VALUE FUND -- SCUDDER SHARES
A Series of Value Equity Trust
A Diversified Mutual Fund Series which Seeks Long-Term Growth of
Capital through Investment in Undervalued Equity Securities
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999
As revised December 1, 1999
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus for the Scudder Shares class of Value Fund,
dated February 1, 1999, 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 the Scudder Shares of Value Fund dated
September 30, 1998 is incorporated by reference into and is hereby deemed to be
part of this Statement of Additional Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
THE FUND'S INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objective and Policies of Value Fund......................................................1
Master/feeder structure......................................................................................2
Investments and Investment Techniques........................................................................2
Investment Restrictions.....................................................................................14
Other Investment Policies...................................................................................14
PURCHASES............................................................................................................15
Additional Information About Opening An Account.............................................................15
Minimum balances............................................................................................17
Additional Information About Making Subsequent Investments..................................................17
Additional Information About Making Subsequent Investments by QuickBuy......................................17
Checks......................................................................................................18
Wire Transfer of Federal Funds..............................................................................18
Share Price.................................................................................................18
Share Certificates..........................................................................................18
Other Information...........................................................................................19
EXCHANGES AND REDEMPTIONS............................................................................................19
Exchanges...................................................................................................19
Redemption by Telephone.....................................................................................20
Redemption By QuickSell.....................................................................................21
Redemption by Mail or Fax...................................................................................21
Redemption-in-Kind..........................................................................................21
Other Information...........................................................................................21
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................22
The No-Load Concept.........................................................................................22
Internet access.............................................................................................23
Dividends and Capital Gains Distribution Options............................................................24
Diversification.............................................................................................24
Scudder Investor Centers....................................................................................24
Reports to Shareholders.....................................................................................24
Transaction Summaries.......................................................................................25
THE SCUDDER FAMILY OF FUNDS..........................................................................................25
SPECIAL PLAN ACCOUNTS................................................................................................30
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations
and Self-Employed Individuals..........................................................................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............................................................31
Scudder 403(b) Plan.........................................................................................32
Automatic Withdrawal Plan...................................................................................32
Group or Salary Deduction Plan..............................................................................32
Automatic Investment Plan...................................................................................32
Uniform Transfers/Gifts to Minors Act.......................................................................33
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................33
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
PERFORMANCE INFORMATION..............................................................................................33
Average Annual Total Return.................................................................................33
Cumulative Total Return.....................................................................................34
Total Return................................................................................................35
Comparison of Fund Performance..............................................................................35
ORGANIZATION OF THE FUND.............................................................................................38
INVESTMENT ADVISER...................................................................................................40
Personal Investments by Employees of the Adviser............................................................43
TRUSTEES AND OFFICERS................................................................................................43
REMUNERATION.........................................................................................................46
Responsibilities of the Board -- Board and Committee Meetings...............................................46
Compensation of Officers and Trustees.......................................................................46
DISTRIBUTOR..........................................................................................................47
TAXES................................................................................................................48
PORTFOLIO TRANSACTIONS...............................................................................................52
Brokerage Commissions.......................................................................................52
Portfolio Turnover..........................................................................................53
NET ASSET VALUE......................................................................................................53
ADDITIONAL INFORMATION...............................................................................................54
Experts.....................................................................................................54
Shareholder Indemnification.................................................................................54
Other Information...........................................................................................54
FINANCIAL STATEMENTS.................................................................................................55
Value Fund..................................................................................................55
APPENDIX
</TABLE>
ii
<PAGE>
THE FUND'S INVESTMENT OBJECTIVES AND POLICIES
Scudder Value Fund (the "Fund") is a diversified series of Value Equity
Trust (the "Trust"), an open-end management company. Value Fund offers the
following classes of shares: Scudder Shares (the "Scudder Shares" or "Shares")
and Value Fund Class A, B and C shares (the "Kemper Shares"). Only the Scudder
Shares of Value Fund are offered herein.
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 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 the Fund, but, to the extent employed, could from time to time
have a material impact on the Fund's performance.
General Investment Objective and Policies of Value Fund
Value Fund seeks to provide long-term growth of capital through
investment in undervalued equity securities. This objective is not fundamental
and may be changed by the Trustees without a shareholder vote. Also, unless
otherwise stated, the policies of the Fund are not fundamental and may be
changed by the Trustees without a shareholder vote. If there is a change in
investment objective, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs. There can be no assurance that the Fund's objective will be met. The Fund
invests primarily in the stock of larger, established U.S. companies that the
Fund's portfolio management team believes are undervalued in the marketplace.
Stocks trade at a discount for many reasons. Typically, these
companies, or their industries, have fallen out of favor with investors because
of such things as earnings disappointments, negative industry or economic
events, or investor skepticism. As a result, their stock prices may not
accurately reflect their long-term business potential. Accordingly, the prices
of these stocks may rise as business fundamentals improve or as market
conditions change. For example, stock prices are often affected beneficially
when a company's earnings exceed general expectations or when investors begin to
appreciate the full extent of a company's business potential.
The Fund invests at least 80% of its assets in equity securities
consisting of common stocks, preferred stocks, securities convertible into
common stocks, rights and warrants. The Fund changes its portfolio securities
for long-term investment considerations and not for trading purposes.
The Fund may be appropriate for investors who seek a core holding to
establish the foundation of a value-oriented portfolio or a value fund to
diversify an investor's existing growth-equity portfolio.
The Fund invests primarily in common stocks of larger, established
domestic companies with market capitalizations of at least $1 billion. The
Adviser uses in-depth fundamental and quantitative research to identify
companies that are currently undervalued in relation to future business
prospects.
The Fund's portfolio management team uses a proprietary computer model
to rank the 1000 stocks that comprise the Russell 1000 Index -- a widely used
large stock universe -- based on their relative valuations. A company's
valuation is measured by comparing its stock price to its business fundamentals,
such as sales, earnings or book value. The Fund's portfolio management team
focuses on the stocks with the lowest valuations, which are further analyzed and
rated using fundamental research, such as an examination of a company's
historical earnings patterns, sales growth and profit margins in order to assess
the likelihood of a rebound in the stock price if a company's business
fundamentals improve or market conditions change.
In an effort to manage the risk exposure of the Fund, the portfolio
management team then assesses the expected volatility of the Fund and the
potential impact the most promising of the stocks may have on the Fund's risk
level. Based
2
<PAGE>
on this information, the Fund's portfolio management team selects approximately
60-90 stocks that the portfolio management team believes offer the greatest
potential for attractive long-term gains.
The Fund typically sells a stock when its price is no longer considered
to be a value, it is less likely to benefit from the current market or economic
environment, it experiences deteriorating fundamentals or its price performance
falls short of the portfolio management team's expectations.
The Fund may invest up to 20% of its assets in investment-grade debt
obligations, including zero coupon securities and commercial paper and may enter
into repurchase agreements and reverse repurchase agreements. In addition, the
Fund may engage in strategic transactions and derivatives and invest in illiquid
securities. 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 Adviser.
The Fund may also purchase debt securities which are rated below
investment-grade (that is, rated below Baa by Moody's or below BBB by S&P) and
unrated securities of equivalent quality as determined by the Adviser, which
usually entail greater risk (including the possibility of default or bankruptcy
of the issues 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 assets in such securities ("high yield/high risk securities" commonly
referred to as "junk bonds") but will invest no more than 10% of its assets in
securities rated B or lower by Moody's or S&P and may not invest more than 5% of
its net assets in securities which are rated C by Moody's or D by S&P or of
equivalent quality as determined by the Adviser. Securities rated C or D may be
in default with respect to payment of principal or interest. Also, longer
maturity bonds tend to fluctuate more in price as interest rates change than do
short-term bonds, providing both opportunity and risk. (See "High Yield, High
Risk Securities.")
The Fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered speculative by the Commodities Futures
Trading Commission.
The Fund may borrow money for temporary, emergency or other purposes,
including investment leverage purposes, as determined by the Trustees.
The Fund cannot guarantee a gain or eliminate the risk of loss. 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 is no assurance that the
Fund's objective will be achieved.
Master/feeder structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Investments and Investment Techniques
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
2
<PAGE>
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 Adviser believes that it is appropriate to do so in
order to achieve the Fund's objective of long-term capital appreciation, the
Fund may invest in debt securities, including bonds of private issuers.
Portfolio debt investments will be selected on the basis of, among other things,
credit quality, and the fundamental outlooks for currency, economic and interest
rate trends, taking into account the ability to hedge a degree of currency or
local bond price risk. The Fund may purchase "investment-grade" bonds, rated
Aaa, Aa, A or Baa by Moody's 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. 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
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."
3
<PAGE>
Convertible Securities. The Fund may each invest in convertible securities, that
is, bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features. The Fund
will limit its purchases of convertible securities to debt securities
convertible into common stocks.
The convertible securities in which the Fund may invest are either
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
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 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.
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", 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
which are "not readily marketable" 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 illiquid investments. Disposing of illiquid investments may
involve time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable price. The
Fund may have to bear the extra expense of registering such securities for
resale and the risk of substantial delay in effecting such registration. Also
market quotations are less readily available. The judgment of the Adviser may at
times play a greater role in valuing these securities than in the case of
unrestricted securities.
4
<PAGE>
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the Securities Act of 1933. The Fund may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 when selling restricted
securities to the public, and in such event the Fund may be liable to purchasers
of such securities if the registration statement prepared by the issuer, or the
prospectus forming a part of it, is materially inaccurate or misleading.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the Investment Company Act of 1940 (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
the Fund 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.
Repurchase Agreements. The Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System or 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
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's or by 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
Fund acquires a debt security ("Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price. Obligations
subject to a repurchase agreement are held in a segregated account and the value
of such Obligations 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 subject to the repurchase
agreement. Obligations will be held by the Fund's 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 risk 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 involved 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 impose on the seller a contractual obligation to deliver additional
securities.
Warrants. The Fund may invest in warrants up to 5% of the value of its
respective net 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 was not exercised by the date of its
expiration, the Fund would lose the entire purchase price of the warrant.
5
<PAGE>
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 Adviser.
Such transactions may increase fluctuations in the market value of the Fund's
assets and may be viewed as a form of leverage.
Zero Coupon Securities. The 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.")
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
6
<PAGE>
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.
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 of the Fund's portfolio, or to
enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of 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
7
<PAGE>
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 or return enhancement purposes and not to create leveraged exposure
in the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the 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.
8
<PAGE>
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 of 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 Securities and Exchange Commission ("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 Federal limits for investing assets in them.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
on securities, indices, currencies and futures
9
<PAGE>
contracts other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, 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 and return enhancement purposes.
Typically, maintaining a futures contract or selling an option thereon requires
the Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures position just as it would for any position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest
10
<PAGE>
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 be
used 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.
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, government exchange controls, blockages, and manipulations
or exchange restrictions imposed by governments can negatively affect purchases
and sales of currency and related instruments. 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
11
<PAGE>
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 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. 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 another NRSRO or is determined
to be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent that obligations of the Fund 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
12
<PAGE>
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, in connection with such
options, 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, if the Fund held a futures or forward contract
instead of segregating cash or liquid assets, 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.
Euro Conversion
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and for the operation of the Fund. The
Euro was introduced on January 1, 1999 by eleven member countries of the
European Economic and Monetary Union (EMU). The introduction of the Euro
requires the redenomination of European debt and equity securities over a period
of time, which may result in various accounting differences and/or tax
treatments. Additional questions are raised by the fact that certain other
European Community members, including the United Kingdom, did not officially
implement the Euro on January 1, 1999.
The Adviser is actively working to address Euro-related issues and
understands that other key service providers are taking similar steps. At this
time, however, no one knows precisely what the degree of impact will be. To the
extent that the market impact or effect on fund holdings is negative, it could
hurt the Fund's performance.
13
<PAGE>
Investment Restrictions
Unless specified to the contrary, the following restrictions are
fundamental policies of the Fund and may not be changed without the approval of
a majority of the outstanding voting securities of the Fund which, under the
1940 Act and the rules thereunder and as used in this Statement of Additional
Information, means the lesser of (1) 67% or more of the shares of the Fund
present at a meeting if the holders of more than 50% of the outstanding shares
of the Fund are present in person or represented by proxy; or (2) more than 50%
of the outstanding shares of the Fund.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" above
is adhered to at the time an investment is made, later change in percentage
resulting from changes in the value or the total cost of the Fund's assets will
not be considered a violation of the restriction.
The Fund has elected to be classified as a diversified series of an
open-end investment company.
As a matter of fundamental policy, the Fund may 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 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.
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:
(a) 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;
(b) enter into either reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(c) 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
14
<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;
(d) 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;
(e) 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;
(f) 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
(g) lend portfolio securities in an amount greater than 5% of its
total assets.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" above
is adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of the Fund's assets will
not be considered a violation of the restriction.
In addition, other nonfundamental policies may be established from time
to time by the Trust's Trustees and would not require the approval of
shareholders.
PURCHASES
(See "Transaction Information" and "Purchases" in the
Fund's respective prospectus.)
The Scudder Shares of Value Fund requires a $2,500 minimum initial
investment and a minimum subsequent investment of $100. The minimum investment
requirements may be waived or lowered for investments effected through banks and
other institutions that have entered into special arrangements with the Fund and
for investments effected on a group basis by certain other entities and their
employees, such as pursuant to a payroll deduction plan and for investments made
in an Individual Retirement Account offered by the Fund. Investment minimums may
also be waived for Trustees and officers of the Fund. Scudder Investor Services,
Inc., Kemper Distributors, Inc. and Scudder Financial Intermediary Services
Group each reserve the right to reject any purchase order. All funds will be
invested in full and fractional shares.
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, 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. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the tax 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.
15
<PAGE>
The minimum initial purchase amount may be less than $2,500 under
certain special plan accounts.
The name Scudder Value Fund as used herein and in its prospectus also
means Value Fund, which is a series of Value Equity Trust. All shares of Value
Fund purchased before April 16, 1998 are considered Scudder Shares of Value
Fund. Investors in Value Fund as of April 15, 1998 can continue to purchase
Scudder Shares. Scudder Shares are not available to new investors with the
following exceptions:
1. Existing shareholders of any fund or class of the Fund in the
Scudder Family of Funds as of April 15, 1998, and their
immediate family members residing at the same address, may
purchase Scudder Shares.
2. Shareholders, who owned shares of Value Fund through any
broker-dealer or service agent omnibus account as of April 15,
1998, may continue to purchase Scudder Shares. Existing
shareholders of any fund in the Scudder Family of Funds
through certain broker-dealers or service agent omnibus
accounts as of April 15, 1998 may purchase Scudder Shares when
made available from that broker-dealer or service agent. Call
the broker-dealer or service agent for more information.
3. Retirement, employee stock, bonus, pension or profit sharing
plans offering the Scudder Family of Funds as of April 15,
1998, may add new participants and accounts. Scudder Shares
are also available to prospective plan sponsors, as well as to
existing plans, which had not previously offered Value Fund as
an investment option.
4. An employee who owns Scudder Shares through a retirement,
employee stock, bonus, pension or profit sharing plan as of
April 15, 1998, may, at a later date, open a new individual
account to purchase Scudder Shares.
5. Any employee, who owns Scudder Shares through a retirement,
employee stock, bonus, pension or profit sharing plan may
complete a direct rollover to an IRA holding Scudder Shares.
6. Scudder Shares are available to the Scudder Kemper
Investments, Inc. retirement plans.
7. Officers, Fund Trustees and Directors, and full-time employees
of Scudder Kemper Investments, Inc. and its subsidiaries, and
their family members may purchase Scudder Shares.
8. Scudder Shares are available to any accounts managed by
Scudder Kemper Investments, Inc., any advisory products
offered by Scudder Kemper Investments, Inc., or Scudder
Investor Services, Inc., and to the portfolios of Scudder
Pathway Series.
9. Registered investment advisors ("RIAs") and certified
financial planners ("CFPs") with clients invested in the
Scudder Family of Funds as of April 15, 1998 may purchase
additional Scudder Shares or open new individual client or
omnibus accounts purchasing Scudder Shares. RIAs and CFPs who
do not have clients invested in the Funds as of April 15, 1998
may enter into a written agreement with Scudder Investor
Services in order to purchase Scudder Shares. Call Scudder
Financial Intermediary Services at 1-800-854-8525 for more
information.
10. Broker-dealers, RIAs and CFPs who have clients participating
in comprehensive fee programs may enter into an agreement with
Scudder Investor Services in order to purchase Scudder Shares.
Call Scudder Financial Intermediary Services at 1-800-854-8525
for more information.
11. Institutional alliances trading through NSCC/FundServ may
purchase Scudder Shares. Call Scudder Financial Intermediary
Services at 1-800-854-8525 for more information.
12. Partnership shareholders invested in Value Fund as of April
15, 1998, through an account registered in the name of a
partnership may open new accounts to purchase Scudder Shares,
whether or not they are listed on the account registration.
Corporate shareholders invested in Value Fund as of April 15,
1998 may open new accounts using the same registration, or if
the corporation is reorganized, the new companies may purchase
Scudder Shares.
16
<PAGE>
Scudder Investor Services may, at its discretion, require appropriate
documentation that an investor is indeed eligible to purchase Scudder Shares.
For more information, please call Scudder Investor Relations at 1-800-225-2470.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the fee to be paid
to the Fund) for any non-fiduciary/non-custodial account
without an automatic investment plan (AIP) in place and a
balance of less than $2,500; and
o redeem all shares in the Fund account 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 respective 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
17
<PAGE>
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 Scudder Service Corporation, the Transfer Agent
("Service Corporation" or "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 that 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 for 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Checks
A certified check is not necessary, but checks are accepted subject to
collection at full face value in U.S. funds and must be drawn on or payable
through, an U.S. bank.
If shares are purchased by a check, which proves to be uncollectible,
the Trust reserves the right to cancel the purchase immediately and the
purchaser will be responsible for any loss incurred by the Fund 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 (normally 4 p.m. eastern time) 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 4 p.m.
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 for Value Fund next computed after receipt of the application in good
order. Net asset value normally will be computed as of the close of regular
trading on each day during which the Exchange is open for trading. Orders
received after the close of regular trading on the Exchange will 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 the Fund, to forward the purchase order to the
Scudder Shares' Transfer Agent in Boston by the close of regular trading on the
Exchange.
Share Certificates
Due to the desire of Trust management to afford ease of redemption,
certificates will not be issued to indicate ownership in the Fund. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
18
<PAGE>
Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Scudder Share's net asset value
next computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
The Tax Identification Number section of the Fund's 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 investors, certification of exempt status) may be
returned to the investor if a certified tax identification number and certain
other required certificates are not supplied.
The Trust may issue shares of the Fund at net asset value in connection
with any merger or consolidation with, or acquisition of the assets of, any
investment company or personal holding company, subject to the requirements of
the 1940 Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and Redemptions" and "Transaction Information"
in the Fund's respective prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund or from
the Scudder Shares and a purchase into another Scudder fund or Scudder Shares
class. The purchase side of the exchange either may be an additional investment
into an existing account or may involve opening a new account in the other fund.
When an exchange involves a new account, the new account will be established
with the same registration, tax identification number, address, telephone
redemption option, "Scudder Automated Information Line" (SAIL) transaction
authorization and dividend option as the existing account. Other features will
not carry over automatically to the new account. Exchanges to a new fund account
must be for a minimum of $2,500. When an exchange represents an additional
investment into an existing account, the account receiving the exchange proceeds
must have identical registration, address, and account options/features as the
account of origin. Exchanges into an existing account must be for $100 or more.
If the account receiving the exchange proceeds is to be different in any
respect, the exchange request must be in writing and must contain an original
signature guarantee as described under "Transaction Information -- Signature
guarantees" in the Fund's prospectuses.
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 phone 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.")
19
<PAGE>
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Trust employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Trust does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trust will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trust 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 1-800-225-5163.
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 request to have the proceeds mailed
or wired to their pre-designated bank account. In order to request redemptions
by telephone, shareholders must have completed and returned to the Transfer
Agent the application, including the designation of a bank account to which the
redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit-Sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption 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.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
20
<PAGE>
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of the Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net asset
value per share calculated at the close of trading on the day of your call.
QuickSell requests received after the close of regular trading on the Exchange
will begin their processing and be redeemed at the net asset value calculated
the following business day. QuickSell transactions are not available for Scudder
IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders that 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 Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by Mail or Fax
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not limited 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 certificated shares or shares
registered in other than individual names contact the Transfer Agent prior to
redemptions to ensure that all necessary documents accompany the request. When
shares are held in the name of a corporation, trust, fiduciary agent, attorney
or partnership, the Transfer Agent requires, in addition to the stock power,
certified evidence of authority to sign. These procedures are for the protection
of shareholders and should be followed to ensure prompt payment. Redemption
requests must not be conditional as to date or price of the redemption. Proceeds
of a redemption will be sent within five business days after receipt by the
Transfer Agent of a request for redemption that complies with the above
requirements. Delays of more than seven days of payment for shares tendered for
repurchase or redemption may result but only until the purchase check has
cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information call 1-800-225-5163.
Redemption-in-Kind
The Trust reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. The
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of the
period.
Other Information
Clients, officers or employees of the Adviser or of an affiliated
organization, and members of such clients', officers' or employees' immediate
families, banks and members of the NASD may direct redemption requests to the
Trust through Scudder Investor Services, Inc. at Two International Place,
Boston, Massachusetts 02110-4103 by letter, fax, TWX, or telephone. A two-part
confirmation will be mailed out promptly after receipt of the request. A written
21
<PAGE>
request in good order as described above and any certificates with a proper
original signature guarantee(s), as described in the Funds' prospectuses under
"Transaction information -- Signature guarantees", should be sent with a copy of
the invoice to Scudder Service Corporation, Confirmed Processing Department, Two
International Place, Boston, Massachusetts 02110-4103. Failure to deliver shares
or required documents (see above) by the settlement date may result in
cancellation of the trade and the shareholder will be responsible for any loss
incurred by the Fund or the principal underwriter by reason of such
cancellation. The Trust shall have the authority, as agent of the shareholder,
to redeem shares in the account to reimburse the Fund or the principal
underwriter for the loss incurred. Net losses on such transactions, which are
not recovered from the shareholder, will be absorbed by the principal
underwriter. Any net gains so resulting will accrue to the Fund. For this group,
repurchases will be carried out at the net asset value next computed after such
repurchase requests have been received. The arrangements described in this
paragraph for repurchasing shares are discretionary and may be discontinued at
any time.
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder 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.
Redemption 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 Trust's Declaration of Trust provides that the determination of net
asset value may be suspended and a shareholder's right to redeem shares and to
receive payments 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, (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 Trust may, by
order, permit such a suspension for the protection of the Fund's shareholders;
provided that applicable rules and regulations of the SEC (or any succeeding
governmental authority) shall govern as to whether the conditions prescribed in
(b), (c) or (d) exist.
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "Investment Products and Services" in the Fund's respective prospectus)
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 the
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 the Fund's average annual net assets, and the maximum
charge for a service fee is 0.25% of the Fund's average annual net assets.
22
<PAGE>
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 the Fund's average annual net assets.
Scudder pioneered the no-load concept when it created the nation's
first no-load fund in 1928, and later developed the nation's first family of
no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder Family of Funds pure no-load fund over investing
the same amount in a load fund that collects an 8.50% front-end load, a load
fund that collects only a 0.75% 12b-1 and/or service fee, and a no-load fund
charging only a 0.25% 12b-1 and/or service fee. The hypothetical figures in the
chart show the value of an account assuming a constant 10% rate of return over
the time periods indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Scudder No-Load Fund with
Years Pure No-Load(TM)Fund 8.50% Load Fund Load Fund with 0.75% 0.25% 12b-1
12b-1 Fee Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10 $25,937 $23,733 $24,222 $25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Investors are encouraged to review the fee tables on page 5 of the
Fund's respective prospectus for more specific information about the rates at
which management fees and other expenses are assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both the Adviser and Lipper Analytical Services, Inc. is
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
The Adviser has communicated with shareholders and other interested
parties on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- 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 that have set up a Personal Page on the Adviser'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.
23
<PAGE>
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of Scudder Shares. A change of instructions for the
method of payment must be received by the Transfer Agent at least five days
prior to a dividend record date. Shareholders also may change their dividend
option either by calling 1-800-225-5163 or by sending written instructions to
the Transfer Agent. Please include your account number with your written
request. 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 Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Diversification
Your investment in the Fund represents an interest in a large,
diversified portfolio of carefully selected securities. Diversification may
protect you against the possible risks associated with concentrating in fewer
securities.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Fund's Prospectus. The Centers are designed to provide
individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "Purchases" or "Exchanges and Redemptions" in the prospectuses.
Reports to Shareholders
The Fund issues to its 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. Each distribution
will be accompanied by a brief explanation of the source of the distribution.
24
<PAGE>
Transaction Summaries
Annual summaries of all transactions in the Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment Products and Services" in the Fund's respective prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
- ----------------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
25
<PAGE>
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
- -----------------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
26
<PAGE>
Scudder Corporate Bond Fund seeks a high level of current income
through investment primarily in investment-grade corporate debt
securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
27
<PAGE>
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
- ----------------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
28
<PAGE>
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
29
<PAGE>
SPECIAL PLAN ACCOUNTS
(See "Transaction Information," "Purchases," and "Exchanges and
Redemptions" in the Fund's respective prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRA's 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
Scudder Shares of Value 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
Scudder Shares of Value 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
Scudder Shares of Value Fund may be purchased as the underlying
investment for an Individual Retirement Account that 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
30
<PAGE>
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>
Scudder Roth IRA: Individual Retirement Account
Scudder Shares of Value 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.
31
<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
Scudder Shares of Value Fund may also be purchased as the underlying
investment for tax sheltered annuity plans under the provisions of Section
403(b)(7) of the Internal Revenue Code. In general, employees of tax-exempt
organizations described in Section 501(c)(3) of the Internal Revenue Code (such
as hospitals, churches, religious, scientific, or literary organizations and
educational institutions) or a public school system are eligible to participate
in a 403(b) plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Redeeming shares -- Signature
guarantees" in the Fund's respective Prospectus. Any such requests must be
received by the Fund's transfer agent ten days prior to the date of the first
automatic withdrawal. An Automatic Withdrawal Plan may be terminated at any time
by the shareholder, the Trust or its agent on written notice, and will be
terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor, which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the
32
<PAGE>
same dollar amount each period, when shares are priced low the investor will
purchase more shares than when the share price is higher. Over a period of time
this investment approach may allow the investor to reduce the average price of
the shares purchased. However, this investment approach does not assure a profit
or protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "DISTRIBUTIONS -- Dividends and Capital Gains Distributions and
Taxes" in the Fund's respective prospectus.)
The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income, which includes any excess of net
realized short-term capital gains over net realized long-term capital losses.
The Fund may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses. If
it appears to be in the best interest of the Fund and its shareholders, the Fund
may retain all or part of such gain for reinvestment after paying the related
federal income taxes which shareholders may then claim as a credit on their
returns. (See "TAXES.") If the Fund does not distribute the amount of capital
gain and/or ordinary income required to be distributed by an excise tax
provision of the Code, the Fund may be subject to that excise tax. (See
"TAXES.") In certain circumstances, the Fund may determine that it is in the
interest of shareholders to distribute less than the required amount.
The 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. 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 will be sent.
PERFORMANCE INFORMATION
(See "FUND SUMMARY -- Past Performance" in the Fund's Prospectus)
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. Effective April 16, 1998, Value Fund was divided into four classes of
shares. Shares of Value Fund outstanding on that date were redesignated Scudder
Shares of the Fund. The performance information set forth below for periods
prior to April 16, 1998 reflects the performance of Value Fund prior to such
redesignation. Performance information for Value Fund for periods subsequent to
April 16, 1998 reflects the performance of the Scudder Shares of Value Fund.
These performance figures are calculated separately for each class of shares of
Value Fund 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 (or such shorter
periods as may be applicable dating from the commencement of the Fund's
operations), 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
33
<PAGE>
reinvested in Fund shares. Average annual total return is calculated by
computing the average annual compound rates of return of a hypothetical
investment over such periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial investment of $10,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $10,000 investment made at the
beginning of the applicable period.
<TABLE>
<CAPTION>
Average Annual Total Return for the periods ended September 30, 1998
One year Five years Life of Fund (1)
-------- ---------- ----------------
<S> <C> <C> <C>
Value Fund*@ -2.08% 16.08% 16.01%
</TABLE>
(1) For the period beginning December 31, 1992 (commencement of
operations).
* The Adviser maintained Fund expenses for the period December
31, 1992 through September 30, 1993, for the three fiscal
years ended September 30, 1996 and until July 31, 1997 of the
fiscal year ended September 30, 1997. The Average Annual Total
Return for one year, five years and for the life of the Fund,
had the Adviser not maintained Fund expenses, would have been
lower.
@ On April 16, 1998, Value Fund adopted its present name. Prior
to that date the Fund comprised a single class of shares and
was known as Scudder Value Fund. Performance information
provided is for the Fund's Scudder Shares class.
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 Fund's Scudder Share class will vary based on changes in
market conditions and the level of the Fund's Scudder Share class' expenses.
In connection with communicating its average annual total return to
current or prospective shareholders, the Fund 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 $10,000 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 computing
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 $10,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $10,000 investment made at the
beginning of the applicable period.
34
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return for the periods ended September 30, 1998
One year Five years Life of Fund(1)
-------- ---------- ---------------
<S> <C> <C> <C>
Value Fund*@ -2.08% 110.72% 134.95%
</TABLE>
(1) For the period beginning December 31, 1992 (commencement of
operations).
* The Adviser maintained Fund expenses for the period December
31, 1992 through September 30, 1993 and for the three fiscal
years ended September 30, 1996 and until July 31, 1997 of the
fiscal year ended September 30, 1997. The Cumulative Total
Return for one year, five years and for the life of the Fund,
had the Adviser not maintained Fund expenses, would have been
lower.
@ On April 16, 1998, Value Fund adopted its present name. Prior
to that date the Fund comprised a single class of shares and
was known as Scudder Value Fund. Performance information
provided is for the Fund's Scudder Shares class.
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.
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 classes' performance data.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, S&P 500, the Nasdaq OTC Composite
Index, the Nasdaq Industrials Index, the Russell 2000 Index, the Wilshire Real
Estate Securities Index and statistics published by the Small Business
Administration.
From time to time, in advertising and marketing literature, 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 such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of the
Fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Trust, 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.
35
<PAGE>
The Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, the Fund's overall investment objective, the average
portfolio maturity, credit quality of the securities held, and interest rate
movements. For equity funds, factors include the Fund's overall investment
objective, the types of equity securities held and the financial position of the
issuers of the securities. The risks/returns associated with an investment in
international bond or equity funds also will depend upon currency exchange rate
fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Fund, including reprints of, or selections from, editorials or
articles about this Fund. Sources for Fund performance information and articles
about the Fund include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
36
<PAGE>
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
which includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
37
<PAGE>
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUND
(See "Investment Adviser" in the Fund's respective prospectus.)
The Fund is a separate 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. All
shares of Value Fund have been subdivided into four classes: Scudder Shares and
Class A, B and C shares. The Trustees have authorized the division of the Value
Fund into share classes, permitting shares of different classes to be
distributed by different methods. Although shareholders of different classes of
a series have an interest in the same portfolio of assets, shareholders of
different classes may bear different expenses in connection with different
methods of distribution. 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 Fund's respective prospectus.
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
38
<PAGE>
voting rights on any matter submitted to shareholders in which the interests of
one class differ from the interest 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 registrations 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 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 the Fund represents an equal proportionate interest in
the 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
the 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 the 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 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.
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.
39
<PAGE>
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
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 involved will
indemnify the Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner provided in the
Declaration of Trust that 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
(See "Investment Adviser" in the Fund's respective prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc.,
Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway
Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder Tax Free
Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund, Scudder
Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil Fund, Inc.,
The Korea Fund, Inc. and The Japan Fund, Inc. Some of the foregoing companies or
trusts have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
40
<PAGE>
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
ongoing studies of the factors that affect the position of various industries,
companies and individual securities. In this work, the Adviser utilizes certain
reports and statistics from a wide variety of sources, including brokers and
dealers who may execute portfolio transactions for the Fund and other clients of
the Adviser, but conclusions are based primarily on investigations and critical
analyses by its own research specialists.
Certain investments may be appropriate for more than one Fund and also
for other clients advised by the Adviser. Investment decisions for the Fund and
other clients are made with a view to achieving their respective investment
objectives and after consideration of such factors as their current holdings,
availability of cash for investment and the size of their investments generally.
Frequently, a particular security may be bought or sold for only one client or
in different amounts and at different times for more than one but less than all
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In addition, purchases
or sales of the same security may be made for two or more clients on the same
date. 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 the most
favorable net results to the Fund.
The transaction between Scudder and Zurich resulted in the assignment
of the Fund's investment management agreements with Scudder, these agreements
were deemed to be automatically terminated at the consummation of the
transaction. In anticipation of the transaction, however, a new investment
management agreement between the Fund and the Adviser was approved by the
Trust's Trustees. At the special meetings of the Fund's shareholders held on
October 27, 1997, the shareholders also approved proposed the new investment
management agreement. The new investment management agreement (the "Agreement")
became effective as of December 31, 1997. On September 7, 1998, the businesses
of Zurich (including Zurich's 70% interest in the Adviser) and the financial
services businesses of B.A.T Industries p.c. ("B.A.T") were combined to form a
new global insurance and financial services company known as Zurich Financial
Services Group. By way of a dual holding company structure, former Zurich
shareholders initially owned approximately 57% of Zurich Financial Services
Group, with the balance initially owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with the Adviser were deemed to have been assigned and,
therefore, terminated. The Board approved a new investment management agreement
with the Adviser, which is substantially identical to the investment management
agreement dated December 31, 1997, except for the dates of execution and
termination and the addition of breakpoints in the fee structures of the Fund.
This agreement became effective on September 7, 1998 and was approved at a
special shareholder meeting held on December 17, 1998.
The Agreement dated September 7, 1998 was approved by the Trustees on
August 6, 1998 and amended on September 15, 1998. The Agreement will continue in
effect until September 30, 1999 and from year to year thereafter only if its
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreement or interested persons of the Adviser or the
Corporation, 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' notice and
automatically terminates in the event of its assignment.
Under the Agreement, the Adviser regularly provides the Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objective, policies and restrictions and determines which
securities shall be purchased for the portfolio of the Fund, which portfolio
securities shall be held or sold by the Fund,
41
<PAGE>
and what portion of the Fund's assets shall be held uninvested, subject always
to the provisions of the Declaration of Trust and By-Laws, of the 1940 Act and
the Code, and to the Fund's investment objective, policies and restrictions, and
subject, further, to such policies and instructions as the Trustees 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.
The Adviser renders significant administrative services (not otherwise
provided by third parties) necessary for the Fund's operations as an open-end
investment company including, but not limited to, preparing reports and notices
to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Fund (such as the Fund's transfer agent, pricing agents, custodian, accountants
and others); preparing and making filings with the SEC and other regulatory
agencies; assisting in the preparation and filing of the Fund's federal, state
and local tax returns; preparing and filing the Fund's federal excise tax
returns; assisting with investor and public relations matters; monitoring the
valuation of securities and the calculation of net asset value, monitoring the
registration of shares of the Fund under applicable federal and state securities
laws; maintaining the Fund's books and records to the extent not otherwise
maintained by a third party; assisting in establishing accounting policies of
the Fund; assisting in the resolution of accounting and legal issues;
establishing and monitoring the Fund's operating budget; processing the payment
of the Fund's bills; assisting the Fund in, and otherwise arranging for, the
payment of distributions and dividends and otherwise assisting the Fund in the
conduct of its business, subject to the direction and control of the Trustees.
The Adviser pays the compensation and expenses (except those for
attending Board and Committee meetings outside New York, New York or Boston,
Massachusetts) of all Trustees, officers and executive employees of the Trust
affiliated with the Adviser and makes available, without expense to the Fund,
the services of the Adviser's directors, officers, and employees as may duly be
elected officers, subject to their individual consent to serve and to any
limitations imposed by law, and provides the Trust's office space and facilities
and provides investment advisory, research and statistical facilities and all
clerical services relating to research, statistical and investment work.
For the Adviser's services, Value Fund pays the Adviser an annual fee
equal to 0.70 of 1% on the first $500 million of average daily net assets and
0.65 of 1% of such net assets in excess of $500 million, 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 voluntarily agreed to waive management fees or
reimburse the Fund to the extent necessary so that the total annualized expenses
of the Fund did not exceed 1.25% of the average daily net assets from December
31, 1997 until July 31, 1997. For the fiscal years ended September 30, 1996 and
1997, the Adviser did not impose a portion of its management fees amounting to
$43,951and $59,309, respectively, and the amounts imposed amounted to $508,822
and $1,073,855, respectively. The net investment advisory fee for the fiscal
year ended September 30, 1998 was $3,214,035, of which $338,473 was unpaid at
September 30, 1998.
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.
Under the Agreement the Fund is responsible for all of its other
expenses including 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 clerical expenses of issue, sale,
underwriting, distribution, redemption or repurchase of shares; the expenses of
and the fees for registering or qualifying securities for sale; fees and
expenses incurred in connection with membership in investment company
organizations; the fees and expenses of the 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 Trust 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 incurred in connection with litigation,
proceedings and claims and the legal obligation it may have to indemnify its
officers and Trustees with respect thereto. The Agreement expressly provides
that the Adviser shall not be required to pay a pricing agent of any Fund for
portfolio pricing services, if any.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
42
<PAGE>
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning the Agreement, Trustees who are not "interested persons" of
the Trust are represented by independent counsel at the 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 the 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 the Agreements.
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 were not
influenced by existing or potential custodial or other Fund relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Fund that may have different
distribution arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with
the Fund as principals in the purchase or sale of securities, except as
individual subscribers or holders of shares of the Fund.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Fund. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Position Principal Scudder Investor
Name and Address with Trust Occupation** Services, Inc.
- ---------------- ---------- ------------ --------------
<S> <C> <C> <C>
Daniel Pierce (64)*#+ President and Managing Director of Scudder Vice President and
Trustee Kemper Investments, Inc. Assistant Treasurer
Paul Bancroft III (68) Trustee Venture Capitalist and --
79 Pine Lane Consultant; Retired President,
Box 6639 Chief Executive Officer and
Snowmass Village, CO 81615 Director, Bessemer Securities
Corporation
43
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name and Address with Trust Occupation** Services, Inc.
- ---------------- ---------- ------------ --------------
Sheryle J. Bolton (52) Scientific Trustee Chief Executive Officer and --
Learning Corporation Director, Scientific Learning
1995 University Ave Corporation, Former President
Suite 400 and Chief Operating Officer,
San Francisco, CA 94704 Physicians Online, Inc.
(electronic transmission of
clinical information for
physicians (1994-1995); Member,
Senior Management Team,
Rockefeller & Co. (1990-1993)
William T. Burgin (55) Trustee General Partner, Bessemer --
83 Walnut Street Venture Partners; General
Wellesley, MA 02481-2101 Partner, Deer & Company;
Director, James River Corp.;
Director Galile Corp., Director
of various privately held
companies
Keith R. Fox (44) Trustee Private Equity Investor, Exeter --
Exeter Capital Management Capital Management Corporation
Corporation
10 East 53rd Street
New York, NY 10022
William H. Luers (69) Trustee President, The Metropolitan
The Metropolitan Museum of Art Museum of Art (1986 to present)
1000 Fifth Avenue
New York, NY 10028
Kathryn L. Quirk (45)*#++ Trustee, Vice Managing Director of Scudder Senior Vice President,
President and Kemper Investments, Inc. Chief Legal Officer and
Assistant Secretary Assistant Clerk
Joan E. Spero (54) Trustee President, The Doris Duke --
Doris Duke Charitable Foundation Charitable Foundation (1997 to
650 Fifth Avenue -- 19th Floor present), Undersecretary of
New York, NY 10019 State for Economic, Business and
Agricultural Affairs, (1993-1997)
Thomas J. Devine (71) Honorary Trustee Consultant --
450 Park Avenue
New York, NY 10022
44
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name and Address with Trust Occupation** Services, Inc.
- ---------------- ---------- ------------ --------------
Wilson Nolen (71) Honorary Trustee Consultant, June 1989 to
1120 Fifth Avenue present, Corporate Vice
New York, NY 10128-0144 President of Becton, Dickinson &
Company (manufacturer of medical
and scientific products),
from 1973 to June 1989
Robert G. Stone, Jr. (75) Honorary Trustee Chairman Emeritus and Director, --
405 Lexington Avenue Kirby Corporation (inland and
39th Floor offshore marine transportation
New York, NY 10174 and diesel repairs)
Donald E. Hall (46)@ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas W. Joseph (58)+ Vice President Senior Vice President of Scudder Vice President,
Kemper Investments, Inc. Treasurer and Assistant
Clerk
Ann M. McCreary( 48)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Kathleen T. Millard (37)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas F. McDonough (52)+ Vice President and Senior Vice President of Scudder Clerk
Secretary Kemper Investments, Inc.
John R. Hebble (40)+ Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
Caroline Pearson (36)+ Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoades (law firm) 1989-1997
</TABLE>
* Mr. Pierce and Ms. Quirk are considered by the Trust and its counsel to
be persons who are "interested persons" of the Adviser or of the Trust
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
# Mr. Pierce and Ms. Quirk are members of the Executive Committee, which
may exercise all of the powers of the Trustees when they are not in
session.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
@ Address: 333 South Hope Street, Los Angeles, California
As of December 31, 1998, all Trustees and officers of the Trust as a
group owned beneficially (as that term is defined in Section 13(d) under the
Securities and Exchange Act of 1934) 383,453 shares, or 1.68% of the shares of
the Scudder Shares of Value Fund.
As of December 31, 1998, 2,521,367 shares in the aggregate, 11.07% of
the outstanding shares of Scudder Value Fund were held in the name of Charles,
Schwab & Co., 101 Montgomery Street, San Francisco, CA 94104, who may be deemed
to be the beneficial owner of certain of these shares, but disclaims any
beneficial ownership therein.
45
<PAGE>
To the best of the Trust's knowledge, as of December 31, 1998, no
person owned beneficially more than 5% of the Fund's or a Class' outstanding
shares, except as stated above.
The Trustees and officers of the Trust also serve in similar capacities
with respect to other Scudder funds.
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 the
Adviser. 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 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, 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 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 the Fund's independent public
accountants and reviews accounting policies and controls.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from the
Fund of Value Equity Trust: an annual trustee's fee of $3,500; a fee of $325 for
attendance at each board meeting, audit committee meeting, or other meeting held
for the purposes of considering arrangements between the Trust on behalf of the
Fund and the Adviser or any affiliate of the Adviser; $100 for all other
committee meetings and reimbursement of expenses incurred for travel to and from
Board Meetings. No additional compensation is paid to any Independent Trustee
for travel time to meetings, attendance at trustees' 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. or other activities.
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 1998 from the Trust and from all of Scudder funds as a group.
<TABLE>
<CAPTION>
Value Equity Trust* All Scudder Funds
------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser(1) the Funds the Adviser(1)
---- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Paul Bancroft III, $14,750 $850 $174,200 $ 8,925 (23 funds)
Trustee (23 funds)
Sheryle J. Bolton, $14,750 $0.00 $149,050 $0.00 (23 funds)
Trustee** (23 funds)
William T. Burgin, $14,750 $850 $150,950 $8,925 (23 funds)
Trustee (23 funds)
46
<PAGE>
Value Equity Trust* All Scudder Funds
------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser(1) the Funds the Adviser(1)
---- --------- -------------- --------- --------------
Thomas J. Devine, $16,650 $850 $178,000 $8,925 (24 funds)
Honorary Trustee+ (24 funds)
Keith R. Fox, Trustee $17,150 $850 $172,350 $8,925 (21 funds)
(21 funds)
William H. Luers, $13,250 $850 $157,050 $8,925 (24 funds)
Trustee** (24 funds)
Wilson Nolen, Honorary $14,750 $850 $189,075 $6,375 (24 funds)
Trustee+ (24 funds)
Joan E. Spero,*** Trustee $2,685 $0.00 $29,736 $0.00 (21 funds)
(21 funds)
Robert G. Stone, Jr $0.00 $0.00 $8,000# $0.00 (1 fund)
Honorary Trustee (1 fund)
</TABLE>
(1) The Adviser paid the compensation to the Trustees for meetings
associated with the Adviser's alliance with Zurich Insurance Company.
See "Investment Adviser" for additional information.
* Value Equity Trust consists of two funds: Scudder Large Company Value
Fund and Value Fund.
** Elected as Trustee of the Trust in October 1997.
*** Elected as Trustee of the Trust in September 1998.
+ Elected as an Honorary Trustee in December 1998, after serving as a
Trustee.
# Includes pension or retirement benefits received as Director of The
Japan Fund.
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, on behalf of the Fund, has an underwriting agreement
pertaining to the Scudder Shares of Value Fund with Scudder Investor Services,
Inc. Two International Place, Boston, MA 02110 (the "Distributor"), a
Massachusetts corporation, which is a subsidiary of the Adviser. This
underwriting agreement dated September 7, 1998 will remain in effect until
September 30, 1999 and from year to year thereafter only if its continuance is
approved annually by a majority of the Trustees who are not parties to such
agreement or interested persons of any such party and either by 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
August 8, 1998.
Under the principal underwriting agreement, the Trust is responsible
for: the payment of all fees and expenses in connection with the preparation and
filing with the SEC of the Trust's registration statement and prospectuses and
any amendments and supplements thereto; the registration and qualification of
shares for sale in the various states, including registering the Trust or the
Fund as a broker/dealer in various states, as required; the fees and expenses of
preparing, printing and mailing prospectuses (see below for expenses relating to
prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications (including newsletters) to shareholders of the Fund; the
cost of printing and mailing confirmations of purchases of shares and the
prospectuses accompanying such confirmations; any issuance taxes or any initial
transfer taxes; a portion of shareholder toll-free telephone charges and
expenses of 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.
47
<PAGE>
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 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
service representatives, a portion of the cost of computer terminals, and of any
activity which is primarily intended to result in the sale of the Fund's shares.
Note: Although the Scudder Shares of Value Fund currently has no
12b-1 Plan and shareholder approval would be required in order
to adopt such plans, the underwriting agreement provides that
the Fund will also pay those fees and expenses permitted to be
paid or assumed by the Fund pursuant to a 12b-1 Plan, if any,
adopted by the Fund, notwithstanding any other provision to
the contrary in the underwriting agreement and the Fund or a
third party will pay those fees and expenses not specifically
allocated to the Distributor in the underwriting agreement.
As agent, the Distributor currently offers shares of the Fund on a
continuous basis to investors in all states. The underwriting agreement provides
that the Distributor accepts orders for shares at net asset value as no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of the Fund.
TAXES
(See "DISTRIBUTIONS -- Dividends and Capital Gains Distributions and
Taxes" in the Fund's prospectus.)
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute and has qualified as
such from its inception. The Fund intends to continue to qualify for such
treatment. Such qualification does not involve governmental supervision of
management or investment practices or policies.
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 in
excess of net long-term capital loss) 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.
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 capital gains (the excess of net long-term capital
gain over net short-term capital loss) are computed by taking into account any
capital loss carryforward of the Fund. Presently, the Fund has no capital loss
carryforward.
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 at
least equal to the sum of 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 as prescribed in the Code) 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.
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 dividends received deduction
for corporations. Shareholders will be informed of the portion of dividends
which so qualify. The dividends-received deduction is reduced to the extent the
shares with respect to which the dividends are received are treated as
debt-financed under the 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 net capital gains are taxable to
shareholders as long-term capital gain, regardless of the length of time the
shares of the Fund have been held by such shareholders. Such distributions are
not eligible for the dividends received deduction. Any loss realized upon the
redemption of shares held at the time of
48
<PAGE>
redemption for six months or less will be treated as a long-term capital loss to
the extent of any amounts treated as long-term capital gain distributions during
such six-month period.
If any net capital gains 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 proportionate share of federal income
taxes paid by the 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 the
shareholder's pro-rata share of such gains and the shareholder's tax credit.
However, retention of such gains by the Fund may cause the Fund to be liable for
an excise tax on all or a portion of those gains.
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 gains, whether received in shares or 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 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.
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.
An 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
$2,250 to IRAs for an individual and his or her non-earning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, contributions may be made to a spousal
IRA even if the spouse has earnings in a given year, if the spouse elects to be
treated as having no earnings (for IRA contribution purposes) for the year.
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
If the Fund invests in stock of certain foreign investment companies,
the Fund may be subject to U.S. federal income taxation on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the Fund's holding period for the stock. The distribution
or gain so allocated to any taxable year of the Fund, other than the taxable
year of the excess distribution or disposition, would be taxed to the Fund at
the highest ordinary income rate in effect for such year, and the tax would be
further increased by an interest charge to reflect the value of the tax deferral
deemed to have resulted from the ownership of the foreign company's stock. Any
amount of distribution or gain allocated to the taxable year of the distribution
or disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
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
49
<PAGE>
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 gain on
dispositions as ordinary income, which is not subject to the 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 written 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 will be recognized by the Fund upon payment of a premium in connection with
the purchase of a put or call option. The character of any gain or loss
recognized (i.e. long-term or short-term) will generally depend, in the case of
a lapse or sale of the option, on the Fund's holding period for the option, and
in the case of the exercise of a put option, on the 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 the underlying security or a substantially identical security in the
Fund's portfolio.
If the 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 the 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,
the operation of which may cause deferral of losses, adjustments in the holding
periods of stocks or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for
certain "qualified covered call options" on stock written by the Fund.
Many or all futures and forward contracts entered into by the Fund and
many or all listed non-equity options written or purchased by the Fund
(including options on debt securities, options on futures contracts, options on
foreign currencies and options on securities 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 day of the Fund's fiscal year (as well as on October 31
for purposes of the 4% excise tax), all outstanding Section 1256 positions will
be marked to market (i.e. treated as if such positions were sold 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, foreign currency gain or loss from foreign
currency-related forward contracts, certain futures and options, and similar
financial instruments entered into or acquired by the 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 position not
governed by Section 1256 and at least one futures or forward contract or
non-equity option or other position governed by Section 1256 which substantially
diminishes the Fund's risk of loss with respect to such other position may be
treated as a "mixed straddle." Mixed straddles are subject to the straddle rules
of Section 1092 of the Code and may result in the deferral of losses if the
non-Section 1256 position is in an unrealized gain at the end of a reporting
period.
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.
50
<PAGE>
Similarly, if the 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 the 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 the 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.
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 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.
Income received by the Fund from sources within a foreign country may
be subject to foreign and other withholding taxes imposed by that country.
The Fund will be required to report to the IRS 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
nonexempt 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 shares, will be reduced by the amounts required to be withheld.
Shareholders 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. By January 31 of each year the Fund issues to each shareholder a
statement of the federal income tax status of all distributions.
The Trust is organized as a Massachusetts business trust. Neither the
Trust nor the Fund is expected to be liable for any income or franchise tax in
the Commonwealth of Massachusetts, provided that the Fund qualifies as a
regulated investment company under the Code.
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.
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.
51
<PAGE>
PORTFOLIO TRANSACTIONS
Brokerage Commissions
The Adviser supervises allocation of brokerage.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Adviser generally places the Fund's purchases and sales of
fixed-income securities with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is authorized when placing portfolio transactions for the Fund to
pay a brokerage commission in excess of that which another broker might charge
for executing the same transaction on account of execution services and the
receipt of research, market or statistical information. In selecting among firms
believed to meet the criteria for handling a particular transaction for Value
Fund, however, the Adviser may give consideration to those firms that have sold
or are selling shares of Value Fund or other funds managed by the Adviser. In
effecting transactions in over-the-counter securities, orders are placed with
the principal market makers for the security being traded unless, after
exercising care, it appears that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements the Adviser's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund, and the Adviser in connection with the
Fund uses 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 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.
For the fiscal years ended September 30, 1996, 1997 and 1998, Value
Fund paid brokerage commissions of $181,652, $273,545 and $354,337,,
respectively. For the fiscal year ended September 30, 1998, the $344,034 (97.09%
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 Trust or Adviser. The total amount of brokerage transactions aggregated
$352,379,408, of which $316,618,010 (89.85% of all brokerage transactions) were
transactions which included research commissions. The Trustees review from time
to time whether the recapture for the benefit of the Fund of some portion of the
brokerage commissions or
52
<PAGE>
similar fees paid by the Fund on portfolio transactions is legally permissible
and advisable. To date no such recapture has been effected.
Portfolio Turnover
For the fiscal years ended September 30, 1996, 1997 and 1998, Value
Fund had an annualized portfolio turnover rate of 90.8%, 47.4%and 47.0%,
respectively. Higher levels of activity by the 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 the Fund's objectives.
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 "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. The net asset value per share of
each class of the Value Fund is computed by dividing the value of the total
assets attributable to a specific class, less all liabilities attributable to
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 on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation on such exchange as of the Value Time. An equity security
which is traded on the National Association of Securities Dealers Automated
Quotation ("Nasdaq") system will be valued at its most recent sale price on such
system as of the Value Time. Lacking any sales, the security is valued at the
most recent bid quotation as of the Value Time. The value of an equity security
not quoted on the Nasdaq System, but traded in another over-the-counter market,
is its most recent sale price if there are 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 by the 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 the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner that, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
53
<PAGE>
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 L.L.P., One Post Office Square,
Boston, Massachusetts 02109, independent accountants, and given on the authority
of that firm as experts in accounting and auditing. Effective July 1, 1998,
Coopers & Lybrand L.L.P. and Price Waterhouse LLP merged to become
PricewaterhouseCoopers LLP. PricewaterhouseCoopers LLP is responsible for
performing annual audits of the financial statements and financial highlights of
the Fund in accordance with generally accepted auditing standards and the
preparation of federal tax returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
"Massachusetts business trust". Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Fund's property or
the acts, obligations or affairs of the Fund. The Declaration of Trust also
provides for indemnification out of the Fund's property of any shareholder of
the Fund held personally liable for the claims and liabilities to which a
shareholder may become subject by reason of being or having been a shareholder
of the Fund. 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 regular
reports to shareholders of the Fund. These transactions will reflect investment
decisions made by the Adviser in light of the objectives and policies of the
Fund, and other factors, such as its other portfolio holdings and tax
considerations should not be construed as recommendations for similar action by
other investors.
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 the Fund as no other series
of the Trust assumes any liabilities for obligations entered into on behalf of
the Fund.
The CUSIP number of the Scudder Shares of Value Fund is 920390-10-1.
The Fund has a fiscal year end of September 30.
The law firm of Dechert Price & Rhoads is counsel to the Fund.
The Trust employs State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 as custodian for the Fund.
Information set forth below for the period from December 31, 1992
(commencement of operations) to September 30, 1997 with respect to Value Fund
Series is provided at the Fund level, since the Fund consisted of one class of
shares (which class was re-designated the "Scudder Value Fund Shares" on April
16, 1998).
54
<PAGE>
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts 02110-4103, a subsidiary of the Adviser, computes net asset values
for the Fund. The Fund pays Scudder Fund Accounting Corporation an annual fee
equal to 0.025% of the first $150 million of average daily net assets, 0.0075%
of such assets in excess of $150 million and 0.0045% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. For the
fiscal years ended September 30, 1996 and 1997, Value Fund incurred annual fees
of $38,190 and $50,128, respectively. For the fiscal year ended September 30,
1998, Value Fund incurred annual fees of $107,935, of which $12,046 is unpaid
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer,
dividend disbursing and shareholder service agent for the Scudder Shares of
Value Fund. Service Corporation also provides subaccounting and recordkeeping
services for shareholder accounts in certain retirement and employee benefit
plans. The Fund pays 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 and 1997, Value Fund incurred
annual fees of $174,570 and $445,397. For the fiscal year ended September 30,
1998, Value Fund incurred annual fees of $917,202, of which $78,673 is unpaid at
September 30, 1998.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the fiscal years ended
September 30, 1996 and 1997, Value Fund incurred annual fees of $174,570 and
$80,120. For the year ended September 30, 1998, Value Fund incurred fees of
$581,273, of which $89,824 is unpaid at September 30, 1998.
The Fund, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
The prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Trust 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 is available for
inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Value Fund
The financial statements, including the investment portfolio of Value
Fund -- Scudder Shares together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements are incorporated by
reference, and attached hereto in the Annual Report to Shareholders of the Fund
dated September 30, 1998, and are hereby deemed to be part of this Statement of
Additional Information.
55
<PAGE>
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
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
<PAGE>
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.
