fund by
SFAC aggregated $67,799, of which $13,084 was unpaid at July 31, 1999. For the
fiscal year ended July 31, 2000, the amount charged to the Fund by SFAC
aggregated $71,632, of which $5,494 was unpaid at July 31, 2000.
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. SSC also provides subaccounting and
recordkeeping services for shareholder accounts in certain retirement and
employee benefit plans. Prior to the implementation of the Administration
Agreement, each Fund paid SSC a fee for maintaining each account for a retail
participant of $26.00, and for each retirement participant of $29.00. The Fund
paid SSC an annual fee for each account maintained for a participant. For the
fiscal years ended August 31, 1997 and 1998, the amounts charged to the Fund by
SSC aggregated $285,621 and $736,233, respectively, of which $31,498 and $72,297
was unpaid at August 31, 1997 and 1998, respectively. For the eleven-month
period ended July 31, 1999, the amount charged to the Fund by SSC aggregated
$696,431, of which $59,497 was unpaid at July 31, 1999. For the fiscal year
ended July 31, 2000, the amount charged to the Fund by SSC aggregated $556,594,
of which $36,746 was unpaid at July 31, 2000.
Scudder Trust Company ("STC"), an affiliate of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. Annual service fees are paid by the
Fund to STC, Two International Place, Boston, Massachusetts 02110-4103 for such
accounts. Prior to the implementation of the Administration Agreement, the Fund
paid STC an annual fee of $29.00 per shareholder account. For the fiscal years
ended August 31, 1997 and 1998, the amounts charged to the Fund by STC
aggregated $20,160 and $255,111, respectively. For the eleven-month period ended
July 31, 1999, the amount charged to the Fund by STC aggregated $743,277, of
which $170,877 was unpaid at July 31, 1999. For the fiscal year ended July 31,
2000, the amount charged to the Fund by STC aggregated $1,106,826, of which
$93,738 was unpaid at July 31, 2000.
Other Information for Large Company Value Fund
The name "Value Equity Trust" is the designation of the Trustees for
the time being under a Declaration of Trust dated October 16, 1985, as amended,
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, shareholders nor other series of the Trust assumes any
personal liability for obligations entered into on behalf of the Fund. 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. All persons dealing with the Fund must look only to the assets of
the Fund for the enforcement of any claims against a Fund as no other series of
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the Trust assumes any liabilities for obligations entered into on behalf of a
Fund.
Prior to the implementation of the Administration Agreement, the Fund
paid SFAC an annual fee equal to 0.025% of the first $150 million of average
daily net assets, 0.0075% of the next 85 million of such assets, and 0.0045% of
such assets in excess of $1 billion, plus holding and transaction charges for
this service. For the fiscal years ended September 30, 1996, 1997 and 1998,
Large Company Value Fund incurred annual fees of $158,045, $157,173 and
$174,325, respectively. For the 10 months ended July 31, 1999, Large Company
Value Fund incurred fees of $147,196, of which $30,868 was unpaid at July 31,
1999. For the fiscal year ended July 31, 2000, the amount charged to the Fund by
SFAC aggregated $168,934, of which $13,899 was unpaid at July 31, 2000.
Prior to the implementation of the Administration Agreement, the Fund
paid Service Corporation a fee for maintaining each account for a retail
participant of $26.00 and for each retirement participant of $29.00. For the
fiscal years ended September 30, 1996, 1997, and 1998, Large Company Value Fund
incurred annual fees of $1,715,004, $2,505,046, and $2,518,178. For the ten
months ended July 31, 1999, Large Company Value Fund incurred fees of
$2,057,788, of which $204,116 was unpaid at July 31, 1999. For the fiscal year
ended July 31, 2000, the amount charged to the Fund by SSC aggregated
$2,568,627, of which $199,096 was unpaid at July 31, 2000.
Prior to the implementation of the Administration Agreement, the Fund
paid Scudder Trust Company an annual fee of $29.00 for each account maintained
for a participant. For the fiscal years ended September 30, 1996, 1997, and
1998, Large Company Value Fund incurred annual fees of $1,715,004, $1,562,194,
and $1,835,663. For the ten months ended July 31, 1999, Large Company Value Fund
incurred annual fees of $1,545,597, of which $294,062 was unpaid at July 31,
1999. For the fiscal year ended July 31, 2000, the amount charged to the Fund by
STC aggregated $1,725,486, of which $144,169 was unpaid at July 31, 2000.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio, of Small
Company Value Fund, and of Large 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 July 31, 2000, as
filed with the Securities and Exchange Commission for Scudder Securities Trust
and Value Equity Trust, respectively, on Form N-30D, and are hereby deemed to be
a part of this Statement of Additional Information.
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APPENDIX
The following is a description of the ratings given by Moody's and S&P
to corporate and municipal bonds.
Ratings of Municipal and Corporate Bonds
Standard & Poor's:
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, large
uncertainties or major exposures to adverse conditions outweigh these.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal in the event of
adverse business, financial, or economic conditions. It is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating. The rating CC typically is applied to debt subordinated
to senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt that is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's:
Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high-grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
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adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Bonds that are rated Baa are considered as medium grade obligations,
i.e.; they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds that are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during other good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
that are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Bonds that are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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SCUDDER SECURITIES TRUST
<TABLE>
<CAPTION>
Item 23. Exhibits:
--------- --------
<S> <C> <C> <C>
(a) (1) Amended and Restated Declaration of Trust dated December 21, 1987,
incorporated by reference to Post-Effective Amendment No. 43 to the
Registration Statement.
(2) Amendment to Amended and Restated Declaration of Trust, dated
December 13, 1990, is incorporated by reference to Post-Effective
Amendment No. 43 to the Registration Statement.
(3) Amendment to Amended and Restated Declaration of Trust to change
the name of the Trust, dated July 21, 1995, is incorporated by
reference to Post-Effective Amendment No. 35 to the Registration
Statement.
(4) Amendment to Amended and Restated Declaration of Trust to add new
series, dated July 21, 1995, is incorporated by reference to
Post-Effective Amendment No. 35 to the Registration Statement.
(5) Establishment and Designation of Series of Shares of Beneficial
Interest, $0.01 par value, with respect to Scudder Development
Fund, Scudder Small Company Value Fund, Scudder Micro Cap Fund, and
Scudder 21st Century Growth Fund, dated June 6, 1996, is
incorporated by reference to Post-Effective Amendment No. 40 to the
Registration Statement.
(6) Establishment and Designation of Series of Shares of Beneficial
Interest, $0.01 par value, with respect to 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, dated June
3, 1997, is incorporated by reference to Post-Effective Amendment
No. 46 to the Registration Statement.
(7) Establishment and Designation of Classes of Shares of Beneficial
Interest, $0.01 par value, with respect to Scudder 21st Century
Growth Fund (Class A Shares, Class B Shares, Class C Shares and
Class S Shares), dated February 8, 2000, is incorporated by
reference to Post-Effective Amendment 70 to the Registration
Statement.
(8) Establishment and Designation of Classes of Shares of Beneficial
Interest, $.01 Par Value, with respect to Scudder 21st Century
Growth Fund (Class A Shares, Class B Shares, Class C Shares, Class
S Shares and Class AARP Shares), dated April 19, 2000, is
Incorporated by reference to Post-Effective Amendment No. 72 to the
Registration Statement.
<PAGE>
(9) Establishment and Designation of Classes of Shares of Beneficial
Interest, $.01 Par Value, Scudder Health Care Fund - Class S Shares
and Scudder Health Care Fund - AARP Shares, dated April 19, 2000,
is incorporated by reference to Post-Effective Amendment No. 72 to
the Registration Statement.
(10) Establishment and Designation of Classes of Shares of Beneficial
Interest, $.01 Par Value, Scudder Small Company Value Fund - Class
S Shares and Scudder Small Company Value Fund - AARP Shares, dated
April 19, 2000, is incorporated by reference to Post-Effective
Amendment No. 72 to the Registration Statement..
(11) Establishment and Designation of Classes of Shares of Beneficial
Interest, $.01 Par Value, Scudder Technology Fund - Class S Shares
and Scudder Technology Fund - AARP Shares, dated April 19, 2000, is
incorporated by reference to Post-Effective Amendment No. 72 to the
Registration Statement..
(b) (1) By-Laws as of October 16, 1985, are incorporated by reference to
Post-Effective Amendment No. 43 to the Registration Statement.
(2) Amendment to the Bylaws of Registrant, as amended through December
9, 1985, is incorporated by reference to Post-Effective Amendment
No. 43 to the Registration Statement.
(3) Amendment to the By-Laws, Article IV: Notice of Meetings, dated
December 12, 1991, is incorporated by reference to Post-Effective
Amendment No. 43 to the Registration Statement.
(4) Amendment to the By-Laws of Registrant, dated February 7, 2000, is
incorporated by reference to Post-Effective Amendment No. 72 to the
Registration Statement.
(c) Inapplicable.
(d) (1) Investment Management Agreement between the Registrant (on behalf
of Scudder Development Fund) and Scudder Kemper Investments, Inc.,
dated September 7, 1998, is incorporated by reference to
Post-Effective Amendment No. 62 to the Registration Statement.
(2) Investment Management Agreement between the Registrant (on behalf
of Scudder Small Company Value Fund) and Scudder Kemper
Investments, Inc., dated September 7, 1998, is incorporated by
reference to Post-Effective Amendment No. 62 to the Registration
Statement.
(3) Investment Management Agreement between the Registrant (on behalf
of Scudder Micro Cap Fund) and Scudder Kemper Investments, Inc.,
dated September 7, 1998, is incorporated by reference to
Post-Effective Amendment No. 62 to the Registration Statement.
<PAGE>
(4) Investment Management Agreement between the Registrant (on behalf
of Scudder Financial Services Fund) and Scudder Kemper
Investments, Inc., dated September 7, 1998, is incorporated by
reference to Post-Effective Amendment No. 62 to the Registration
Statement.
(5) Investment Management Agreement between the Registrant (on behalf
of Scudder Health Care Fund) and Scudder Kemper Investments, Inc.,
dated September 7, 1998, is incorporated by reference to
Post-Effective Amendment No. 62 to the Registration Statement.
(6) Investment Management Agreement between the Registrant (on behalf
of Scudder Technology Fund) and Scudder Kemper Investments, Inc.,
dated September 7, 1998, is incorporated by reference to
Post-Effective Amendment No. 62 to the Registration Statement.
(7) Investment Management Agreement between the Registrant (on behalf
of Scudder 21st Century Growth Fund) and Scudder Kemper
Investments, Inc., dated September 7, 1998, is incorporated by
reference to Post-Effective Amendment No. 62 to the Registration
Statement.
(8) Form of Investment Management Agreement between the Registrant, on
behalf of Scudder 21st Century Growth Fund, and Scudder Kemper
Investments, Inc., dated October 2, 2000, is incorporated by
reference to Post-Effective Amendment No. 72 to the Registration
Statement.
(9) Form of Investment Management Agreement between the Registrant, on
behalf of Scudder Development Fund, and Scudder Kemper
Investments, Inc., dated October 2, 2000, is incorporated by
reference to Post-Effective Amendment No. 72 to the Registration
Statement
(10) Investment Management Agreement between the Registrant, on behalf
of Scudder 21st Century Growth Fund, and Scudder Kemper
Investments, Inc., dated October 2, 2000, filed herein.
(11) Investment Management Agreement between the Registrant, on behalf
of Scudder Development Fund, and Scudder Kemper Investments, Inc.,
dated October 2, 2000, filed herein.
(e) (1) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., dated September 7, 1998, is incorporated by
reference to Post-Effective Amendment No. 62 to the Registration
Statement.
(2) Underwriting Agreement between the Registrant and Kemper
Distributors Inc., dated May 1, 2000, is incorporated by reference
to Post-Effective Amendment No. 71 to the Registration Statement.
<PAGE>
(3) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., dated May 8, 2000, is incorporated by reference to
Post-Effective Amendment No. 72 to the Registration Statement.
(f) Inapplicable.
(g) (1) Custodian Contract between the Registrant and State Street Bank
and Trust Company, dated September 6, 1995, is incorporated by
reference to Post-Effective Amendment No. 35 to the Registration
Statement.
(2) Fee schedule for Exhibit (g)(1) is incorporated by reference to
Post-Effective Amendment No. 35 to the Registration Statement.
(3) Amendment to Custody Contract between the Registrant and State
Street Bank and Trust Company, dated March 1, 1999, is
incorporated by referenced to Post-Effective Amendment No. 69 to
the Registration Statement.
(4) Sub-custodian Agreement between Brown Brothers Harriman & Co. and
The Bank of New York, London office, dated January 30, 1979, is
incorporated by reference to Post-Effective Amendment No. 43 to
the Registration Statement.
(5) Fee schedule for Exhibit (g)(4) is incorporated by reference to
Post-Effective Amendment No. 43 to the Registration Statement.
(h) (1) Transfer Agency and Service Agreement between the Registrant and
Scudder Service Corporation, dated October 2, 1989, is
incorporated by reference to Post-Effective Amendment No. 43 to
the Registration Statement.
(2) Revised fee schedule for Exhibit (h)(1) is incorporated by
reference to Post-Effective Amendment No. 37 to the Registration
Statement.
(3) Service Agreement between Copeland Associates, Inc. (on behalf of
Scudder Development Fund) and Scudder Service Corporation, dated
June 8, 1995, is incorporated by reference to Post-Effective
Amendment No. 35 to the Registration Statement.
(4) COMPASS Service Agreement between the Registrant and Scudder Trust
Company, dated January 1, 1990, is incorporated by reference to
Post-Effective Amendment No. 43 to the Registration Statement.
(5) Fee schedule for Exhibit (h)(4) is incorporated by reference to
Post-Effective Amendment No. 43 to the Registration Statement.
<PAGE>
(6) Shareholder Services Agreement between the Registrant and Charles
Schwab & Co., Inc., dated June 1, 1990, is incorporated by
reference to Post-Effective Amendment No. 43 to the Registration
Statement.
(7) Fund Accounting Services Agreement between the Registrant (on
behalf of Scudder Development Fund) and Scudder Fund Accounting
Corporation, dated March 21, 1995, is incorporated by reference to
Post-Effective Amendment No. 35 to the Registration Statement.
(8) Fund Accounting Services Agreement between the Registrant (on
behalf of Scudder Small Company Value Fund) and Scudder Fund
Accounting Corporation, dated October 6, 1995, is incorporated by
reference to Post-Effective Amendment No. 37 to the Registration
Statement.
(9) Fund Accounting Services Agreement between the Registrant (on
behalf of Scudder Micro Cap Fund) and Scudder Fund Accounting
Corporation, dated August 12, 1996, is incorporated by reference
to Post-Effective Amendment No. 41 to the Registration Statement.
(10) Fund Accounting Services Agreement between the Registrant (on
behalf of Scudder 21st Century Growth Fund) and Scudder Fund
Accounting Corporation, dated September 9, 1996, is incorporated
by reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(11) Fund Accounting Services Agreement between the Registrant (on
behalf of Scudder Financial Services Fund) and Scudder Fund
Accounting Corporation, dated September 11, 1997, is incorporated
by reference to Post-Effective Amendment No. 50 to the
Registration Statement.
(12) Fund Accounting Services Agreement between the Registrant (on
behalf of Scudder Health Care Fund) and Scudder Fund Accounting
Corporation, dated December 4, 1997, is incorporated by reference
to Post-Effective Amendment No. 62 to the Registration Statement.
(13) Fund Accounting Services Agreement between the Registrant (on
behalf of Scudder Technology Fund) and Scudder Fund Accounting
Corporation, dated December 4, 1997, is incorporated by reference
to Post-Effective Amendment No. 62 to the Registration Statement.
(14) Administrative Services Agreement between Scudder 21st Century
Growth Fund and Kemper Distributors, Inc., dated May 1, 2000, is
incorporated by reference to Post-Effective Amendment No. 71 to
the Registration Statement.
(15) Agency Agreement between the Registrant (on behalf of Scudder 21st
Century Growth Fund) and Kemper Service Company, dated May 1,
2000, is incorporated by reference to Post-Effective Amendment No.
71 to the Registration Statement.
<PAGE>
(16) Fund Accounting Agreement between Scudder 21st Century Growth Fund
and Scudder Fund Accounting Corporation, dated May 1, 2000, is
incorporated by reference to Post-Effective Amendment No. 71 to
the Registration Statement.
(17) Form of Administrative Services Agreement (and Fee Schedule
thereto) between the Registrant, on behalf of Scudder 21st Century
Growth Fund, Scudder Development Fund, Scudder Health Care Fund,
Scudder Small Company Value Fund and Scudder Technology Fund,
Inc., and Scudder Kemper Investments, Inc., dated October 2, 2000,
is incorporated by reference to Post-Effective Amendment No. 72 to
the Registration Statement.
(i) Legal Opinion and Consent of Counsel, filed herein.
(j) Consent of Independent Auditors, filed herein.
(k) Inapplicable.
(l) Inapplicable.
(m) Rule 12b-1 Plan for Class B and Class C Shares of Scudder 21st
Century Growth Fund, dated May 1, 2000, is incorporated by
reference to Post-Effective Amendment No. 71 to the Registration
Statement.
(n) Mutual Funds Multi-Distribution System Plan Pursuant to Rule 18f-3
is incorporated by reference to Post-Effective Amendment No. 70 to
the Registration Statement.
(1) Amended Plan With Respect to Scudder 21st Century Growth Fund
Pursuant to Rule 18f-3, dated March 14, 2000, is incorporated by
reference to Post-Effective Amendment No. 72 to the Registration
Statement.
(2) Plan With Respect to Scudder Health Care Fund Pursuant to Rule
18f-3, dated March 14, 2000, is incorporated by reference to
Post-Effective Amendment No. 72 to the Registration Statement.
(3) Plan With Respect to Scudder Small Company Value Fund Pursuant to
Rule 18f-3, dated March 14, 2000, is incorporated by reference to
Post-Effective Amendment No. 72 to the Registration Statement.
(4) Amended and Restated Plan With Respect to Scudder Technology Fund
Pursuant to Rule 18f-3, dated May 8, 2000, is incorporated by
reference to Post-Effective Amendment No. 72 to the Registration
Statement.
(p) Code of Ethics of Scudder Securities Trust is incorporated by
reference to Post-Effective Amendment No. 71 to the Registration
Statement.
<PAGE>
(1) Code of Ethics of Scudder Kemper Investments, Inc. and certain
of its subsidiaries including Kemper Distributors, Inc. and
Scudder Investor Services, Inc., incorporated by reference to
Post-Effective Amendment No. 72 to the Registration Statement.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Registrant
-------- -------------------------------------------------------------
None
Item 25. Indemnification
-------- ---------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV, Sections 4.1 - 4.3 of the Registrant's Declaration
of Trust provide as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
Etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all such Persons shall look solely to the Trust Property
for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
<PAGE>
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or other,
including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided
hereunder to a Trustee or officer:
(i) against any liability to the Trust, a Series
thereof, or the Shareholders by reason of a final adjudication
by a court or other body before which a proceeding was brought
that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Trust;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as provided in
paragraph (b)(i) or (b)(ii) resulting in a payment by a
Trustee or officer, unless there has been a determination that
such Trustee or officer did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office:
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available
facts (as opposed to a full trial-type inquiry) by
(x) vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust,
shall be severable, shall not affect any other rights
to which any Trustee or officer may now or hereafter
be entitled, shall continue as to a person who has
ceased to be such Trustee or officer and shall insure
to the benefit of the heirs, executors,
administrators and assigns of such a person. Nothing
contained herein shall affect any rights to
indemnification to which personnel of the Trust other
than Trustees and officers may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense
to any claim, action, suit or proceeding of the
character described in paragraph (a) of this Section
4.3 may be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by
or on behalf of the recipient to repay such amount if
it is
<PAGE>
ultimately determined that he is not entitled to
indemnification under this Section 4.3, provided that
either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an "Interested Person" of the
Trust (including anyone who has been exempted from being an
"Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or
proceeding.
Item 26. Business or Other Connections of Investment Adviser
-------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has
stockholders and employees who are
denominated officers but do not as such have
corporation-wide responsibilities. Such
persons are not considered officers for the
purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Chairman of the Board, Scudder, Stevens & Clark (Luxembourg) S.A.#
Director, Scudder Investments (UK) Ltd. ooo
Chairman of the Board, Scudder Investments Asia, Ltd. @
Chairman of the Board, Scudder Investments Japan, Inc.&
Senior Vice President, Scudder Investor Services, Inc.**
Director, Scudder Trust (Cayman) Ltd. xxx
Director, Scudder, Stevens & Clark Australia @@
Director, Korea Bond Fund Management Co., Ltd.+
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Nick Bratt Director and Vice President, Scudder Kemper Investments, Inc.**
Vice President, Scudder MAXXUM Company***
Vice President, Scudder, Stevens & Clark Corporation**
Vice President, Scudder, Stevens & Clark Overseas Corporation oo
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
<PAGE>
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
Director, Scudder Investments (UK) Ltd.ooo
Director, Scudder Investments Japan, Inc.&
Director, Scudder Kemper Holdings (UK) Ltd. ooo
President and Director, Zurich Investment Management, Inc. xx
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
ooo 1 South Place 5th floor, London EC2M 2ZS England
@ One Exchange Square 29th Floor, Hong Kong
& Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku,
Tokyo 105-0001
@@ Level 3, 5 Blue Street North Sydney, NSW 2060
Item 27. Principal Underwriters
-------- ----------------------
(a) Scudder Investor Services, Inc. and Kemper
Distributors Inc., act as principal underwriters of the
Registrant's shares and also act as principal underwriters for
other funds managed by Scudder Kemper Investments, Inc.
(b) The Underwriters have employees who are denominated officers of an
operational area. Such persons do not have corporation-wide responsibilities and
are not considered officers for the purpose of this Item 27.
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
------------------ ------------------------------- -----------------------
<PAGE>
<S> <C> <C> <C>
Lynn S. Birdsong Senior Vice President President
345 Park Avenue
New York, NY 10154
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President Assistant Secretary
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President Vice President
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
James J. McGovern Chief Financial Officer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Trustee, Vice President &
345 Park Avenue Legal Officer and Assistant Clerk Assistant Secretary
New York, NY 10154
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
<PAGE>
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
----- ------------------------- -----------------------
James L. Greenawalt President None
Thomas W. Littauer Director, Chief Executive Officer and Vice President
Vice Chairman
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer and Vice President
James J. McGovern Chief Financial Officer and Treasurer None
Linda J. Wondrack Vice President and Chief Compliance Vice President
Officer
Paula Gaccione Vice President None
Michael E. Harrington Managing Director None
Robert A. Rudell Vice President None
William M. Thomas Managing Director None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Paul J. Elmlinger Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director, Chairman President
Stephen R. Beckwith Director None
Herbert A. Christiansen Vice President None
Michael Curran Managing Director None
Robert Froelich Managing Director None
C. Perry Moore Managing Director None
Lorie O'Malley Managing Director None
<PAGE>
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
----- ------------------------- -----------------------
David Swanson Managing Director None
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriters Commissions And Repurchases Commissions Compensation
------------ ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
Kemper Distributors, Inc. None None None None
</TABLE>
Item 28. Location of Accounts and Records.
-------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments Inc., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
custodian are maintained by State Street Bank and Trust
Company, Heritage Drive, North Quincy, Massachusetts. Records
relating to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 29. Management Services.
-------- --------------------
Inapplicable.
Item 30. Undertakings.
-------- -------------
Inapplicable.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and State of
Massachusetts, on the 26th day of September, 2000.
SCUDDER SECURITIES TRUST
By: /s/ Linda C. Coughlin
--------------------------------
Linda C. Coughlin
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 26th day of September 2000
on behalf of the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John R. Hebble
----------------------------------------------
John R. Hebble Treasurer September 26, 2000
/s/ Henry J. Becton
----------------------------------------------
Henry J. Becton* Trustee September 26, 2000
/s/ Dawn-Marie Driscoll
----------------------------------------------
Dawn-Marie Driscoll* Trustee September 26, 2000
/s/ Edgar R. Fiedler
----------------------------------------------
Edgar R. Fiedler* Trustee September 26, 2000
/s/ Keith Fox
----------------------------------------------
Keith Fox* Trustee September 26, 2000
/s/ Joan E. Spero
----------------------------------------------
Joan E. Spero* Trustee September 26, 2000
/s/ Jean Gleason Stromberg
----------------------------------------------
Jean Gleason Stromberg* Trustee September 26, 2000
/s/ Jean C. Tempel
----------------------------------------------
Jean C. Tempel* Trustee September 26, 2000
/s/ Steven Zaleznick
----------------------------------------------
Steven Zaleznick* Trustee September 26, 2000
</TABLE>
<PAGE>
*By: /s/John Millette
-------------------------------------
John Millette** Secretary
**Attorney-in-fact pursuant to powers of
attorney contained in and incorporated by
reference to Post-Effective Amendment No.
62 to the Registration Statement, filed
on August 2, 1999; pursuant to power of
attorney contained in Post-Effective
Amendment No. 71, filed on May 1, 2000;
pursuant to powers of attorney contained
in Post-Effective Amendment No. 72, filed
on August 1, 2000.
2
<PAGE>
File No. 2-36238
File No. 811-2021
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 74
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 58
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER SECURITIES TRUST
<PAGE>
SCUDDER SECURITIES TRUST
EXHIBIT INDEX
d(10)
d(11)
(i)
(j)
