As filed with the Securities and Exchange Commission
on August 26, 1997.
Securities Act File No. __________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_x_ /
Pre-Effective Amendment No. /_____/
Post-Effective Amendment No. /_____/
SCUDDER INTERNATIONAL FUND, INC.
(Exact Name of Registrant as Specified in Charter)
345 Park Avenue, New York, NY 10154
(Address of Principal Executive Offices) (Zip Code)
(617) 295-2567
(Registrant's Area Code and Telephone Number)
with copies to:
Paula M. Gaccione, Esq. Sheldon A. Jones, Esq.
Scudder, Stevens & Clark, Inc. Dechert Price & Rhoads
345 Park Avenue Ten Post Office Square - South
New York, NY 10154 Boston, MA 02109-4603
Approximate Date of Proposed Public Offering:
As soon as practicable after
this Registration Statement becomes effective.
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It is proposed that this filing will become effective on September 25, 1997
pursuant to Rule 488(a) under the Securities Act of 1933.
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<PAGE>
No filing fee is required because the Registrant has previously registered an
indefinite number of its shares under the Securities Act of 1933 pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended. The notice
required by such Rule for the Registrant's fiscal year ended March 31, 1997 was
filed on May 29, 1997.
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CROSS REFERENCE SHEET
Pursuant to Rule 481(a) Under the Securities Act of 1933
<TABLE>
<S> <C>
<CAPTION>
Item of Form N-14 Location in the Prospectus
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PART A
1. Beginning of Registration Statement and Outside Front Cross Reference Sheet; Notice of Special Meeting
Cover Page of Prospectus of Stockholders
2. Beginning and Outside Back Cover Page of Prospectus Table of Contents
3. Fee Table, Synopsis Information, and Risk Factors Synopsis - Fees and Expenses; Special
Considerations and Risk Factors
4. Information About the Transactions Synopsis - The Proposed Reorganization
5. Information About the Registrant Synopsis; Special Considerations and Risk
Factors; Additional Information
6. Information About the Company Being Acquired Synopsis; Special Considerations and Risk
Factors; Additional Information
7. Voting Information Notice of Special Meeting of Stockholders;
Introduction
8. Interest of Certain Persons and Experts Special Considerations and Risk Factors
9. Additional Information Required for Reoffering by (Not Applicable)
Persons Deemed to be Underwriters
PART B Statement of Additional Information Caption
10. Cover Page Outside Cover Page
11. Table of Contents Table of Contents
12. Additional Information about the Registrant Incorporation of Documents by Reference in
Statement of Additional Information
13. Additional Information about the Company Being Not Applicable
Acquired
14. Financial Statements Exhibits to Statement of Additional Information
PART C
15 - 17 Information required to be included in Part C is
set forth under the appropriate Item, so numbered,
in Part C of this Registration Statement.
</TABLE>
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<PAGE>
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<PAGE>
PART A
INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
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<PAGE>
SCUDDER INSTITUTIONAL FUND, INC.
IMPORTANT NEWS
SEPTEMBER [ ], 1997
FOR SCUDDER FUND STOCKHOLDERS
While we encourage you to read the full text of the enclosed proxy
statement, here's a brief overview of some matters affecting your Fund
which require a stockholder vote.
Q & A: QUESTIONS AND ANSWERS
Q. WHAT IS HAPPENING?
A. You are being asked to vote on an Agreement and Plan of Reorganization
whereby all or substantially all of the assets of your Fund would be
transferred in a tax-free reorganization to Scudder International Fund, a
series of Scudder International Fund, Inc., in exchange for shares of stock
of the Barrett International Shares class of Scudder International Fund. If
the Agreement and Plan of Reorganization is approved and consummated, you
would no longer be a stockholder of the Fund, but would become a
stockholder of the Barrett International Shares class of Scudder
International Fund, which has substantially similar investment objectives
and policies as your Fund. The following pages give you additional
information on the proposed reorganization and several other matters you
are being asked to vote on.
Q. WHAT ELSE AM I BEING ASKED TO VOTE ON?
A. Scudder, Stevens & Clark, Inc. ("Scudder"), your Fund's investment manager,
has agreed to form an alliance with Zurich Insurance Company ("Zurich").
Zurich is a leading international insurance and financial services
organization. As a result of the proposed alliance, there will be a change
in ownership of Scudder. In order for Scudder to continue to serve as
investment manager of your Fund, it is necessary for the Fund's
stockholders to approve a new investment management agreement. A vote is
also being sought for the election of Directors to serve on the Board of
Directors of the Corporation listed above and for the ratification of the
selection of the Fund's accountants. With the exception of the ratification
of the selection of the Fund's accountants, you are being asked to vote on
these additional matters in the event that the proposed reorganization is
not approved. The Board members of your Fund, including those who are not
affiliated with the Fund or Scudder, recommend that you vote FOR these
proposals.
Q. WHY AM I BEING ASKED TO VOTE ON THE PROPOSED NEW INVESTMENT MANAGEMENT
AGREEMENT?
A. The Investment Company Act of 1940, which regulates investment companies
such as the Fund, requires a vote whenever there is a change in control of
a fund's investment manager. Zurich's alliance with Scudder will result in
such a change of control and requires a Fund stockholder vote on a new
investment management agreement with the Fund.
Q. HOW WILL THE SCUDDER-ZURICH ALLIANCE AFFECT ME AS A FUND STOCKHOLDER?
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A. Your Fund and your Fund's investments will not change as a result of the
Scudder-Zurich alliance (except to the extent the proposed reorganization
noted above is approved). The terms of the new investment management
agreement are the same in all material respects as the current investment
management agreement. Similarly, the other service arrangements between
your Fund and Scudder will not be affected. You should continue to receive
the same level of services that you have come to expect from Scudder over
the years. If stockholders do not approve the new investment management
agreement, the current investment management agreement will terminate upon
the closing of the Scudder-Zurich transaction and the Board of Directors
will take such action as it deems to be in the best interests of your Fund
and its stockholders.
Q. WHY HAS SCUDDER DECIDED TO ENTER INTO THIS ALLIANCE?
A. Scudder believes that the Scudder-Zurich alliance will enable Scudder to
enhance its capabilities as a global asset manager. Scudder further
believes that the alliance will enable it to enhance its ability to deliver
the level of services currently provided to you and your Fund and to
fulfill its obligations under the new investment management agreement
consistent with current practices.
Q. WILL THE INVESTMENT MANAGEMENT FEES BE THE SAME?
A. The investment management fees will not change as a result of the
Scudder-Zurich transaction. If the proposed reorganization is approved, the
investment management fees will change as described more fully in this
proxy statement.
Q. WILL I CONTINUE TO BE ABLE TO PURCHASE SHARES WITHOUT ANY SALES LOAD?
A. Yes, you will be able to continue to purchase shares of your Fund without
any sales load.
Q. HOW DO THE BOARD MEMBERS OF MY FUND RECOMMEND THAT I VOTE?
A. After careful consideration, the Board members of your Fund, including
those who are not affiliated with the Fund or Scudder, recommend that you
vote in favor of all the proposals on the enclosed proxy card.
Q. WHOM DO I CALL FOR MORE INFORMATION?
A. Please call Shareholder Communications Corporation, your Fund's information
agent, at 1-800-733-8481 ext. 488.
Q. WILL THE FUND PAY FOR THE PROXY SOLICITATION AND LEGAL COSTS ASSOCIATED
WITH THESE TRANSACTIONS?
A. No, Scudder will bear these costs.
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<PAGE>
ABOUT THE PROXY CARD
If you have more than one account in the Fund in your name at the same
address, you will receive separate proxy cards for each account but only
one proxy statement for the Fund. Please vote all issues on each proxy card
that you receive.
THANK YOU FOR MAILING YOUR PROXY CARD(S) PROMPTLY.
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<PAGE>
SCUDDER INSTITUTIONAL FUND, INC.
345 Park Avenue
New York, New York 10154
1-800-349-4281
September [ ], 1997
Dear Stockholders:
A Special Meeting of Stockholders (the "Special Meeting") of Scudder
Institutional Fund, Inc. ("Institutional Fund Inc."), the sole active series of
which is the Institutional International Equity Portfolio ("International Equity
Portfolio"), will be held at [time], Eastern time, on [day, date], 1997, at the
offices of Scudder, Stevens & Clark, Inc. ("Scudder"), 25th Floor, 345 Park
Avenue (at 51st Street), New York, New York 10154. Stockholders who are unable
to attend this meeting are strongly encouraged to vote by proxy, which is
customary in corporate meetings of this kind. A Proxy Statement/Prospectus
regarding the Special Meeting, a proxy card for your vote at the meeting and an
envelope - postage prepaid - in which to return your proxy card are enclosed.
As you read in the Questions and Answers (Q&A) on the outside cover, you
are being asked to vote on an Agreement and Plan of Reorganization whereby all
or substantially all of the assets of the International Equity Portfolio would
be transferred in a tax-free reorganization to Scudder International Fund, a
series of Scudder International Fund, Inc., in exchange for shares of stock of
the Barrett International Shares class of Scudder International Fund. If the
Agreement and Plan of Reorganization is approved and consummated, you would no
longer be a stockholder of the International Equity Portfolio, but would become
a stockholder of the Barrett International Shares class of Scudder International
Fund, which has substantially similar investment objectives and policies as the
International Equity Portfolio.
In addition, Scudder has agreed to form an alliance with Zurich Insurance
Company ("Zurich"). Zurich is a leading international insurance and financial
services organization. (More information about Zurich can be found inside the
Proxy Statement/Prospectus.) Because of the Scudder-Zurich alliance, it is
necessary for the International Equity Portfolio's stockholders to approve a new
investment management agreement. You are being asked to approve the new
investment management agreement in the event that the proposed reorganization is
not approved.
You are also being asked to vote for the election of Directors to serve on
the Board of Directors of Institutional Fund Inc. and for the ratification of
the selection of the International Equity Portfolio's accountants. You are being
asked to vote for the election of Directors in the event that the proposed
reorganization is not approved.
The Board members of your Fund believe that each of the proposals set forth
in the Notice of Meeting for your Fund is important and recommend that you read
the enclosed materials carefully and then vote FOR all proposals.
Since all of the funds for which Scudder acts as investment manager are
required to conduct shareholder meetings, if you own shares of more than one
fund, you will receive more than one proxy card. Please sign and return each
proxy card you receive.
Your vote is important. Please take a moment now to sign and return your
proxy card(s) in the enclosed postage-paid return envelope. If we do not receive
your signed proxy card(s) after a reasonable amount of time you may receive a
telephone call from our proxy solicitor, Shareholder Communications Corporation,
reminding you to vote your shares.
Respectfully,
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<PAGE>
Daniel Pierce
President and Chairman of the Board of Directors
STOCKHOLDERS ARE URGED TO SIGN THE PROXY CARD(S) AND RETURN IT IN THE
POSTAGE-PAID ENVELOPE TO ENSURE A QUORUM AT THE MEETING. YOUR VOTE IS IMPORTANT
REGARDLESS OF THE SIZE OF YOUR STOCKHOLDINGS.
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<PAGE>
SCUDDER INSTITUTIONAL FUND, INC.
Notice of Special Meeting of Stockholders
Please take notice that a Special Meeting (the "Special Meeting") of
Stockholders of Scudder Institutional Fund, Inc. ("Institutional Fund Inc."),
the sole active series of which is the Institutional International Equity
Portfolio ("International Equity Portfolio"), will be held at the offices of
Scudder, Stevens & Clark, Inc., 25th Floor, 345 Park Avenue (at 51st Street),
New York, New York 10154, on [day/date], 1997, at [time], Eastern time, for the
following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization;
(2) To approve or disapprove a new investment management agreement between
International Equity Portfolio and its investment manager;
(3) To elect Directors of Institutional Fund Inc.;
(4) To ratify or reject the selection of Price Waterhouse LLP as the
independent accountants for the International Equity Portfolio's current
fiscal year.
The appointed proxies will vote on any other business as may properly come
before the Special Meeting or any adjournments thereof.
Holders of record of shares of common stock of the International Equity
Portfolio at the close of business on August 15, 1997 are entitled to vote at
the Special Meeting and at any adjournments thereof.
In the event that the necessary quorum to transact business or the vote
required to approve or reject any proposal is not obtained at the Special
Meeting, the persons named as proxies may propose one or more adjournments of
the Special Meeting in accordance with applicable law to permit further
solicitation of proxies. Any such adjournment will require the affirmative vote
of the holders of a majority of the International Equity Portfolio's shares
present in person or by proxy at the Special Meeting. The persons named as
proxies will vote in favor of such adjournment those proxies which they are
entitled to vote in favor and will vote against any such adjournment those
proxies to be voted against that proposal.
By Order of the Board of Directors,
Thomas F. McDonough, Secretary
September [ ], 1997
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IMPORTANT -- We urge you to sign and date the enclosed proxy card and return it
in the enclosed addressed envelope which requires no postage and is intended for
your convenience. Your prompt return of the enclosed proxy card may save the
necessity and expense of further solicitations to ensure a quorum at the Special
Meeting. If you can attend the Special Meeting and wish to vote your shares in
person at that time, you will be able to do so.
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<PAGE>
TABLE OF CONTENTS
PROPOSAL 1: APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION.................17
SYNOPSIS.........................................................17
SPECIAL CONSIDERATIONS AND RISK FACTORS..........................21
ADDITIONAL INFORMATION...........................................31
PROPOSAL 2: APPROVAL OF NEW INVESTMENT MANAGEMENT AGREEMENT..................31
PROPOSAL 3: ELECTION OF DIRECTORS FOR THE CORPORATION........................40
PROPOSAL 4: RATIFICATION OR REJECTION OF THE SELECTION OF INDEPENDENT
ACCOUNTANTS......................................................44
ADDITIONAL INFORMATION........................................................45
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PROXY STATEMENT/PROSPECTUS
September [ ], 1997
Relating to the acquisition of the assets of
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO ("International Equity Portfolio"),
a series of SCUDDER INSTITUTIONAL FUND, INC. ("Institutional Fund Inc.")
by and in exchange for shares of
SCUDDER INTERNATIONAL FUND ("International Fund"),
a series of SCUDDER INTERNATIONAL FUND, INC. ("International Fund Inc.")
345 Park Avenue
New York, New York 10154
(800) [_____-________]
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to stockholders of the
International Equity Portfolio in connection with a proposed reorganization (the
"Reorganization") in which all or substantially all of the assets of the
International Equity Portfolio would be acquired by the International Fund, in
exchange solely for voting shares of common stock of the Barrett International
Shares class of the International Fund (known as the "Barrett Shares") and the
assumption by the International Fund of all of the identified and stated
liabilities of the International Equity Portfolio. Barrett Shares of the
International Fund thereby received would then be distributed to the
stockholders of the International Equity Portfolio in liquidation of the
International Equity Portfolio [, and Institutional Fund Inc. would then be
deregistered as an investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"), and terminated under applicable state law]. As a
result of the Reorganization, each stockholder of the International Equity
Portfolio would receive that number of full and fractional Barrett Shares of the
International Fund having an aggregate net asset value equal to the aggregate
net asset value of such stockholder's stock of the International Equity
Portfolio held as of the close of business on the business day preceding the
closing of the Reorganization. Stockholders of the International Equity
Portfolio are being asked to vote on an Agreement and Plan of Reorganization
pursuant to which such transactions, as described more fully below, would be
consummated. (In the descriptions of the various proposals below, the word
"fund" is sometimes used to mean investment companies or series thereof in
general, and not the Fund whose proxy statement/prospectus this is.)
The International Fund is a series of shares of common stock of
International Fund Inc., an open-end management investment company organized as
a Maryland corporation. The International Equity Portfolio is a series of shares
of common stock of Institutional Fund Inc., an open-end management investment
company organized as a Maryland corporation. The principal investment objective
of each of the International Fund and the International Equity Portfolio is to
seek long-term growth of capital primarily through a diversified portfolio of
marketable foreign equity securities.
In addition, this Proxy Statement/Prospectus is being furnished to
stockholders of the International Equity Portfolio in connection with a
transaction in which Scudder, Stevens & Clark, Inc. ("Scudder" or the
"Investment Manager") has agreed to form an alliance with Zurich Insurance
Company ("Zurich"). Zurich is a leading international insurance and financial
services organization. As a result of the proposed alliance, there will be a
change in ownership in the International Equity Portfolio's investment manager,
Scudder. In order for Scudder to continue to serve as investment manager of the
International Equity Portfolio, it is necessary for the International Equity
Portfolio's stockholders to approve a new investment management agreement. A
vote is also being sought
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
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<PAGE>
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
for the election of Directors to serve on the Board of Directors of
Institutional Fund Inc. and for the ratification of the selection of the
International Equity Portfolio's accountants. With the exception of the
ratification of the selection of the International Equity Portfolio's
accountants, stockholders are being asked to vote on these additional matters in
the event that the Reorganization is not approved.
This Proxy Statement/Prospectus, which should be retained for future
reference, sets forth concisely the information about the International Fund
that a prospective investor should know before investing. For a more detailed
discussion of the investment objectives, policies, restrictions and risks of the
International Fund, see the prospectus for the International Fund dated August
1, 1997, which is included herewith and incorporated herein by reference. For a
more detailed discussion of the investment objectives, policies, restrictions
and risks of the International Equity Portfolio, see the prospectus for the
International Equity Portfolio dated May 1, 1997, which is incorporated herein
by reference and a copy of which may be obtained without charge by writing to
Scudder Investor Services, Inc., Two International Place, Boston, MA 02110-4103
or by calling toll-free (800) 225-2470. A Statement of Additional Information
dated September [ ], 1997 containing additional information about the
Reorganization and the parties thereto has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into this Proxy
Statement/Prospectus. A copy of the Statement of Additional Information is
available upon request and without charge by writing to Scudder Investor
Services, Inc., Two International Place, Boston, MA 02110-4103, or by calling
(800) 225-2470. Stockholder inquiries regarding the International Equity
Portfolio or regarding the International Fund may be made by calling (800)
225-2470. The information contained herein concerning the International Equity
Portfolio has been provided by, and is included herein in reliance upon, the
International Equity Portfolio. The information contained herein concerning the
International Fund has been provided by, and is included herein in reliance
upon, the International Fund. The Barrett Shares will be a newly established
class of shares of the International Fund and will be identical in all material
respects to the International Fund shares currently offered and sold, as
described in the Prospectus and Statement of Additional Information for the
International Fund dated August 1, 1997, except as otherwise described herein.
This Proxy Statement/Prospectus, the Notice of Special Meeting to
Stockholders and the proxy card are first being mailed to stockholders on or
about September [ ], 1997 or as soon as practicable thereafter. Any stockholder
giving a proxy has the power to revoke it by mail (addressed to the Secretary at
the principal executive office of the International Equity Portfolio, c/o
Scudder, Stevens & Clark, Inc., 345 Park Avenue, New York, New York 10154), or
in person at the Special Meeting, by executing a superseding proxy or by
submitting a notice of revocation to the International Equity Portfolio. All
properly executed proxies received in time for the Special Meeting will be voted
as specified in the proxy or, if no specification is made, in favor of each
proposal referred to in the Proxy Statement.
The presence at any stockholders' meeting, in person or by proxy, of the
holders of a majority of the shares entitled to be cast of the International
Equity Portfolio shall be necessary and sufficient to constitute a quorum for
the transaction of business. In the event that the necessary quorum to transact
business or the vote required to approve or reject any proposal is not obtained
at the Special Meeting, the persons named as proxies may propose one or more
adjournments of the Special Meeting in accordance with applicable law to permit
further solicitation of proxies with respect to any proposal which did not
receive the vote necessary for its passage or to obtain a quorum with respect to
those proposals for which there is represented a sufficient number of votes in
favor. Actions taken at the Special Meeting will be effective irrespective of
any adjournments with respect to any other proposals. Any such adjournment will
require the affirmative vote of the holders of a majority of the International
Equity Portfolio's shares present in person or by proxy at the Special Meeting.
The persons named as proxies will vote in favor of such adjournment those
proxies which they are entitled to vote in favor and will vote against any such
adjournment those proxies to be voted against that proposal. For purposes of
determining the presence of a quorum for transacting business at the Special
Meeting, abstentions and broker "non-votes" will be treated as shares that are
present but which have not been voted. Broker non-votes are proxies received by
the International Equity Portfolio from brokers or nominees when the broker or
nominee has neither received instructions from the beneficial owner or other
persons entitled to vote nor has discretionary power to vote on a particular
matter. Accordingly, stockholders are urged to forward their voting instructions
promptly.
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Abstentions and broker non-votes will have the effect of a "no" vote for
Proposals 1 and 2, which require the approval of a specified percentage of the
outstanding shares of each Fund. Abstentions and broker non-votes will not be
counted in favor of, but will have no other effect on the vote for Proposals 3
and 4, which require the approval of a plurality and a majority, respectively,
of shares of Institutional Fund Inc. voting at the Special Meeting.
Proposal 1 requires the affirmative vote of the holders of a majority of
the Fund's shares outstanding and entitled to vote thereon.
Proposal 2 requires the affirmative vote of a "majority of the outstanding
voting securities" of the International Equity Portfolio. The term "majority of
the outstanding voting securities" as defined in the 1940 Act and as used in
this Proxy Statement/Prospectus means: the affirmative vote of the lesser of (1)
67% of the voting securities of the International Equity Portfolio present at
the meeting if more than 50% of the outstanding shares of the International
Equity Portfolio are present in person or by proxy or (2) more than 50% of the
outstanding shares of the International Equity Portfolio.
The following table summarizes those voting requirements:
Vote Required for Approval
--------------------------
Proposal 1 (Approval of Approved by a majority of the
Agreement and Plan of Fund's shares outstanding and
Reorganization) entitled to vote thereon
Proposal 2 Approved by a "majority of the
(Approval of New Investment outstanding voting securities" of the
Management Agreement) Fund
Proposal 3 Each nominee must be elected by a
(Election of Directors) plurality of the shares voting at the
Special Meeting
Proposal 4 Approved by a majority of the
(Ratification of Selection of shares voting at the Special Meeting
Accountants)
Holders of record of the shares of common stock of the International Equity
Portfolio at the close of business on August 15, 1997 (the "Record Date"), as to
any matter on which they are entitled to vote, will be entitled to one vote per
share on all business of the Special Meeting. There were [ ] shares of the
International Equity Portfolio outstanding as of August 15, 1997.
The International Fund provides periodic reports to all of its stockholders
which highlight relevant information including investment results and a review
of portfolio changes. You may receive a copy of the most recent annual report
for the International Fund and a copy of any more recent semi-annual report,
without charge, by calling 800-225-5163 or writing the International Fund, Two
International Place, Boston, MA 02110.
The International Equity Portfolio provides periodic reports to all of its
stockholders which highlight relevant information including investment results
and a review of portfolio changes. You may receive a copy of the most recent
annual report for the International Equity Portfolio and a copy of any more
recent semi-annual report, without charge, by calling 800-854-8525 or writing
the International Equity Portfolio, c/o Scudder, Stevens & Clark, Inc., 345 Park
Avenue, New York, New York 10154.
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PROPOSAL 1: APPROVAL OF
AGREEMENT AND PLAN OF REORGANIZATION
The Board of Directors of Institutional Fund Inc., including all of the
Directors who are not "interested persons" of Institutional Fund Inc. (as
defined in the 1940 Act) (the "Non-interested Directors"), approved on August 6,
1997 an Agreement and Plan of Reorganization dated as of , 1997 (the
"Reorganization Agreement"). Subject to its approval by the stockholders of the
International Equity Portfolio, the Reorganization Agreement provides for (a)
the transfer of all or substantially all of the assets and all of the identified
and stated liabilities of the International Equity Portfolio to International
Fund, a series of shares of common stock of International Fund Inc., in exchange
solely for Barrett Shares of the International Fund; (b) the distribution of
such Barrett Shares to the stockholders of the International Equity Portfolio in
complete liquidation of the International Equity Portfolio and (c) the possible
deregistration of Institutional Fund Inc. as an investment company under the
1940 Act and its termination under state law (the "Reorganization").
As a result of the Reorganization, each stockholder of the International
Equity Portfolio will thus become a stockholder of the International Fund and
will hold, immediately after the closing of the Reorganization (the "Closing"),
that number of full and fractional Barrett Shares of the International Fund
having an aggregate net asset value equal to the aggregate net asset value of
such stockholders shares held in the International Equity Portfolio as of the
close of business on the business day preceding the Closing. The investment
objective, policies and restrictions of the Barrett Shares class of
International Fund will be substantially similar to those of the International
Equity Portfolio at the time of the Closing.
A copy of the Reorganization Agreement is attached to this Proxy
Statement/Prospectus as Exhibit C, and the description of the Reorganization
Agreement which follows is qualified in its entirety by reference to Exhibit C.
SYNOPSIS
The following is a summary of certain information contained in this Proxy
Statement/Prospectus. This summary is qualified by reference to the more
complete information contained elsewhere in this Proxy Statement/Prospectus, the
Prospectus of International Fund, and the Reorganization Agreement, which is
attached to this Proxy Statement/Prospectus as Exhibit C. Stockholders should
read the entire Proxy Statement/Prospectus carefully.
The Proposed Reorganization. The Board of Directors of Institutional Fund
Inc., including a majority of the Non-interested Directors, has approved the
Reorganization Agreement pursuant to which all or substantially all of the
assets of the International Equity Portfolio would be acquired by the
International Fund, in exchange solely for Barrett Shares of the International
Fund and the assumption by the International Fund of all of the identified and
stated liabilities of the International Equity Portfolio. Barrett Shares of the
International Fund thereby received would then be distributed to the
stockholders of the International Equity Portfolio in liquidation of the
International Equity Portfolio, [and Institutional Fund Inc. would then be
deregistered as an investment company under the 1940 Act and terminated under
applicable state law]. As a result of the Reorganization, each stockholder of
the International Equity Portfolio would thus become a stockholder of the
International Fund and would hold, immediately after the Closing, that number of
full and fractional Barrett Shares of the International Fund having an aggregate
net asset value equal to the aggregate net asset value of such stockholders'
shares held in the International Equity Portfolio as of the close of business on
the business day preceding the Closing.
The exchange of all or substantially all of the International Equity
Portfolio's assets for Barrett Shares of International Fund and the assumption
of all of the identified and stated liabilities of the International Equity
Portfolio by the International Fund are expected to occur on [________,1997], or
on such later date as the parties may agree in writing (the "Closing Date").
For the reasons set forth below under "The Proposed Transaction - Reasons
for the Proposed Transaction," the Board of Directors of Institutional Fund
Inc., including the Non-interested Directors, has
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<PAGE>
concluded that the Reorganization is in the best interests of the International
Equity Portfolio and its stockholders and that the interests of existing
stockholders of the International Equity Portfolio will not be diluted as a
result of the transactions contemplated by the Reorganization Agreement.
Accordingly, the Board of Directors recommends approval of the Reorganization
Agreement. If the Reorganization Agreement is not approved, the International
Equity Portfolio will continue in existence, unless the Board of Directors
advocates other action, which may include the termination and liquidation of the
International Equity Portfolio.
Approval of the Reorganization Agreement with respect to the International
Equity Portfolio requires the affirmative vote of the holders of a majority of
the shares of the International Equity Portfolio outstanding and entitled to
vote thereon.
Form of Organization. The International Fund is a diversified series of
International Fund Inc., an open-end management investment company registered
under the 1940 Act. International Fund Inc. is a Maryland corporation whose
predecessor was organized in 1953. International Fund Inc. offers five (5) other
existing portfolios, none of which is involved in the Reorganization: Scudder
Emerging Markets Growth Fund, Scudder Greater Europe Growth Fund, Scudder
International Growth and Income Fund, Scudder Latin America Fund and Scudder
Pacific Opportunities Fund. The International Equity Portfolio is a diversified
series of Institutional Fund Inc., an open-end management investment company
registered under the 1940 Act. Institutional Fund Inc. was formed as a
corporation on January 2, 1986 under the laws of the State of Maryland.
Investment Objectives and Policies. Each of the International Fund and the
International Equity Portfolio (each also referred to herein as a "Fund" and
collectively the "Funds") seek long-term growth of capital primarily through a
diversified portfolio of marketable foreign equity securities. These securities
are selected primarily to permit each Fund to participate in non-United States
companies and economies with prospects for growth. Each Fund invests in
companies, wherever organized, which do business primarily outside the United
States. Each Fund intends to diversify investments among several countries and
to have represented in the portfolio, in substantial proportions, business
activities in not less than five different countries in the case of the
International Equity Portfolio, and not less than three different countries in
the case of the International Fund.
The International Fund generally invests in equity securities of
established companies, listed on foreign exchanges, which the Investment Manager
believes have favorable characteristics. When the Investment Manager believes
that it is appropriate to do so in order to achieve the International Fund's
investment objective of long-term capital growth, the International Fund may
invest up to 20% of its total assets in debt securities. The International Fund
may purchase "investment-grade" bonds, which are those rated Aaa, Aa, A or Baa
by Moody's Investors Service, Inc. ("Moody's") or AAA, AA, A or BBB by Standard
& Poor's ("S&P") or, if unrated, judged by the Investment Manager to be of
equivalent quality. The International Fund may also invest up to 5% of its total
assets in debt securities which are rated below investment grade.
The International Equity Portfolio generally invests at least 90% of its
total assets in equity securities of established companies, listed on foreign
exchanges, which the Investment Manager believes have favorable characteristics.
When the Investment Manager believes that it is appropriate to do so in order to
achieve the International Equity Portfolio's investment objective of long-term
capital growth, the International Equity Portfolio may invest up to 10% of its
total assets in debt securities. The International Equity Portfolio may purchase
"investment-grade" bonds, which are those rated Aaa, Aa, A or Baa by Moody's or
AAA, AA, A or BBB by S&P or, if unrated, judged by the Investment Manager to be
of equivalent quality. The International Equity Portfolio may also invest up to
5% of its total assets in debt securities which are rated below investment
grade.
When the Investment Manager determines that exceptional conditions
exist abroad, each Fund may, for temporary defensive purposes, invest all or a
portion of its assets in Canadian or U.S. Government obligations or currencies,
or securities of companies incorporated in and having their principal activities
in Canada or the U.S. See "Special Considerations and Risk Factors" and
"Comparison of Policies and Restrictions" below.
Fees and Expenses. The International Fund retains as its investment manager
the investment management firm of Scudder, Stevens & Clark, Inc., a Delaware
corporation located at 345 Park Avenue, New
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<PAGE>
York, New York 10154, to manage its daily investment and business affairs
subject to the policies established by the Directors of International Fund Inc.
The management fee payable under the current Investment Management Agreement for
International Fund is equal to an annual rate of 0.90% on the first $500 million
of average daily net assets, 0.85% of such assets in excess of $500 million,
0.80% of such assets in excess of $1 billion, 0.75% of such assets in excess of
$2 billion and 0.70% of such assets in excess of $3 billion. The International
Fund's fee is graduated so that increases in the Fund's net assets may result in
a lower fee rate and decreases in the Fund's net assets may result in a higher
fee rate. The fee is payable monthly, provided the Fund will make such interim
payments as may be requested by the Investment Manager not to exceed 75% of the
amount of the fee then accrued on the books of the Fund and unpaid. The fee is
higher than that charged by many funds which invest primarily in U.S.
securities, but not necessarily higher than the fees charged to funds with
investment objectives similar to that of the International Fund. As of March 31,
1997 the International Fund had total net assets of $2,583,030,686. The total
fees paid by the International Fund to the Investment Manager for the fiscal
year ended March 31, 1997 were $20,989,160, which includes fees paid under
International Fund's investment management agreement which was in effect prior
to September 5, 1996.
For the fiscal year ended March 31, 1997, the International Fund's total
expense ratio (total annual operating expenses as a percentage of average net
assets) was 1.15%. The Investment Manager projects that after the proposed
Reorganization is effected, the expense ratio of the Barrett Shares class of the
International Fund will be approximately 1.14%. The actual expense ratio for the
Barrett Shares class of International Fund for the fiscal years ending March 31,
1998 and March 31, 1999 may be higher or lower than 1.14% depending upon the
International Fund's performance, general stock market and economic conditions,
sales and redemptions of International Fund shares (including redemptions by
former International Equity Portfolio stockholders), and other factors.
The International Equity Portfolio also retains the Investment Manager to
manage its daily investment and business affairs subject to the policies
established by the Directors of Institutional Fund Inc. The management fee
payable under the current Investment Management Agreement for International
Equity Portfolio is equal to an annual rate of .90% of the Fund's average daily
net assets. The fee is payable monthly, provided the Fund will make such interim
payments as may be requested by the Investment Manager not to exceed 75% of the
amount of the fee then accrued on the books of the Fund and unpaid. The fee is
higher than that charged by many funds which invest primarily in U.S.
securities, but not necessarily higher than the fees charged to funds with
investment objectives similar to that of the International Equity Portfolio. As
of March 31, 1997 the International Equity Portfolio had total net assets of
$18,323,484.94. For the period April 3, 1996 (commencement of operations) to
December 31, 1996, the Investment Manager did not impose any of its fee
amounting to $104,861.
For the fiscal year ended December 31, 1996, the International Equity
Portfolio's total expense ratio (total annual operating expenses as a percentage
of average net assets) was 0.95% including waivers and reimbursements. If the
Investment Manager had not agreed to waive its fee and reimburse other expenses,
total annual operating expenses would have been [ ].
The current expenses of each Fund and pro forma expenses following the
proposed restructuring are outlined below:
Annual Fund Operating Expenses (as a percentage of average net assets)^1
<TABLE>
<S> <C> <C> <C>
<CAPTION>
International Equity International Fund Pro Forma
Portfolio^2 (Barrett Shares)
Investment Management Fee [ ]% 0.81% 0.81%
12b-1 Fees NONE NONE NONE
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<PAGE>
Other Expenses [ ]% 0.33% 0.33%
---- ----- -----
Total Fund Operating Expenses [ ]% 1.14% 1.14%
</TABLE>
^1 The percentages in the table expressing annual fund operating expenses for
the International Equity Portfolio and the International Fund are based on
amounts incurred during the year ended March 31, 1997, International Fund's
most recent fiscal year end. For the fiscal year ended December 31, 1996,
the International Equity Portfolio's total expense ratio (total annual
operating expenses as a percentage of average net assets) was 0.95%,
including waivers and reimbursements. The International Equity Portfolio's
total expense ratio for fiscal year ended December 31, 1996 included an
investment management fee of 0.95%, 12b-1 fees of 0.00% and other expenses
of 0.00%, including waivers and reimbursements. If the Investment Manager
had not agreed to waive its fee and reimburse other expenses for fiscal
year ended December 31, 1996, total annual operating expenses of the
International Equity Portfolio would have been [ ].
^2 Until July 31, 1997, the Investment Manager had agreed to waive its
investment management fee and reimburse other expenses to the extent
necessary so that the total annualized expenses of the International Equity
Portfolio did not exceed 0.95% of average daily net assets. Effective
August 1, 1997 through December 31, 1997, the Investment Manager has agreed
to waive its management fee and reimburse other expenses to the extent
necessary so that the total annualized expenses of the International Equity
Portfolio do not exceed 1.15% of average daily net assets. Estimated
expenses in the table are for the fiscal year ended December 31, 1997 and
include the effect of a new transfer agency fee which took effect July 1,
1997. If the Investment Manager had not agreed to waive its fee and
reimburse other expenses, it is estimated that the annualized expenses of
the International Equity Portfolio would be: investment management fee
0.90%, other expenses 1.36% and total operating expenses 2.26% for the
fiscal year ended December 31, 1997.
Example. Based on the level of total operating expenses for each of the
Funds listed in the table above, the total expenses relating to a $1,000
investment, assuming a 5% annual return and redemption at the end of each
period, are listed below. Investors do not pay these expenses directly; they are
paid by the Fund before it distributes its net investment income to
stockholders. Actual expenses may be greater or less than those shown. Federal
regulations require the example to assume 5% annual return, but actual annual
return will vary.
<TABLE>
<S> <C> <C> <C>
<CAPTION>
International Equity Portfolio1 International Fund Pro Forma
1 Year $12 [$12]
3 Years $36 [$36]
5 Years $63 [$63]
10 Years $140 [$140]
</TABLE>
^1 Based on the level of total operating expenses for the International Equity
Portfolio estimated for the Fund's fiscal year ended December 31, 1997, the
total expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period would be: for one year, $11; for three
years, $33; for five years, $57; and for 10 years, $130.
Purchase, Redemption, and Exchange Information. The purchase, redemption
and exchange procedures and privileges for the International Equity Portfolio
and the Barrett Shares class of the International Fund are substantially
similar, except as discussed below. For example:
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<PAGE>
There is a $1,000 minimum initial investment requirement in the
International Equity Portfolio and a minimum account size requirement of $1,000.
The minimum investment requirement may be waived or lowered. The minimum
subsequent investment required for the Institutional Fund is $1,000.
The Barrett Shares class of the International Fund will have a [$25,000]
minimum initial investment requirement and a $[ ] minimum subsequent investment
requirement, which may be changed by the Board of Directors.
The Barrett Shares of the International Fund will not be exchangeable with
other funds within the Scudder Family of Funds. Shares of the International
Equity Portfolio currently are not exchangeable with other funds within the
Scudder Family of Funds.
Dividends and Other Distributions. Each of the Funds intends to distribute
dividends from its net investment income and any net realized capital gains
after utilization of capital loss carryforwards, if any, in December to prevent
application of a federal excise tax. An additional distribution may be made if
necessary. Any dividends or capital gains distributions declared in October,
November, or December with a record date in such a month and paid during the
following January will be treated by stockholders for federal income tax
purposes as if received on December 31 of the calendar year in which it is
declared. Dividends and distributions of each Fund will be invested in
additional shares of the Fund at net asset value and credited to the
stockholder's account on the payment date or, at the stockholder's election,
paid in cash.
[If the Reorganization Agreement is approved by the International Equity
Portfolio's stockholders, then as soon as practicable before the Closing Date
the International Equity Portfolio will pay its stockholders a cash distribution
of all undistributed 1997 net investment income and undistributed realized net
capital gains.]
Federal Income Tax Consequences of the Reorganization. The International
Fund and the International Equity Portfolio will have received an opinion of
Dechert Price & Rhoads, counsel to the International Equity Portfolio, to the
effect that the Reorganization will constitute a tax-free reorganization within
the meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). If the Reorganization constitutes a tax-free
reorganization, no gain or loss will be recognized to the International Equity
Portfolio or its stockholders as a result of the Reorganization. See "The
Proposed Transaction - Tax Considerations."
SPECIAL CONSIDERATIONS AND RISK FACTORS
The principal investment risk of an investment in either the International
Equity Portfolio or the International Fund is fluctuations in the net asset
value of the Fund's shares. Portfolio management, market conditions, use of
investment policies, and other factors affect such fluctuations. Although the
investment objectives, policies and restrictions of the International Equity
Portfolio and the International Fund are substantially similar, there are
differences between them, which differences are outlined below. There can be no
assurance that either Fund will achieve its stated objective.
International Equity Portfolio. The principal investment objective of each
of the International Fund and the International Equity Portfolio is long-term
growth of capital primarily through a diversified portfolio of marketable
foreign equity securities.
Comparison of Policies and Restrictions. The securities in which the Funds
invest are selected primarily to permit each Fund to participate in non-United
States companies and economies with prospects for growth. Each Fund invests in
companies, wherever organized, which do business primarily outside the United
States. Each Fund intends to diversify investments among several countries and
to have represented in the portfolio, in substantial proportions, business
activities in not less than five different countries in the case of the
International Equity Portfolio, and not less than three different countries in
the case of the International Fund.
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<PAGE>
The International Fund generally invests in equity securities of
established companies, listed on foreign exchanges, which the Investment Manager
believes have favorable characteristics. When the Investment Manager believes
that it is appropriate to do so in order to achieve the International Fund's
investment objective of long-term capital growth, the International Fund may
invest up to 20% of its total assets in debt securities. The International Fund
may purchase "investment-grade" bonds, which are those rated Aaa, Aa, A or Baa
by Moody's or AAA, AA, A or BBB by S&P or, if unrated, judged by the Investment
Manager to be of equivalent quality. The International Fund may also invest up
to 5% of its total assets in debt securities which are rated below investment
grade.
The International Equity Portfolio generally invests at least 90% of its
total assets in equity securities of established companies, listed on foreign
exchanges, which the Investment Manager believes have favorable characteristics.
When the Investment Manager believes that it is appropriate to do so in order to
achieve the International Equity Portfolio's investment objective of long-term
capital growth, the International Equity Portfolio may invest up to 10% of its
total assets in debt securities. The International Equity Portfolio may purchase
"investment-grade" bonds, which are those rated Aaa, Aa, A or Baa by Moody's or
AAA, AA, A or BBB by S&P or, if unrated, judged by the Investment Manager to be
of equivalent quality. The International Equity Portfolio may also invest up to
5% of its total assets in debt securities which are rated below investment
grade.
When the Investment Manager determines that exceptional conditions exist
abroad, each of the International Fund and the International Equity Portfolio
may, for temporary defensive purposes, invest all or a portion of its assets in
Canadian or U.S. Government obligations or currencies, or securities of
companies incorporated in and having their principal activities in Canada or the
U.S.
Primary Investments:
Foreign Securities. Each of the Funds invests primarily in foreign
securities. Investments in foreign securities involve special considerations due
to limited information, higher brokerage costs, different accounting standards,
thinner trading markets as compared to domestic markets and the likely impact of
foreign taxes on the income from securities. They may also entail other risks,
such as the possibility of one or more of the following; imposition of dividend
or interest withholding or confiscatory taxes; currency blockages or transfer
restrictions; expropriation, nationalization or other adverse political or
economic developments; less government supervision and regulation of securities
exchanges, brokers and listed companies; and the difficulty of enforcing
obligations in other countries. Purchases of foreign securities are usually made
in foreign currencies and, as a result, the Fund may incur currency conversion
costs and may be affected favorably or unfavorably by changes in the value of
foreign currencies against the U.S. dollar. Further, it may be more difficult
for a Fund's agents to keep currently informed about corporate actions which may
affect the prices of portfolio securities. Communications between the U.S. and
foreign countries may be less reliable than within the U.S., increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. A Fund's ability and decisions to purchase and sell
portfolio securities may be affected by laws or regulations relating to the
convertibility and repatriation of assets.
Repurchase Agreements. Each of the Funds may enter into repurchase
agreements. If the seller under a repurchase agreement becomes insolvent, a
Fund's right to dispose of the securities may be restricted, or the value of the
securities may decline before the Fund is able to dispose of them. In the event
of the commencement of bankruptcy or insolvency proceedings with respect to the
seller of the securities before repurchase of the securities under a repurchase
agreement, a Fund may encounter delay and incur costs, including a decline in
the value of the securities, before being able to sell the securities.
Securities Lending. From time to time, International Fund may lend its
portfolio securities to registered broker/dealers as described above. The risks
of lending portfolio securities, as with other extensions of secured credit,
consist of possible delays in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should the
borrower fail financially. Loans will be made to registered broker/dealers
deemed by the Investment Manager to be in good standing and will not be made
unless, in the judgment of the Investment Manager, the consideration to be
received in exchange for such loans would justify the risk.
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<PAGE>
Debt Securities. Each of the Funds may, as described above, invest to a
limited extent in debt securities rated below investment grade, i.e. below Baa
by Moody's and below BBB by S&P. (commonly referred to as "junk bonds"). The
lower the ratings of such debt securities, the greater their risks render them
like equity securities. Moody's considers bonds it rate Baa to have speculative
elements as well as investment-grade characteristics. Each of the Funds may
invest in securities which are rated D by S&P or, if unrated, are of equivalent
quality. Securities rated D may be in default with respect to payment of
principal or interest.
Illiquid and Restricted Securities. Each of the Funds may invest in
illiquid and restricted securities. The absence of a trading market can make it
difficult to ascertain a market value for illiquid and restricted securities.
Disposing of illiquid and restricted securities may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for a Fund
to sell them promptly at an acceptable price.
Strategic Transactions and Derivatives. From time to time, each of the
Funds may engage in strategic transactions and derivatives. Strategic
Transactions, including derivative contracts, have risks associated with them
including possible default by the other party to the transaction, illiquidity
and, to the extent the Adviser's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to a Fund, force the sale or purchase of portfolio securities
at inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, limit the amount
of appreciation a Fund can realize on its investments or cause the Fund to hold
a security it might otherwise sell. The use of currency transactions can result
in a Fund incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements or the inability to
deliver or receive a specified currency. The use of options and futures
transaction entails certain other risks. In particular, the variable degree of
correlation between price movements in the related portfolio position of a Fund
creates the possibility that losses on the hedging instrument may be greater
than gains in the value of a Fund's position. In addition, futures and options
markets may not be liquid in all circumstances and certain over-the-counter
options may have no markets. As a result, in certain market, a Fund might not be
able to close out a transaction without incurring substantial losses, if at all.
Although the use of futures contracts and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time they tend to limit any potential gain which
might result from an increase in the 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.
Fundamental Policies. Each Fund has "fundamental" investment policies which
may be changed only with stockholder approval and "nonfundamental" investment
policies which may be changed only with the approval of a Fund's Board of
Directors. Following is a description of certain of the Funds' current
fundamental investment policies which are substantially similar:
Neither Fund may, with respect to 75% of its total assets taken at market
value, purchase more than 10% of the voting securities of any one issuer or
invest more than 5% of the value of its total assets in the securities of any
one issuer, except obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and except securities of other investment
companies.
Neither Fund may borrow money except as a temporary measure for
extraordinary or emergency purposes or except in connection with reverse
repurchase agreements; provided that the Funds maintain asset coverage of 300%
for all borrowings.
Neither Fund may act as an underwriter of securities issued by others,
except to the extent that the Fund may be deemed an underwriter in connection
with the disposition of its portfolio securities.
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<PAGE>
Neither Fund may make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent that the entry into repurchase agreements and
the purchase of debt securities in accordance with the Fund's investment
objectives and investment policies may be deemed to be loans.
Neither Fund may purchase or sell real estate (except that the Funds may
invest in (i) securities of companies which deal in real estate or mortgages,
and (ii) securities secured by real estate or interests therein, and that the
Funds reserve freedom of action to hold and to sell real estate acquired as a
result of the Funds' ownership of securities).
Neither Fund may purchase or sell physical commodities or contracts
relating to physical commodities.
Stockholders of the International Fund are being asked at a Special Meeting
of Stockholders on October __, 1997 to approve certain changes to the
International Fund's fundamental investment restrictions. If approved,
International Fund's foregoing policies would be revised as follows.
International Fund will not:
(a) concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended and interpreted
by regulatory authority having jurisdiction from time to time.
(b) borrow money, except as permitted under the Investment Company Act of
1940, as amended and interpreted by regulatory authority having
jurisdiction from time to time;
(c) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended and interpreted by regulatory
authority having jurisdiction from time to time;
(d) 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;
(e) 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; or
(f) make loans to other persons, except (i) loans of portfolio securities,
and (ii) to the extent that entry into repurchase agreements and the
purchase of debt instruments or interests in indebtedness in
accordance with the Fund's investment objective and policies may be
deemed to be loans.
(g) purchase physical commodities or contracts relating to physical
commodities.
In addition, International Fund will continue to be classified as a
diversified series of an open-end management investment company.
The nonfundamental investment restrictions of the International Equity
Portfolio and the International Fund are substantially similar except as
described herein.
Description of the Reorganization Agreement. As stated, the Reorganization
Agreement provides for the transfer of all or substantially all of the assets of
the International Equity Portfolio to the International Fund in exchange for
that number of full and fractional Barrett Shares in the International Fund
having an aggregate net asset value equal to the aggregate net asset value of
such stockholders' stock held in the International Equity Portfolio as of the
close of business on the business day preceding the Closing. International Fund
will assume all
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<PAGE>
of the identified and stated liabilities of the International Equity Portfolio.
In connection with the Closing, Institutional Fund Inc., on behalf of the
International Equity Portfolio, will distribute the shares of the International
Fund received in the exchange to the stockholders of the International Equity
Portfolio in complete liquidation of the International Equity Portfolio.
[Institutional Fund Inc. will subsequently be deregistered as an investment
company under the 1940 Act and terminated under Maryland law.]
Upon completion of the Reorganization, each stockholder of the
International Equity Portfolio will own that number of full and fractional
Barrett Shares in the International Fund having an aggregate net asset value
equal to the aggregate net asset value of such stockholder's stock held in the
International Equity Portfolio immediately as of the close of business on the
business day preceding the Closing. Such accounts will be identical in all
material respects to the accounts currently maintained by Institutional Fund
Inc. for each stockholder. In the interest of economy and convenience, shares of
the International Equity Portfolio generally are not represented by physical
certificates, and shares of the International Fund similarly generally will be
in uncertificated form.
Stockholders of the International Equity Portfolio will, of course,
continue to be able to redeem their shares at the net asset value next
determined until the Closing. Redemption requests received by Institutional Fund
Inc. thereafter will be treated as requests received by International Fund Inc.
for the redemption of shares of the International Fund received by the
stockholder in the Reorganization.
The obligations of Institutional Fund Inc. and International Fund Inc.
under the Reorganization Agreement are subject to various conditions, as stated
therein. Among other things, the Reorganization requires that all filings be
made with, and all authority be received from, the SEC and state securities
commissions as may be necessary in the opinion of counsel to permit the parties
to carry out the transactions contemplated by the Reorganization Agreement.
Institutional Fund Inc. and International Fund Inc. are in the process of making
the necessary filings. To provide against unforeseen events, the Reorganization
Agreement may be terminated or amended at any time prior to the Closing by
action of the Directors of Institutional Fund Inc. and the Directors of
International Fund Inc., notwithstanding the approval of the Reorganization
Agreement by the stockholders of the International Equity Portfolio. However, no
amendment may be made that materially adversely affects the interests of the
stockholders of the International Equity Portfolio. Institutional Fund Inc. and
International Fund Inc. may at any time waive compliance with any of the
covenants and conditions contained in the Reorganization Agreement. For a
complete description of the terms and conditions of the Reorganization, see the
Reorganization Agreement at Exhibit C.
Reasons for the Reorganization. The proposed Reorganization was presented
to the Board of Directors of Institutional Fund Inc. for consideration and
approval at a special meeting on August 6, 1997. All of the Directors were
present at the meeting. For the reasons discussed below, the Board of Directors
of Institutional Fund Inc., including all of the Non-interested Directors, has
determined that the interests of the existing stockholders of the International
Equity Portfolio will not be diluted as a result of the proposed Reorganization,
and that the proposed Reorganization is in the best interests of the
International Equity Portfolio and its stockholders.
The proposed combination of the International Equity Portfolio and the
International Fund will allow the International Equity Portfolio's stockholders
to continue to participate in a professionally managed portfolio consisting
primarily of foreign equity investments. The Directors of the International
Equity Portfolio believe that International Equity Portfolio stockholders will
benefit from the proposed Reorganization because the International Fund, while
guided by substantially similar investment objectives and policies, offers the
following benefits:
Increased Investment Opportunities: The International Fund is currently
approximately more than 100 times larger than the International Equity
Portfolio. Because of its much larger asset base, the International Fund can
acquire and dispose of securities on more favorable terms than the International
Equity Portfolio. Also, because of its larger size, the International Fund can
obtain a wider variety of investments. Moreover, it is anticipated that
combining the International Equity Portfolio and the International Fund will
further enhance trading efficiency and investment flexibility.
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<PAGE>
Lower Fund Expenses Over Time: While total fund expenses of the
International Fund will be higher than those currently paid by stockholders of
the International Equity Portfolio on account of expense limitations currently
in place, if the proposed transaction is approved, stockholders may benefit from
lower total fund expenses over the long-term. There can be no assurance that the
Investment Manager will continue its expense limitation arrangement currently in
effect for the International Equity Portfolio once such expense limitation
expires after December 31, 1997.
Due to the small size of the International Equity Portfolio, the Directors
and management of the Fund believe that the Fund cannot grow to a sufficient
size through the sale of additional stock to provide investors with significant
economies of scale. Accordingly, it is recommended that the International Equity
Portfolio's stockholders approve the Reorganization with the International Fund.
The Board of Directors of the International Equity Portfolio, in
recommending the proposed transaction, considered a number of factors, including
the following:
(1) the capabilities and resources of the Investment Manager and its
affiliates in the areas of investment management and stockholder
servicing;
(2) expense ratios and information regarding fees and expenses of the
International Equity Portfolio and the International Fund;
(3) the terms and conditions of the Reorganization and whether it
would result in dilution of the interests of the International
Equity Portfolio's stockholders;
(4) the compatibility of the International Fund, its investment
objectives, policies and restrictions with those of the
International Equity Portfolio;
(5) the growth opportunities afforded by the proposed consolidation
with the International Fund; and
(6) the tax consequences to the International Equity Portfolio and
its stockholders.
Description of Securities To Be Issued. The authorized capital stock of
International Fund Inc. consists of 700,000,000 shares, $0.01 par value per
share. The Directors of International Fund Inc. are authorized to divide the
shares into separate series of which the International Fund is one. Shares of
International Fund Inc. entitle their holders to one vote per share; however,
separate votes will be taken by each series on matters affecting an individual
series. Shares have noncumulative voting rights and no preemptive or
subscription rights. International Fund Inc. is not required to hold stockholder
meetings annually, although stockholder meetings may be called for purposes such
as electing or removing Directors, changing fundamental policies, or approving
an investment management agreement.
The Directors of International Fund Inc., in their discretion, may
authorize the division of shares of International Fund Inc. (or shares of a
series) into different classes permitting shares of different classes to be
distributed by different methods. Although stockholders of different classes of
a series would have an interest in the same portfolio of assets, stockholders of
different classes may bear different expenses in connection with different
methods of distribution. Consistent with the Directors' authority, the Directors
of International Fund Inc. have authorized the issuance of Barrett Shares, a
newly organized class of shares of the International Fund.
International Fund Inc.'s By-Laws provide that meetings of stockholders may
be called at any time by the President, and shall be called by the President or
Secretary at the request, in writing or by resolution, of a majority of
Directors, or at the written request of the holder or holders of twenty-five
percent (25%) or more of the total number of shares of International Fund Inc.
then issued and outstanding and entitled to vote at such meeting. Any such
request shall state the purpose of the proposed meeting. In the event that
stockholders of International Fund Inc. wish to communicate with other
stockholders concerning the removal of any Director of International Fund
-26-
<PAGE>
Inc., such stockholders shall be assisted in communicating with other
stockholders for the purpose of obtaining signatures to request a meeting of
stockholders, all in the manner provided in Section 16(c) of the 1940 Act as if
that section were applicable.
Tax Considerations. The Reorganization is conditioned upon the receipt of
Institutional Fund Inc. and International Fund Inc. of an opinion from Dechert
Price & Rhoads, substantially to the effect that, based on the facts,
assumptions and representations of the parties, for federal income tax purposes:
(i) the transfer to International Fund of all of the assets of the International
Equity Portfolio in exchange solely for International Fund Barrett Shares and
the assumption by the International Fund of all of the identified and stated
liabilities of the International Equity Portfolio, followed by the distribution
of such Barrett Shares to the International Equity Portfolio stockholders in
exchange for their shares of the International Equity Portfolio in complete
liquidation of the International Equity Portfolio, will constitute a
"reorganization" within the meaning of Section 368(a)(1) of the Code, and the
International Fund and the International Equity Portfolio will each be "a party
to a reorganization" within the meaning of Section 368(b) of the Code; (ii) no
gain or loss will be recognized by the International Equity Portfolio upon the
transfer of all of its assets to the International Fund in exchange solely for
International Fund Barrett Shares and the assumption by the International Fund
of the identified and stated liabilities of the International Equity Portfolio;
(iii) the basis of the assets of the International Equity Portfolio in the hands
of the International Fund will be the same as the basis of such assets of the
International Equity Portfolio immediately prior to the transfer; (iv) the
holding period of the assets of the International Equity Portfolio in the hands
of the International Fund will include the period during which such assets were
held by the International Equity Portfolio; (v) no gain or loss will be
recognized by the International Fund upon the receipt of the assets of the
International Equity Portfolio in exchange for International Fund Barrett Shares
and the assumption by the International Fund of the identified and stated
liabilities of the International Equity Portfolio; (vi) no gain or loss will be
recognized by the stockholders of the International Equity Portfolio upon the
receipt of International Fund Barrett Shares solely in exchange for their shares
of the International Equity Portfolio as part of the transaction; (vii) the
basis of the International Fund Barrett Shares received by the stockholders of
the International Equity Portfolio will be the same as the basis of the shares
of the International Equity Portfolio exchanged therefor; and (viii) the holding
period of the International Fund Barrett Shares received by the stockholders of
the International Equity Portfolio will include the holding period during which
the shares of the International Equity Portfolio exchanged therefor were held,
provided that at the time of the exchange the shares of the International Equity
Portfolio were held as capital assets in the hands of the stockholders of the
International Equity Portfolio.
While Institutional Fund Inc. is not aware of any adverse state or local
tax consequences of the proposed Reorganization, it has not requested any ruling
or opinion with respect to such consequences and stockholders may wish to
consult their own tax advisers with respect to such matters.
Comparative Information on Stockholder Rights. Each of International Fund
Inc. and Institutional Fund Inc. is a Maryland corporation governed by its
Articles of Incorporation dated July 31, 1975 and January 2, 1986, respectively,
each as amended and restated, its By-Laws and applicable Maryland law. The
business and affairs of each of the Funds are managed under the direction of a
Board of Directors.
Barrett International Shares are a class of stock of each of the
International Fund and the International Equity Portfolio. The number of shares
of common stock of each of International Fund Inc. and Institutional Fund Inc.
authorized is 700,000,000 and 25,000,000,000, respectively. Under the Articles
of Incorporation of each of Institutional Fund Inc. and International Fund Inc.,
the Board of Directors is authorized to create new classes or series of shares
without a vote of stockholders.
Interests in the International Fund and the International Equity Portfolio
are represented by transferable shares of common stock having $0.01 par value
and $0.001 par value, respectively. The Directors of each of International Fund
Inc. and Institutional Fund Inc. may from time to time divide or combine the
shares into a greater or lesser number without thereby changing the
proportionate common stocks in that portfolio. The Directors of International
Fund Inc. and Institutional Fund Inc. each have the power to create separate
classes of shares for each portfolio and to create additional classes in the
future without a vote of stockholders. Classes of
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<PAGE>
shares enable Institutional Fund Inc. and International Fund Inc. each to
implement a multiple class distribution system.
Liquidation Expenses of The Fund. [If the Reorganization is effected, the
International Equity Portfolio will liquidate, cease to operate as a business,
and dissolve its corporate existence. In this connection, the International
Equity Portfolio will incur certain expenditures, obligations, and liabilities
to be paid or discharged on and after the Closing Date ("Liquidation Expenses"),
for which it will retain a portion of its cash and cash equivalents as the
Expense Reserve.]
Interest of Certain Persons. The Investment Manager has a financial
interest in the Reorganization, arising from the fact that its management fee
under its Investment Management Agreement with the International Fund will
increase as the amount of the International Fund's assets increases: the amount
of those assets will increase by virtue of the Reorganization. See "Synopsis -
Fees and Expenses." Similarly, Scudder Service Corporation, a subsidiary of the
Investment Manager, is the transfer, stockholder servicing, and dividend-paying
agent for the International Fund, and its fees from the International Fund will
increase from the addition to the International Fund of new accounts.
Portfolio Turnover. The average annual portfolio turnover rate for the
International Fund, i.e. the ratio of the lesser of annual sales or purchases to
the monthly average value of the portfolio (excluding from both the numerator
and the denominator securities with maturities at the time of acquisition of one
year or less), for the fiscal year ended March 31, 1996 and March 31, 1997, was
45.2% and 35.8%, respectively. The average annual portfolio turnover rate for
the International Equity Portfolio for the period April 3, 1996 (commencement of
operations) to December 31, 1996 was 10.1% (annualized).
Capitalization and Performance. The following table shows on an unaudited
basis the capitalization of the International Equity Portfolio and the Barrett
Shares Class of the International Fund as of [ ] and on a pro forma basis as of
March 31, 1997 giving effect to the Reorganization:
(In thousands, except per share values)
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
International Fund International Equity Pro Forma Pro Forma for
Barrett Shares Class Portfolio Adjustments* Reorganization*
Net Assets
Net Asset Value per share
Shares outstanding
</TABLE>
* The pro forma relates to the International Fund as a whole; the proforma
for the Barrett Shares class of the International Fund is as follows: _________
Total return is a measure of the change in value of an investment in a fund
over the period covered, which assumes that any dividends or capital gains
distributions are automatically reinvested in shares of the same class of that
fund rather than paid to the investor in cash. The formula for total return used
by a fund is prescribed by the SEC and includes three steps: (1) adding to the
total number of shares of the particular class that would be purchased by a
hypothetical $1,000 investment in the fund all additional shares that would have
been purchased if all dividends and distributions paid or distributed during the
period had been automatically reinvested; (2) calculating the redeemable value
of the hypothetical initial investment as of the end of the period by
multiplying the total number of shares owned at the end of the period by the net
asset value per share of the relevant class on the last trading day of the
period; and (3) dividing this account value for the hypothetical investor by the
amount of the initial investment, and annualizing the result for periods of less
than one year. Total return may be stated with or without giving effect to any
expense limitations in effect for a fund.
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<PAGE>
Average Annual Total Return. The following table reflects average annual
total returns for the one, five and ten year periods ending July 31, 1997 for
shares of the International Equity Portfolio and the International Fund:
Average Annual Total Return:
<TABLE>
<S> <C> <C> <C>
<CAPTION>
Period International Equity Portfolio Institutional Fund*
------ ------------------------------ -------------------
One Year
Five Years
Ten Years
Since Inception
</TABLE>
- -----------------------------------
* Barrett Shares of International Fund were not offered prior to April 3, 1996.
Performance shown is for shares of the International Fund in existence prior to
such date.
Investment Manager. Scudder, Stevens & Clark, Inc., 345 Park Avenue, New
York, New York 10154 is the investment manager to the International Fund
pursuant to an Investment Management Agreement with International Fund Inc., on
behalf of the International Fund, substantially similar in all material respects
to that currently in place for the International Equity Portfolio.
Stockholders of the International Fund are being asked to approve a new
investment management agreement with Scudder Kemper in connection with the
transactions pursuant to the Scudder-Zurich alliance described more fully in
Proposal 2 below. If approved, the new investment management agreement between
the International Fund and Scudder Kemper is not expected to have a material
effect on the operations of the International Fund or on its stockholders. No
material change in the International Fund's investment philosophy, objectives or
strategies is currently envisioned.
The Directors and Executive Officers of International Fund Inc., their
business addresses and principal occupations during the past five years are:
<TABLE>
<S> <C>
<CAPTION>
Present Office with International Fund Inc. (Date
Became Director), Principal Occupation or
Name (Age) Employment and Directorships
- ---------- ----------------------------
Paul Bancroft III (67) Director, Scudder International Fund, Inc. (1982). Venture Capitalist and
Consultant (1988 to present); Retired President, Chief Executive Officer
and Director, Bessemer Securities Corp. (private investment company);
Director, Western Atlas, Inc. (diversified oil services and industrial
automation company). Former Director: Albany International, Inc. (paper
machine belt manufacturer); and Measurex Corp. (process control systems
company). Mr. Bancroft serves on the Boards of an additional 6 Trusts or
Corporations whose Funds are advised by Scudder.
Nicholas Bratt* (49) President, Scudder International Fund, Inc. (1982). Managing Director of
Scudder, Stevens & Clark, Inc. Mr. Bratt serves on the Boards of an
additional 12 Trusts or Corporations whose Funds are advised by Scudder.
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<PAGE>
Present Office with International Fund Inc. (Date
Became Director), Principal Occupation or
Name (Age) Employment and Directorships
- ---------- ----------------------------
Thomas J. Devine Director, Scudder International Fund, Inc. (1978). Consultant. Mr. Devine
serves on the Boards of an additional 5 Trusts or Corporations whose Funds
are advised by Scudder.
Keith R. Fox (43) Director, Scudder International Fund, Inc. (1996). President, Exeter
Capital Management Corporation (private equity investment firm). Mr. Fox
serves on the Boards of an additional 3 Trusts or Corporations whose Funds
are advised by Scudder.
William H. Gleysteen, Jr. (71) Director, Scudder International Fund, Inc. (1990). Consultant; Guest
Scholar, Brookings Institute; Former President, The Japan Society, Inc.
(until 1996). Mr. Gleysteen serves on the Boards of an additional 4 Trusts
or Corporations whose Funds are advised by Scudder.
David S. Lee* (63) Vice President, Assistant Treasurer and Director, Scudder International
Fund, Inc. (1997). Managing Director, Scudder, Stevens & Clark, Inc.;
Trustee Emeritus, New England Medical Center. Mr. Lee serves on the Boards
of an additional 35 Trusts or Corporations whose Funds are advised by
Scudder.
William H. Luers (68) Director, Scudder International Fund, Inc. (1990). President, The
Metropolitan Museum of Art; Director: IDEX Corporation (liquid handling
equipment manufacturer) and Wickes Lumber Company (building materials for
contractors); Former Director: Transco Energy Company (natural gas
transmission company) (until 1995) and The Discount Corporation of New York
(bond trading) (until 1993). Mr. Luers serves on the Boards of an
additional 3 Trusts or Corporations whose Funds are advised by Scudder.
Wilson Nolen (70) Director, Scudder International Fund, Inc. (1975). Consultant; Trustee:
Cultural Institutions Retirement Fund, Inc., New York Botanical Garden,
Skowhegan School of Painting and Sculpture; and Former Director, Ecohealth,
Inc. (biotechnology company) (until 1996). Mr. Nolen serves on the Boards
of an additional 9 Trusts or Corporations whose Funds are advised by
Scudder.
Daniel Pierce* (63) Chairman of the Board and Director, Scudder International Fund, Inc.
(1986). Chairman of the Board and Managing Director of Scudder, Stevens &
Clark, Inc. Director, Fiduciary Trust Company (bank and trust company) and
Fiduciary Company Incorporated (bank and trust company). Mr. Pierce serves
on the Boards of an additional 25 Trusts or Corporations whose Funds are
advised by Scudder.
Kathryn L. Quirk* (44) Vice President, Assistant Secretary and Director, Scudder International
Fund, Inc. (1996). Managing Director of Scudder, Stevens & Clark, Inc.
Ms. Quirk serves on the Boards of an additional 31 Trusts or Corporations
whose Funds are advised by Scudder.
Dr. Gordon Shillinglaw (72) Director, Scudder International Fund, Inc. (1982). Professor Emeritus of
Accounting, Columbia University Graduate School of Business. Dr.
Shillinglaw serves on the Boards of an additional 8 Trusts or Corporations
-30-
<PAGE>
Present Office with International Fund Inc. (Date
Became Director), Principal Occupation or
Name (Age) Employment and Directorships
- ---------- ----------------------------
whose Funds are advised by Scudder.
</TABLE>
- ----------------
* Directors considered by International Fund Inc. and its counsel to be
"interested persons" (as defined in the 1940 Act) of International Fund
Inc. or of its investment manager.
Stockholders of the International Fund are being asked to elect a new slate
of Directors in connection with the Scudder-Zurich alliance for reasons
substantially similar to those set forth in Proposal 3 below.
Expenses of the Reorganization. Expenses relating to the proposed
Reorganization are expected to approximate $___________. The expenses relating
to the proposed Reorganization expenses will be borne by Scudder. There can, of
course, be no assurance that actual total expenses will be lower.
ADDITIONAL INFORMATION
As of June 30, 1997, 3,476,331 shares in the aggregate, 6.48% of the
outstanding shares of International 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. As of June 30, 1997 the Directors and Officers of
International Fund Inc. as a group beneficially owned less than 1% of each class
of shares of the International Fund outstanding. As of June 30, 1997, the
Directors and Officers of Institutional Fund Inc. as a group beneficially owned
less than 1% of the outstanding shares of the International Equity Portfolio. No
persons own beneficially, as of June 30, 1997, 5% or more of the outstanding
shares of the International Equity Portfolio.
Required Vote
Approval of the Reorganization Agreement requires the affirmative vote
of a majority of the International Equity Portfolio's shares outstanding and
entitled to vote thereon. Subject to such approval, the reorganization is
currently scheduled to become effective as of the close of business on
____________, 1997, but may be postponed by mutual agreement of Institutional
Fund Inc. and International Fund Inc. The Directors unanimously recommend that
the stockholders of the Fund vote in favor of this Proposal 1.
-31-
<PAGE>
PROPOSAL 2: APPROVAL OF NEW
INVESTMENT MANAGEMENT AGREEMENT
Introduction. Scudder acts as the investment manager to the International
Equity Portfolio (also referred to in Proposals 2, 3 and 4 as the "Fund")
pursuant to an investment management agreement entered into by the Fund and
Scudder (the "Current Investment Management Agreement"). On June 26, 1997,
Scudder entered into a Transaction Agreement (the "Transaction Agreement") with
Zurich Insurance Company ("Zurich") pursuant to which Scudder and Zurich have
agreed to form an alliance. Under the terms of the Transaction Agreement, Zurich
will acquire a majority interest in Scudder, and Zurich Kemper Investments, Inc.
("ZKI"), a Zurich subsidiary, will become part of Scudder. Scudder's name will
be changed to Scudder Kemper Investments, Inc. ("Scudder Kemper"). The foregoing
are referred to as the "Transactions." ZKI, a Chicago-based investment adviser
and the adviser to the Kemper funds, has approximately $80 billion under
management. The headquarters of Scudder Kemper will be in New York. Edmond D.
Villani, Scudder's Chief Executive Officer, will continue as Chief Executive
Officer of Scudder Kemper and will become a member of Zurich's Corporate
Executive Board.
-31-
<PAGE>
Consummation of the Transactions would constitute an "assignment," as that
term is defined in the 1940 Act, of the Fund's Current Investment Management
Agreement with Scudder. As required by the 1940 Act, the Current Investment
Management Agreement provides for its automatic termination in the event of its
assignment. In anticipation of the Transactions, a new investment management
agreement (the "New Investment Management Agreement," together with the Current
Investment Management Agreement, the "Investment Management Agreement") between
the Fund and Scudder Kemper is being proposed for approval by stockholders of
the Fund. A copy of the form of the New Investment Management Agreement is
attached hereto as Exhibit A. THE NEW INVESTMENT MANAGEMENT AGREEMENT IS IN ALL
MATERIAL RESPECTS ON THE SAME TERMS AS THE CURRENT INVESTMENT MANAGEMENT
AGREEMENT. Conforming changes are being recommended to the New Investment
Management Agreement in order to promote consistency among all the funds
currently advised by Scudder and to permit ease of administration. The material
terms of the Current Investment Management Agreement are described under
"Description of the Current Investment Management Agreement" below.
Stockholders are being asked to approve this Proposal 2 in the event that
the Reorganization, as described in Proposal 1 above, is not consummated.
Board of Directors Recommendation. On August 6, 1997, the Board of
Institutional Fund Inc. (also referred to in Proposals 2, 3 and 4 as the
"Corporation"), including Non-interested Directors, voted to approve the New
Investment Management Agreement and to recommend its approval to stockholders.
For information about the Board's deliberations and the reasons for its
recommendation, please see "Board of Directors Evaluation" below.
The Board of the Corporation recommends that its stockholders vote in favor
of the approval of the New Investment Management Agreement for the Fund.
Board of Directors Evaluation. On June 26, 1997, representatives of Scudder
advised the Non-interested Directors of the Corporation by means of a telephone
conference call that Scudder had entered into the Transaction Agreement. At that
time, Scudder representatives described the general terms of the proposed
Transactions and the perceived benefits for the Scudder organization and for its
investment advisory clients.
Scudder subsequently furnished the Non-interested Directors additional
information regarding the proposed Transactions, including information regarding
the terms of the proposed Transactions, and information regarding the Zurich and
ZKI organizations. In a series of subsequent telephone conference calls and
in-person meetings, the Non-interested Directors discussed this information
among themselves and with representatives of Scudder and Zurich. They were
assisted in their review of this information by their independent legal counsel
and also consulted with a representative of the Fund's independent auditors and
with an independent consultant knowledgeable in mutual fund industry matters.
In the course of these discussions, Scudder advised the Non-interested
Directors that it did not expect that the proposed Transactions would have a
material effect on the operations of the Fund or its stockholders. Scudder has
advised the Non-interested Directors that the Transaction Agreement, by its
terms, does not contemplate any changes in the structure or operations of the
Fund. Scudder representatives have informed the Directors that Scudder intends
to maintain the separate existence of the funds that Scudder and ZKI manage in
their respective distribution channels. Scudder has also advised the
Non-interested Directors that although it expects that various portions of the
ZKI organization would be combined with Scudder's operations, the senior
executives of Scudder overseeing those operations will remain largely unchanged.
It is possible, however, that changes in certain personnel currently involved in
providing services to the Fund may result from future efforts to combine the
strengths and efficiencies of both firms. In their discussions with the
Directors, Scudder representatives also emphasized the strengths of the Zurich
organization and its commitment to provide the new Scudder Kemper organization
with the resources necessary to continue to provide high quality services to the
Fund and the other investment advisory clients of the new Scudder Kemper
organization.
-32-
<PAGE>
The Board of the Corporation was advised that Scudder intends to rely on
Section 15(f) of the 1940 Act, which provides a non-exclusive safe harbor for an
investment adviser to an investment company or any of the investment adviser's
affiliated persons (as defined under the 1940 Act) to receive any amount or
benefit in connection with a change in control of the investment adviser so long
as two conditions are met. First, for a period of three years after the
transaction, at least 75% of the board members of the investment company must
not be "interested persons" of the investment company's investment adviser or
its predecessor adviser. On or prior to the consummation of the Transactions,
the Board, assuming the election of the nominees that you are being asked to
elect in "Proposal 3: Election of Directors," would be in compliance with this
provision of Section 15(f). (See "Proposal 3: Election of Directors"). Second,
an "unfair burden" must not be imposed upon the investment company as a result
of such transaction or any express or implied terms, conditions or
understandings applicable thereto. The term "unfair burden" is defined in
Section 15(f) to include any arrangement during the two-year period after the
transaction whereby the investment adviser, or any interested person of any such
adviser, receives or is entitled to receive any compensation, directly or
indirectly, from the investment company or its shareholders (other than fees for
bona fide investment advisory or other services) or from any person in
connection with the purchase or sale of securities or other property to, from or
on behalf of the investment company (other than bona fide ordinary compensation
as principal underwriter for such investment company). No such compensation
agreements are contemplated in connection with the Transactions. Scudder has
undertaken to pay the costs of preparing and distributing proxy materials to,
and of holding the meeting of, the Fund's shareholders as well as other fees and
expenses in connection with the Transactions, including the fees and expenses of
legal counsel and consultants to the Fund and the Non-interested Directors.
During the course of their deliberations, the Non-interested Directors
considered a variety of factors, including the nature, quality and extent of the
services furnished by Scudder to the Fund; the necessity of Scudder maintaining
and enhancing its ability to retain and attract capable personnel to serve the
Fund; the investment record of Scudder in managing the Fund; the increased
complexity of the domestic and international securities markets; Scudder's
profitability from advising the Fund; possible economies of scale; comparative
data as to investment performance, advisory fees and other fees, including
administrative fees, and expense ratios; the risks assumed by Scudder; the
advantages and possible disadvantages to the Fund of having an adviser of the
Fund which also serves other investment companies as well as other accounts;
possible benefits to Scudder from serving as manager to the Fund and from
affiliates of Scudder serving the Fund in various other capacities; current and
developing conditions in the financial services industry, including the entry
into the industry of large and well capitalized companies which are spending and
appear to be prepared to continue to spend substantial sums to engage personnel
and to provide services to competing investment companies; and the financial
resources of Scudder and the continuance of appropriate incentives to assure
that Scudder will continue to furnish high quality services to the Fund.
In addition to the foregoing factors, the Non-interested Directors gave
careful consideration to the likely impact of the Transactions on the Scudder
organization. In this regard, the Non-interested Directors considered, among
other things, the structure of the Transactions which affords Scudder executives
substantial autonomy over Scudder's operations and provides substantial equity
participation and incentives for many Scudder employees; Scudder's and Zurich's
commitment to Scudder's paying compensation adequate to attract and retain top
quality personnel; Zurich's strategy for the development of its asset management
business through Scudder; information regarding the financial resources and
business reputation of Zurich; and the complementary nature of various aspects
of the business of Scudder and the Zurich Kemper organization and the intention
to maintain separate Scudder and Kemper brands in the mutual fund business.
Based on the foregoing, the Non-interested Directors concluded that the
Transactions should cause no reduction in the quality of services provided to
the Fund and believe that the Transactions should enhance Scudder's ability to
provide such services. The Non-interested Directors considered the foregoing
factors with respect to the Fund.
On August 6, 1997, the Directors of the Corporation, including the
Non-interested Directors of the Corporation approved the New Investment
Management Agreement.
Information Concerning the Transactions and Zurich. Under the Transaction
Agreement, Zurich will pay $866.7 million in cash to acquire two-thirds of
Scudder's outstanding shares and will contribute ZKI to Scudder
-33-
<PAGE>
for additional shares, following which Zurich will have a 79.1% fully diluted
equity interest in the combined business. Zurich will then transfer a 9.6% fully
diluted equity interest in Scudder Kemper to a compensation pool for the benefit
of Scudder and ZKI employees, as well as cash and warrants on Zurich shares for
award to Scudder employees, in each case subject to five-year vesting schedules.
After giving effect to the Transactions, current Scudder stockholders will have
a 29.6% fully diluted equity interest in Scudder Kemper and Zurich will have a
69.5% fully diluted interest in Scudder Kemper. Scudder's name will be changed
to Scudder Kemper Investments, Inc.
The purchase price for Scudder or for ZKI in the Transactions is subject to
adjustment based on the impact to revenues of non-consenting clients, and will
be reduced if the annualized investment management fee revenues (excluding the
effect of market changes, but taking into account new assets under management)
from clients at the time of closing, as a percentage of such revenues as of
[June 30], 1997 (the "Revenue Run Rate Percentage"), is less than 90%.
At the closing, Zurich and the other stockholders of Scudder Kemper will
enter into a Second Amended and Restated Security Holders Agreement (the "New
SHA"). Under the New SHA, Scudder stockholders will be entitled to designate
three of the seven members of the Scudder Kemper board of directors and two of
the four members of an Executive Committee, which will be the primary
management-level committee of Scudder Kemper. Zurich will be entitled to
designate the other four members of the Scudder Kemper board and other two
members of the Executive Committee.
The names, addresses and principal occupations of the initial
Scudder-designated directors of Scudder Kemper are as follows: Lynn S. Birdsong,
345 Park Avenue, New York, New York, Managing Director of Scudder; Cornelia M.
Small, 345 Park Avenue, New York, New York, Managing Director of Scudder; and
Edmond D. Villani, 345 Park Avenue, New York, New York, President, Chief
Executive Officer and Managing Director of Scudder.
The names, addresses and principal occupations of the initial
Zurich-designated directors of Scudder Kemper are as follows: Lawrence W. Cheng,
Mythenquai 2, Zurich, Switzerland, Chief Investment Officer for Investments and
Institutional Asset Management and the corporate functions of Securities and
Real Estate for Zurich; Steven M. Gluckstern, Mythenquai 2, Zurich, Switzerland,
responsible for Reinsurance, Structured Finance, Capital Market Products and
Strategic Investments, and a member of the Corporate Executive Board of Zurich;
Rolf Hueppi, Mythenquai 2, Zurich, Switzerland, Chairman of the Board and Chief
Executive Officer of Zurich; and Markus Rohrbasser, Mythenquai 2, Zurich,
Switzerland, Chief Financial Officer and member of the Corporate Executive Board
of Zurich.
The initial Scudder-designated Executive Committee members will be Messrs.
Birdsong and Villani (Chairman). The initial Zurich-designated Executive
Committee members will be Messrs. Cheng and Rohrbasser.
The New SHA requires the approval of a majority of the Scudder-designated
directors for certain decisions, including changing the name of Scudder Kemper,
effecting a public offering before April 15, 2005, causing Scudder Kemper to
engage substantially in non-investment management and related business, making
material acquisitions or divestitures, making material changes in Scudder
Kemper's capital structure, dissolving or liquidating Scudder Kemper, or
entering into certain affiliated transactions with Zurich. The New SHA also
provides for various put and call rights with respect to Scudder Kemper stock
held by current Scudder employees, limitations on Zurich's ability to purchase
other asset management companies outside of Scudder Kemper, rights of Zurich to
repurchase Scudder Kemper stock upon termination of employment of Scudder Kemper
personnel, and registration rights for stock held by continuing Scudder
stockholders.
The Transactions are subject to a number of conditions, including approval
by Scudder stockholders; the Revenue Run Rate Percentages of Scudder and ZKI
being at least 75%; Scudder and ZKI having obtained director and stockholder
approvals from U.S.-registered funds representing 90% of assets of such funds
under management as of June 26, 1997; the absence of any restraining order or
injunction preventing the Transactions, or any litigation challenging the
Transactions that is reasonably likely to result in an injunction or
invalidation of the
-34-
<PAGE>
Transactions, and the continued accuracy of the representations and warranties
contained in the Transaction Agreement. The Transactions are expected to close
during the fourth quarter of 1997.
The information set forth above concerning the Transactions has been
provided to the Corporation by Scudder, and the information set forth below
concerning Zurich has been provided to the Corporation by Zurich.
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. Zurich Insurance Group is particularly strong in the insurance of
international companies and organizations. Over the past few years, Zurich's
global presence, particularly in the United States, has been strengthened by
means of selective acquisitions.
Description of the Current Investment Management Agreement. Under the
Current Investment Management Agreement, Scudder provides the Fund with
continuing investment management services. The Investment Manager also
determines which securities shall be purchased, held, or sold, and what portion
of the Fund's assets shall be held uninvested, subject to the Corporation's
Articles of Incorporation, By-Laws, investment policies and restrictions, the
provisions of the 1940 Act, and such policies and instructions as the Directors
may determine.
The Current Investment Management Agreement provides that the Investment
Manager will provide portfolio management services and that the Investment
Manager will place portfolio transactions in accordance with policies expressed
in the Fund's registration statement, pay the Fund's office rent, render
significant administrative services on behalf of the Fund (not otherwise
provided by third parties) necessary for the Fund's operating as an open-end
investment company including, but not limited to, preparing reports to and
meeting materials for the Corporation's Board of Directors and reports and
notices to Fund stockholders; supervising, negotiating contractual arrangements
with, to the extent appropriate, and monitoring the performance of various
third-party service providers to the Fund (such as the Fund's transfer and
pricing agents, fund accounting agent, custodian, accountants and others) and
other persons in any capacity deemed necessary or desirable to Fund operations;
preparing and making filings with the Securities and Exchange Commission (the
"SEC" or the "Commission") and other regulatory and self-regulatory
organizations, including but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration Statement, semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act;
overseeing the tabulation of proxies by the Fund's transfer agent; 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 pursuant to Section
4982 of the Internal Revenue Code of 1986, as amended; providing assistance with
investor and public relations matters; monitoring the valuation of portfolio
securities and the calculation of net asset value; monitoring the registration
of shares of the Fund under applicable federal and state securities laws;
maintaining or causing to be maintained for the Fund all books, records and
reports and any other information required under the 1940 Act, to the extent
such books, records and reports and other information are not maintained by the
Fund's custodian or other agents of the Fund; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting
issues that may arise with respect to the Fund's operations and consulting with
the Fund's independent accountants, legal counsel and the Fund's other agents as
necessary in connection therewith; establishing and monitoring the Fund's
operating expense budgets; reviewing the Fund's bills; processing the payment of
bills that have been approved by an authorized person; assisting the Fund in
determining the amount of dividends and distributions available to be paid by
the Fund to its stockholders, preparing and arranging for the printing of
dividend notices to stockholders, and providing the transfer and dividend paying
agent, the custodian, and the accounting agent with such information as is
required for such parties to effect the payment of dividends and distributions;
and otherwise assisting the Fund in the conduct of its business, subject to the
direction and control of the Corporation's Board of Directors.
Under the Current Investment Management Agreement, the Fund is responsible
for other expenses, including organizational expenses (including out-of-pocket
expenses, but not including the Investment Manager's
-35-
<PAGE>
overhead or employee costs); brokers' commissions or other costs of acquiring or
disposing of any portfolio securities of the Fund; legal, auditing and
accounting expenses; payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; taxes and
governmental fees; the fees and expenses of the Fund's transfer agent; expenses
of preparing share certificates and any other expenses, including clerical
expenses, of issuance, offering, distribution, sale, redemption or repurchase of
shares; the expenses of and fees for registering or qualifying securities for
sale; the fees and expenses of Non-interested Directors; the cost of printing
and distributing reports, notices and dividends to current stockholders; and the
fees and expenses of the Fund's custodians, subcustodians, accounting agent,
dividend disbursing agents and registrars. The Fund may arrange to have third
parties assume all or part of the expenses of sale, underwriting and
distribution of shares of the Fund. The Fund is also responsible for expenses of
stockholders' and other meetings, the cost of responding to stockholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify officers and
Directors of the Corporation with respect thereto. The Fund is also responsible
for the maintenance of books and records which are required to be maintained by
the Fund's custodian or other agents of the Corporation; telephone, telex,
facsimile, postage and other communications expenses; any fees, dues and
expenses incurred by the Fund in connection with membership in investment
company trade organizations; expenses of printing and mailing prospectuses and
statements of additional information of the Fund and supplements thereto to
current stockholders; costs of stationery; fees payable to the Investment
Manager and to any other Fund advisors or consultants; expenses relating to
investor and public relations; interest charges, bond premiums and other
insurance expense; freight, insurance and other charges in connection with the
shipment of the Fund's portfolio securities; any litigation expenses;
indemnification of Directors and officers of the Corporation and other expenses.
The Investment Manager is responsible for the payment of the compensation
and expenses of all Directors, officers and executive employees of the Fund
(including the Fund's share of payroll taxes) affiliated with the Investment
Manager and making available, without expense to the Fund, the services of such
Directors, officers and employees as may duly be elected officers of the
Corporation, subject to their individual consent to serve and to any limitations
imposed by law. The Fund is responsible for the fees and expenses (specifically
including travel expenses relating to Fund business) of Directors not affiliated
with the Investment Manager. Under each Current Investment Management Agreement,
the Investment Manager also pays the Fund's share of payroll taxes, as well as
expenses, such as travel expenses (or an appropriate portion thereof), of
Directors and officers of the Corporation who are Directors, officers or
employees of the Investment Manager, to the extent that such expenses relate to
attendance at meetings of the Board of Directors of the Corporation, or any
committees thereof or advisers thereto, held outside Boston, Massachusetts or
New York, New York. During the Fund's most recent fiscal year, no compensation,
direct or otherwise (other than through fees paid to the Investment Manager),
was paid or became payable by the Corporation to any of its officers or
Directors who were affiliated with the Investment Manager.
In return for the services provided by the Investment Manager as investment
manager, and the expenses it assumes under Current Investment Management
Agreement, the Fund pays the Investment Manager a management fee which is
accrued daily and payable monthly. The management fee rate for the Fund is set
forth in the table below. As of the end of the Fund's last fiscal year, the Fund
had net assets and paid an aggregate management fee to the Investment Manager
during such period as set forth below.
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Aggregate
Fiscal Year Net Management Management
Fund (ended) Assets Fee Rate Fee Paid
- ---- ------- ------ ----------- --------
- -----------------------------------------------------------------------------------------------------------------
Institutional International Equity Portfolio 12-31-96 $17,897,508 .90% $0
</TABLE>
-36-
<PAGE>
The Current Investment Management Agreement further provides that the
Investment Manager 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
such agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Investment Manager in the
performance of its duties or from reckless disregard by the Investment Manager
of its obligations and duties under such agreement.
The Current Investment Management Agreement may be terminated without
penalty upon sixty (60) days' written notice by either party. The Fund may agree
to terminate its Current Investment Management Agreement either by the vote of a
majority of the outstanding voting securities of the Fund, or by the Board of
Directors. As stated above, the Current Investment Management Agreement
automatically terminates in the event of its assignment.
Scudder has acted as the Investment Manager for the Fund since the Fund
commenced operations as shown below. Also shown below is the date of the Current
Investment Management Agreement, the date when the Current Investment Management
Agreement was last approved by the Directors and the stockholders of the Fund
and the date to which the Current Investment Management Agreement was last
continued. The Current Investment Management Agreement was last submitted to
stockholders prior to its becoming effective, as required by the 1940 Act.
<TABLE>
<S> <C> <C> <C> <C> <C>
<CAPTION>
Date of Current
Commencement Investment Last Approved by Date
of Management Continued
Fund Operations Agreement Directors Stockholders to
---- ---------- --------- --------- ------------ --
Institutional 4-3-96 4-3-96 7-27-97 4-2-96 7-31-98
International
Equity Portfolio
</TABLE>
--------------
* An Investment Management Agreement which is changed from a prior
agreement solely to reduce the fee payable by the Fund does not require
stockholder approval prior to becoming effective. In those cases, the date
shown for stockholder approval may be later than the effective date.
The New Investment Management Agreement. The New Investment Management
Agreement for the Fund will be dated as of the date of the consummation of the
Transactions, which is expected to occur in the fourth quarter of 1997, but in
no event later than February 28, 1998. The New Investment Management Agreement
will be in effect for an initial term ending on the same date as would the
Current Investment Management Agreement but for the Transactions, and may
continue thereafter from year to year only if specifically approved at least
annually by the vote of "a majority of the outstanding voting securities" of the
Fund, or by the Board and, in either event, the vote of a majority of the
Non-interested Directors, cast in person at a meeting called for such purpose.
In the event that stockholders of Fund do not approve the New Investment
Management Agreement, the Current Investment Management Agreement will remain in
effect until the closing of the Transactions at which time it would terminate.
In such event, the Board of Corporation will take such action as it deems to be
in the best interests of the Fund and its stockholders. In the event the
Transactions are not consummated, Scudder will continue to provide services to
the Fund in accordance with the terms of the Current Investment Management
Agreement for such periods as may be approved at least annually by the Board,
including a majority of the Non-interested Directors.
Differences Between the Current and New Investment Management Agreement.
The New Investment Management Agreement is substantially the same as the Current
Investment Management Agreement in all material respects. The principal changes
that have been made are summarized below. The New Investment Management
Agreements reflect conforming changes that have been made in order to promote
consistency among
-37-
<PAGE>
all funds currently advised by Scudder and to permit ease of administration. For
example, in the New Investment Management Agreement, the term "accounting
agents" would be added to the list of service providers to which the Investment
Manager must provide information in connection with the payment of dividends and
distributions.
In addition, the New Investment Management Agreement would clarify that
purchase and sale opportunities which are suitable for more than one client of
the Investment Manager will be allocated by the Investment Manager in an
equitable manner.
Further, the New Investment Management Agreement would clarify the scope of
the licensing provisions governing the use of the Scudder name. Specifically,
the New Investment Management Agreement identifies Scudder Kemper as the
exclusive licensee of the rights to use and sublicense the names "Scudder,"
"Scudder Kemper Investments, Inc.," and "Scudder, Stevens & Clark, Inc."
(together the "Scudder Marks"). Under this license, the Corporation, with
respect to the Fund, has the nonexclusive right to use and sublicense the
Scudder name and marks as part of its name, and to use the Scudder Marks in the
Corporation's investment products and services. This license continues only as
long as the New Investment Management Agreement is in place, and only as long as
Scudder Kemper continues to be a licensee of the Scudder Marks from Scudder
Trust Company, which is the owner and licensor of the Scudder Marks. As a
condition of the license, the Corporation, on behalf of each of the Fund,
undertakes certain responsibilities and agrees to certain restrictions, such as
agreeing not to challenge the validity of the Scudder Marks or ownership by
Scudder Trust Company and the obligation to use the name within commercially
reasonable standards of quality. In the event the agreement is terminated, the
Corporation, on behalf of the Fund, must not use a name likely to be confused
with those associated with the Scudder Marks.
The New Investment Management Agreement adds conforming language that
describes in greater detail the portfolio management services provided by the
Investment Manager and adds a new section that describes the administrative
responsibilities and duties of the Investment Manager. For example, the section
entitled Portfolio Management Services specifies that the Fund will have the
benefit of the Investment Manager's analysis and research, and that the
Investment Manager will undertake responsibilities such as making records
available to regulators and providing periodic reports to the Board. The section
entitled Administrative Services is new and describes the types of
administrative services that the Investment Manager has been customarily
providing to the Fund. For a fuller explanation of the types of administrative
services, please refer to the second paragraph under "Description of the Current
Investment Management Agreement" in these proxy materials.
Other conforming changes include: deletion of the Investment Manager's
potential responsibility for monitoring the calculation and payment of
distributions to stockholders; addition of a provision clarifying that the New
Investment Management Agreement supersedes all prior agreements; and addition of
a provision replacing New York with Massachusetts as the jurisdiction whose laws
will govern the New Investment Management Agreement.
Investment Manager. Scudder is one of the most experienced investment
counsel firms in the United States. It was established in 1919 as a partnership
and was restructured as a Delaware corporation in 1985. The principal source of
Scudder's income is professional fees received from providing continuing
investment advice. Scudder provides investment counsel for many individuals and
institutions, including insurance companies, endowments, industrial corporations
and financial and banking organizations.
Scudder is a Delaware corporation. Daniel Pierce* is the Chairman of the
Board of Scudder, Edmond D. Villani# is President and Chief Executive Officer of
Scudder, Stephen R. Beckwith#, Lynn S. Birdsong#, Nicholas Bratt#, E. Michael
Brown*, Mark S. Casady*, Linda C. Coughlin*, Margaret D. Hadzima*, Jerard K.
Hartman#, Richard A. Holt@, John T. Packard+, Kathryn L. Quirk#, Cornelia M.
Small# and Stephen A. Wohler* are the
-38-
<PAGE>
other members of the Board of Directors of Scudder (see footnote for symbol
key).. The principal occupation of each of the above named individuals is
serving as a Managing Director of Scudder.
All of the outstanding voting and nonvoting securities of Scudder are held
of record by Stephen R. Beckwith, Juris Padegs#, Daniel Pierce and Edmond D.
Villani in their capacity as the representatives of the beneficial owners of
such securities (the "Representatives"), pursuant to a Security Holders'
Agreement among Scudder, the beneficial owners of securities of Scudder and such
Representatives. Pursuant to the Security Holders' Agreement, the
Representatives have the right to reallocate shares among the beneficial owners
from time to time. Such reallocations will be at net book value in cash
transactions. All Managing Directors of Scudder own voting and nonvoting stock
and all Principals of Scudder own nonvoting stock.
Directors, officers and employees of Scudder from time to time may enter
into transactions with various banks, including the Fund's custodian bank. It is
Scudder's opinion that the terms and conditions of those transactions will not
be influenced by existing or potential custodial or other Fund relationships.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of Scudder,
computes net asset value and provides fund accounting services for the Fund.
Scudder Service Corporation ("SSC"), also a subsidiary of Scudder, is the
transfer, shareholding and dividend-paying agent for the Fund. Scudder Trust
Company ("STC"), an affiliate of Scudder, provides subaccounting and
recordkeeping services for stockholder accounts in certain retirement and
employee benefit plans. The table below sets forth for the Fund the respective
fees paid to SFAC SSC and STC during the last fiscal year of the Fund.
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
Aggregate Fee Aggregate Fee Aggregate Fee
Paid to SFAC During Paid to SSC During Paid to STC During
Fund Fiscal Year Last Fiscal Year Last Fiscal Year Last Fiscal Year
- ---- ----------- ---------------- ---------------- ----------------
Institutional International 12-31-96 $0 $15,431 $0
Equity Portfolio
</TABLE>
SFAC, SSC and STC will continue to provide fund accounting, transfer
agency, subaccounting and recordkeeping services to the Fund under the current
arrangements if the New Investment Management Agreement is approved.
Exhibit B sets forth the fees and other information regarding other
investment companies advised by Scudder.
Brokerage Commissions on Portfolio Transactions. To the maximum extent
feasible, Scudder places orders for portfolio transactions through Scudder
Investor Services, Inc., Two International Place, Boston, Massachusetts 02110
(the "Distributor") (a corporation registered as a broker/dealer and a
subsidiary of Scudder), which in turn places orders on behalf of the Fund with
issuers, underwriters or other brokers and dealers. In selecting brokers and
dealers with which to place portfolio transactions for the Fund, Scudder will
not consider sales of shares of funds currently advised by ZKI, although it may
place such transactions with brokers and dealers that sell shares of funds
currently advised by ZKI. The Distributor receives no commissions, fees or other
remuneration from the Fund for this service. Allocation of portfolio
transactions is supervised by Scudder.
* Two International Place, Boston, Massachusetts
# 345 Park Avenue, New York, New York
+ 101 California Street, San Francisco, California
@ Two Prudential Plaza, 180 North Stetson, Suite 5400, Chicago, Illinois
-39-
<PAGE>
Required Vote. Approval of this Proposal by the Fund requires the
affirmative vote of a "majority of the outstanding voting securities" of the
Fund. The Directors recommend that the stockholders vote in favor of this
Proposal 2.
PROPOSAL 3: ELECTION OF DIRECTORS FOR THE CORPORATION
At the Special Meeting, five Directors are to be elected to constitute the
Board of the Corporation. For election of Directors at the Special Meeting, each
Board of Directors has approved the nomination of the following individuals: Dr.
Rosita P. Chang, Edgar R. Fiedler, Peter B. Freeman, Dr. J. D. Hammond and
Richard M. Hunt.
The persons named as proxies on the enclosed proxy card will vote for the
election of the nominees named above unless authority to vote for any or all of
the nominees is withheld in the proxy. Each Director so elected will serve as a
Director of the Corporation until the next meeting of stockholders, if any,
called for the purpose of electing Directors and until the election and
qualification of a successor or until such Director sooner dies, resigns or is
removed as provided in the Articles of Incorporation of the Corporation. Since
the Corporation does not hold annual meetings, Directors will hold office for an
indeterminate period.
Each of the nominees has indicated that he or she is willing to serve as a
Director. If any or all of the nominees should become unavailable for election
due to events not now known or anticipated, the persons named as proxies will
vote for such other nominee or nominees as the Directors may recommend. The
following table sets forth certain information concerning the current Directors
and the nominees. Unless otherwise noted, each of the Directors and nominees has
engaged in the principal occupation listed in the following table for more than
five years, but not necessarily in the same capacity.
-40-
<PAGE>
NOMINEES:
<TABLE>
<S> <C>
<CAPTION>
Present Office with the Corporation
(Date Nominee Became Director),
Principal Occupation or
Name (Age) Employment and Directorships
- ---------- ----------------------------
Dr. Rosita P. Chang (42) Professor of Finance, University of Rhode Island. Dr. Chang serves on the
Boards of 1 Trust whose Funds are advised by Scudder.
Edgar R. Fiedler* (68) Director (1987). Senior Fellow and Economic Counselor, The Conference
Board, Inc.; Formerly Assistant Secretary of the Treasury for Economic
Policy. Director: The Stanley Works; Zurich-American Insurance Company;
Harris Insight Funds; and Emerging Mexico Fund. Mr. Fiedler serves on the
Boards of an additional 5 Trusts or Corporations whose Funds are advised by
Scudder.
Peter B. Freeman (65) Director (1991). Trustee, Eastern Utilities Associates (electric utility
holding company); Director, AMICA Life Insurance Co.; Director, AMICA
Insurance Co. Formerly: President, Fields Point Management Co. and Goelet
Estate Co. (private investment management companies); Former Director, The
Providence Journal Company (multi-media company). Mr. Freeman serves on the
Boards of an additional 9 Trusts or Corporations whose Funds are advised by
Scudder.
Dr. J. D. Hammond (63) Dean, Smeal College of Business Administration, Pennsylvania State
University; Member of the Board, The Atlantic Mutual Insurance Co. Former
Trustee, Provident Mutual Life Insurance Company. Dr. Hammond serves on the
Boards of an additional 2 Trusts or Corporations whose Funds are advised by
Scudder.
Richard M. Hunt (70) University Marshall and Senior Lecturer, Harvard University; Vice Chairman,
American Council on Germany; Director, Council on the United States and
Italy; Life Trustee, American Field Service; and Partner, Elmhurst
Investment Trust (family investment firm). Mr. Hunt serves on the Boards of
an additional 2 Trusts or Corporations whose Funds are advised by Scudder.
</TABLE>
- ----------------
* Director considered by the Corporation and its counsel to be an "interested
person" (as defined in the 1940 Act) of the Corporation or of its
investment manager because of their employment by the Investment Manager
and, in some cases, holding offices with the Corporation. Prior to the
Transaction Agreement entered into between Scudder and Zurich, Mr. Fiedler
was considered not to be an interested person of the Corporation; however,
by virtue of his former relationship with Zurich-American Insurance
Company, a subsidiary of Zurich, the Corporation treats Mr. Fiedler as an
interested person of the Corporation under the 1940 Act.
-41-
<PAGE>
CURRENT DIRECTORS NOT
STANDING FOR
RE-ELECTION:
<TABLE>
<S> <C>
<CAPTION>
Present Office with the Corporation (Date Became Director),
Principal Occupation or
Name (Age) Employment and Directorships
- ---------- ----------------------------
Robert W. Lear (80) Director (1989). Executive-in-Residence, Visiting Professor, Columbia
University Graduate School of Business; Director, Equitable Capital
Partners Enhancement Yield Funds. Former Director, Cambrex Corp.
David S. Lee* (63) Chairman of the Board and Director (1994). Managing Director, Scudder,
Stevens & Clark, Inc.; Trustee Emeritus, New England Medical Center. Mr.
Lee serves on the Boards of an additional 15 Trusts or Corporations whose
Funds are advised by Scudder.
Daniel Pierce* (63) President and Director (1990). Chairman of the Board and Managing
Director of Scudder, Stevens & Clark, Inc. Director, Fiduciary Trust
Company (bank and trust company) and Fiduciary Company Incorporated (bank
and trust company). Mr. Pierce serves on the Boards of an additional 18
Trusts or Corporations whose Funds are advised by Scudder.
</TABLE>
- ----------------
* Directors considered by the Corporation and its counsel to be
"interested persons" (as defined in the 1940 Act) of the Corporation or
of its investment manger because of their employment by the Investment
Manager and, in some cases, holding offices with the Corporation.
As of June 30, 1997, no nominees to or Directors of the Corporation owned
directly or beneficially any shares of the Fund.
To the best of the Corporation's knowledge, as of June 30, 1997, no person
owned beneficially more than 5% of any Fund's outstanding shares.
Responsibilities of the Board - Board and Committee Meetings. The Board of
Directors of the Corporation is responsible for the general oversight of Fund
business. A majority of the Board's members are not affiliated with Scudder.
These Non-interested Directors have primary responsibility for assuring that the
Fund is managed in the best interests of its stockholders.
The Board of Directors meets at least quarterly to review the investment
performance of the Funds and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Non-interested Directors review the fees paid to the
Investment Manager and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, each Fund's investment performance, the quality and efficiency of
the various other services provided, costs incurred by the Investment Manager
and its affiliates, and comparative information regarding fees and expenses of
competitive funds. They are assisted in this process by the Funds' independent
public accountants and by independent legal counsel selected by the
Non-interested Directors. In addition, the Non-interested Directors from time to
time have established and served on task forces and subcommittees focusing on
particular matters such as investment, accounting and shareholder service
issues.
The Board of the Corporation has both an Audit Committee and a Committee on
Independent Directors, the responsibilities of which are described below.
-42-
<PAGE>
Audit Committee. The Board of the Corporation has an Audit Committee
consisting of the Non-interested Directors. The Audit Committee reviews with
management and the independent accountants for each Fund, among other things,
the scope of the audit and the controls of each Fund and its agents, reviews and
approves in advance the type of services to be rendered by independent
accountants, recommends the selection of independent accountants for each Fund
to the Board and, in general, considers and reports to the Board on matters
regarding each Fund's accounting and bookkeeping practices.
Committee on Independent Directors. The Board of the Corporation has a
Committee on Independent Directors consisting of all the Non-interested
Directors. The Committee is charged with the duty of making all nominations for
Non-interested Directors and consideration of other related matters.
Stockholders' recommendations as to nominees received by management are referred
to the Committee for its consideration and action.
The following chart sets forth the number of meetings of the Board, the
Audit Committee and the Committee on Independent Directors of the Corporation
during the calendar year 1996.
NUMBER OF BOARD AND COMMITTEE MEETINGS HELD
DURING THE CALENDAR YEAR 1996
<TABLE>
<S> <C> <C> <C>
<CAPTION>
BOARD OF AUDIT NOMINATING
DIRECTORS COMMITTEE COMMITTEE
NAME OF CORPORATION MEETINGS MEETINGS MEETINGS
------------------- -------- -------- ---------
Scudder Institutional Fund, Inc. 4 1 1
</TABLE>
Executive Officers. In addition to Mr. Pierce, a Director who is also an
officer of the Corporation, the following persons are Executive Officers of the
Corporation:
<TABLE>
<CAPTION>
<S> <C> <C>
Present Office with the Corporation; Year First Became
Name (Age) Principal Occupation or Employment (1) an Officer (2)
- ---------- ------------------------------------- --------------
K. Susan Cote (35) Vice President; Principal of Scudder, Stevens & Clark, 1996
Inc.
Carol L. Franklin (44) Vice President; Managing Director of Scudder, Stevens & 1996
Clark, Inc.
Jerard K. Hartman (64) Vice President; Managing Director of Scudder, Stevens & 1996
Clark, Inc.
Thomas W. Joseph (58) Vice President and Assistant Secretary; Principal of 1989
Scudder, Stevens & Clark, Inc.
Thomas F. McDonough (50) Vice President and Secretary; Principal of Scudder, 1989
Stevens & Clark, Inc.
Pamela A. McGrath (43) Vice President and Treasurer; Managing Director of 1991
Scudder, Stevens & Clark, Inc.
Kathryn L. Quirk (44) Vice President; Managing Director of Scudder, Stevens & 1996
Clark, Inc.
</TABLE>
-43-
<PAGE>
- -------------------
(1) Unless otherwise stated, all of the Executive Officers have been associated
with the Corporation for more than five years, although not necessarily in
the same capacity.
(2) The President, Treasurer and Secretary each holds office until his or her
successor has been duly elected and qualified, and all other officers hold
offices in accordance with the By-laws of the Corporation.
Compensation of Directors and Officers. Scudder supervises the Fund's
investments, pays the compensation and certain expenses of its personnel who
serve as Directors and officers of the Corporation and receives a management fee
for its services. Several of the Corporation's officers and Directors are also
officers, Directors, employees or stockholders of Scudder and participate in the
fees paid to that firm, although the Corporation makes no direct payments to
them other than for reimbursement of travel expenses in connection with their
attendance at Directors' and committee meetings.
The following Compensation Table provides in tabular form the following
data:
Column (1) All Directors who receive compensation from the Corporation.
Column (2) Aggregate compensation received by the Director of the
Corporation during the calendar year 1996.
Column (3) Total compensation received by each Director from funds managed
by Scudder (collectively, the "Fund Complex") during the calendar year 1996.
The Directors do not receive any pension or retirement benefits from the
Corporation.
<TABLE>
<S> <C> <C>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3)
Aggregate Compensation
Total Compensation From
the Corporation and Fund
Name of Director Scudder Institutional Fund, Inc. Complex Paid to Director
---------------- -------------------------------- ------------------------
Edgar R. Fiedler* $17,907 $108,083 (20 Funds)
Peter B. Freeman $ 9,076 $131,734 (33 Funds)
Robert W. Lear $ 9,076 $33,049 (11 Funds)
</TABLE>
* Mr. Fiedler received $17,907 through a deferred compensation program. As
of December 31, 1996, Mr. Fiedler had a total of $191,130 and $205,223 accrued
over a period of several years in a deferred compensation program for serving on
the Board of Directors of Scudder Institutional Fund, Inc. and Scudder Fund,
Inc., respectively.
Required Vote. Election of each of the listed nominees for Director
requires the affirmative vote of a majority of the votes of the Corporation cast
at the Special Meeting in person or by proxy. The Directors of the Corporation
recommend that the stockholders vote in favor of each of the nominees listed in
this Proposal 3.
PROPOSAL 4: RATIFICATION OR REJECTION
OF THE SELECTION OF INDEPENDENT ACCOUNTANTS
-44-
<PAGE>
The Board of Directors of the Corporation, including a majority of the
Non-interested Directors, has selected Price Waterhouse LLP to act as
independent accountants of the Fund for the current fiscal year. Price
Waterhouse LLP are independent accountants and have advised the Fund that they
have no direct financial interest or material indirect financial interest in the
Fund. One or more representatives of Price Waterhouse LLP are expected to be
present at the Special Meeting and will have an opportunity to make a statement
if they so desire. Such representatives are expected to be available to respond
to appropriate questions posed by stockholders or management.
Required Vote. Ratification of the selection of independent accountants
requires the affirmative vote of a majority of the votes cast at the Special
Meeting in person or by proxy. The Directors recommend that the stockholders of
the Fund vote in favor of this Proposal 4
ADDITIONAL INFORMATION
General. The cost of preparing, printing and mailing the enclosed proxy,
accompanying notice and proxy statement and all other costs incurred in
connection with the solicitation of proxies, including any additional
solicitation made by letter, telephone or telegraph, will be paid by Scudder. In
addition to solicitation by mail, certain officers and representatives of the
Corporation, officers and employees of Scudder and certain financial services
firms and their representatives, who will receive no extra compensation for
their services, may solicit proxies by telephone, telegram or personally.
Shareholder Communications Corporation ("SCC") has been engaged to assist
in the solicitation of proxies. As the Special Meeting date approaches, certain
stockholders of the Fund may receive a telephone call from a representative of
SCC if their vote has not yet been received. Authorization to permit SCC to
execute proxies may be obtained by telephonic or electronically transmitted
instructions from stockholders of the Fund. Proxies that are obtained
telephonically will be recorded in accordance with the procedures set forth
below. The Directors believe that these procedures are reasonably designed to
ensure that the identity of the stockholder casting the vote is accurately
determined and that the voting instructions of the stockholder are accurately
determined.
In all cases where a telephonic proxy is solicited, the SCC representative
is required to ask for each stockholder's full name, address, social security or
employer identification number, title (if the stockholder is authorized to act
on behalf of an entity, such as a corporation), and the number of shares owned
and to confirm that the stockholder has received the proxy statement/prospectus
and card in the mail. If the information solicited agrees with the information
provided to SCC, then the SCC representative has the responsibility to explain
the process, read the proposals listed on the proxy card, and ask for the
stockholder's instructions on each proposal. The SCC representative, although he
or she is permitted to answer questions about the process, is not permitted to
recommend to the stockholder how to vote, other than to read any recommendation
set forth in the proxy statement. SCC will record the stockholder's instructions
on the card. Within 72 hours, the stockholder will be sent a letter or mailgram
to confirm his or her vote and asking the stockholder to call SCC immediately if
his or her instructions are not correctly reflected in the confirmation.
If the stockholder wishes to participate in the Special Meeting, but does
not wish to give his or her proxy by telephone, the stockholder may still submit
the proxy card originally sent with the proxy statement or attend in person.
Should stockholders require additional information regarding the proxy or
replacement proxy cards, they may contact SCC toll-free at 1-800-733-8481 ext.
488. Any proxy given by a stockholder, whether in writing or by telephone, is
revocable.
Proposals of Stockholders. Stockholders wishing to submit proposals for
inclusion in a proxy statement for a stockholder meeting subsequent to the
Special Meeting, if any, should send their written proposals to the Secretary of
the Corporation, c/o Scudder, Stevens & Clark, Inc., 345 Park Avenue, New York,
NY 10154, within a reasonable time before the solicitation of proxies for such
meeting. The timely submission of a proposal does not guarantee its inclusion.
-45-
<PAGE>
Other Matters to Come Before the Special Meeting. The Board of Directors is
not aware of any matters that will be presented for action at the Special
Meeting other than the matters set forth herein. Should any other matters
requiring a vote of stockholders arise, the proxy in the accompanying form will
confer upon the person or persons entitled to vote the shares represented by
such proxy the discretionary authority to vote the shares as to any such other
matters in accordance with their best judgment in the interest of the
Corporation and/or Fund.
PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY. NO POSTAGE IS
REQUIRED IF MAILED IN THE UNITED STATES.
By order of the Board of Directors,
Thomas F. McDonough
Secretary
-46-
<PAGE>
Exhibit A
---------
Form of
New Investment Management Agreement
Name of Fund
345 Park Avenue
New York, New York 10154
, 199_
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
[Name of Series]
Ladies and Gentlemen:
[Name of Corporation] (the "Corporation") has been established as a
Maryland corporation to engage in the business of an investment company.
Pursuant to the Corporation's Articles of Incorporation, as amended from
time-to-time (the "Articles"), the Board of Directors has divided the
Corporation's shares of capital stock, par value $__ per share, (the "Shares")
into separate series, or funds, including [name of series] (the "Fund"). Series
may be abolished and dissolved, and additional series established, from time to
time by action of the Directors.
The Corporation, on behalf of the Fund, has selected you to act as the
sole investment manager of the Fund and to provide certain other services, as
more fully set forth below, and you have indicated that you are willing to act
as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Corporation on behalf of the
Fund agrees with you as follows:
1. Delivery of Documents. The Corporation engages in the business of
investing and reinvesting the assets of the Fund in the manner and in accordance
with the investment objectives, policies and restrictions specified in the
currently effective Prospectus (the "Prospectus") and Statement of Additional
Information (the "SAI") relating to the Fund included in the Corporation's
Registration Statement on Form N-1A, as amended from time to time, (the
"Registration Statement") filed by the Corporation under the Investment Company
Act of 1940, as amended, (the "1940 Act") and the Securities Act of 1933, as
amended. Copies of the documents referred to in the preceding sentence have been
furnished to you by the Corporation. The Corporation has also furnished you with
copies properly certified or authenticated of each of the following additional
documents related to the Corporation and the Fund:
(a) The Articles dated __________, 19__, as amended to date.
(b) By-Laws of the Corporation as in effect on the date hereof (the "By-Laws").
<PAGE>
(c) Resolutions of the Directors of the Corporation and the shareholders of
the Fund selecting you as investment manager and approving the form of
this Agreement.
The Corporation will furnish you from time to time with copies,
properly certified or authenticated, of all amendments of or supplements, if
any, to the foregoing, including the Prospectus, the SAI and the Registration
Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder" and ["Scudder Kemper
Investments, Inc."/"Scudder, Stevens & Clark, Inc."] trademarks (together, the
"Scudder Marks"), you hereby grant the Corporation a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Corporation's
name (the "Fund Name"), and (ii) the Scudder Marks in connection with the
Corporation's investment products and services, in each case only for so long as
this Agreement, any other investment management agreement between you (or any
organization which shall have succeeded to your business as investment manager
("your Successor")) and the Corporation, or any extension, renewal or amendment
hereof or thereof remains in effect, and only for so long as you are a licensee
of the Scudder Marks, provided however, that you agree to use your best efforts
to maintain your license to use and sublicense the Scudder Marks. The
Corporation agrees that it shall have no right to sublicense or assign rights to
use the Scudder Marks, shall acquire no interest in the Scudder Marks other than
the rights granted herein, that all of the Corporation's uses of the Scudder
Marks shall inure to the benefit of Scudder Trust Company as owner and licensor
of the Scudder Marks (the "Trademark Owner"), and that the Corporation shall not
challenge the validity of the Scudder Marks or the Trademark Owner's ownership
thereof. The Corporation further agrees that all services and products it offers
in connection with the Scudder Marks shall meet commercially reasonable
standards of quality, as may be determined by you or the Trademark Owner from
time to time, provided that you acknowledge that the services and products the
Corporation rendered during the one-year period preceding the date of this
Agreement are acceptable. At your reasonable request, the Corporation shall
cooperate with you and the Trademark Owner and shall execute and deliver any and
all documents necessary to maintain and protect (including but not limited to in
connection with any trademark infringement action) the Scudder Marks and/or
enter the Corporation as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your Successor) and the Corporation, or you no longer are
a licensee of the Scudder Marks, the Corporation shall (to the extent that, and
as soon as, it lawfully can) cease to use the Fund Name or any other name
indicating that it is advised by, managed by or otherwise connected with you (or
your Successor) or the Trademark Owner. In no event shall the Corporation use
the Scudder Marks or any other name or mark confusingly similar thereto
(including, but not limited to, any name or mark that includes the name
"Scudder") if this Agreement or any other investment advisory agreement between
you (or your Successor) and the Fund is terminated.
3. Portfolio Management Services. As manager of the assets of the Fund,
you shall provide continuing investment management of the assets of the Fund in
accordance with the investment objectives, policies and restrictions set forth
in the Prospectus and SAI; the applicable provisions of the 1940 Act and the
2
<PAGE>
Internal Revenue Code of 1986, as amended, (the "Code") relating to regulated
investment companies and all rules and regulations thereunder; and all other
applicable federal and state laws and regulations of which you have knowledge;
subject always to policies and instructions adopted by the Corporation's Board
of Directors. In connection therewith, you shall use reasonable efforts to
manage the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 3, you shall
be entitled to receive and act upon advice of counsel to the Corporation or
counsel to you. You shall also make available to the Corporation promptly upon
request all of the Fund's investment records and ledgers as are necessary to
assist the Corporation in complying with the requirements of the 1940 Act and
other applicable laws. To the extent required by law, you shall furnish to
regulatory authorities having the requisite authority any information or reports
in connection with the services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the Corporation are
being conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments,
currencies, repurchase agreements, futures, options and other contracts relating
to investments to be purchased, sold or entered into by the Fund and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Fund policies as expressed in the Registration Statement. You shall determine
what portion of the Fund's portfolio shall be invested in securities and other
assets and what portion, if any, should be held uninvested.
You shall furnish to the Corporation's Board of Directors periodic
reports on the investment performance of the Fund and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Corporation's officers or Board of Directors
shall reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Fund such office space and facilities in the United States as the
Fund may require for its reasonable needs, and you (or one or more of your
affiliates designated by you) shall render to the Corporation administrative
services on behalf of the Fund necessary for operating as an open-end investment
company and not provided by persons not parties to this Agreement including, but
not limited to, preparing reports to and meeting materials for the Corporation's
Board of Directors and reports and notices to Fund shareholders; supervising,
negotiating contractual arrangements with, to the extent appropriate, and
monitoring the performance of, accounting agents, custodians, depositories,
transfer agents and pricing agents, accountants, attorneys, printers,
underwriters, brokers and dealers, insurers and other persons in any capacity
deemed to be necessary or desirable to Fund operations; preparing and making
filings with the Securities and Exchange Commission (the "SEC") and other
regulatory and self-regulatory organizations, including, but not limited to,
preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
3
<PAGE>
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Fund's transfer agent; 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 return pursuant to Section 4982 of the Code; providing assistance
with investor and public relations matters; monitoring the valuation of
portfolio securities and the calculation of net asset value; monitoring the
registration of Shares of the Fund under applicable federal and state securities
laws; maintaining or causing to be maintained for the Fund all books, records
and reports and any other information required under the 1940 Act, to the extent
that such books, records and reports and other information are not maintained by
the Fund's custodian or other agents of the Fund; assisting in establishing the
accounting policies of the Fund; assisting in the resolution of accounting
issues that may arise with respect to the Fund's operations and consulting with
the Fund's independent accountants, legal counsel and the Fund's other agents as
necessary in connection therewith; establishing and monitoring the Fund's
operating expense budgets; reviewing the Fund's bills; processing the payment of
bills that have been approved by an authorized person; assisting the Fund in
determining the amount of dividends and distributions available to be paid by
the Fund to its shareholders, preparing and arranging for the printing of
dividend notices to shareholders, and providing the transfer and dividend paying
agent, the custodian, and the accounting agent with such information as is
required for such parties to effect the payment of dividends and distributions;
and otherwise assisting the Corporation as it may reasonably request in the
conduct of the Fund's business, subject to the direction and control of the
Corporation's Board of Directors. Nothing in this Agreement shall be deemed to
shift to you or to diminish the obligations of any agent of the Fund or any
other person not a party to this Agreement which is obligated to provide
services to the Fund.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Directors, officers and executive employees of the Corporation (including the
Fund's share of payroll taxes) who are affiliated persons of you, and you shall
make available, without expense to the Fund, the services of such of your
directors, officers and employees as may duly be elected officers of the
Corporation, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 3 hereof and the administrative services described
in section 4 hereof.
You shall not be required to pay any expenses of the Fund other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Fund's
Directors and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Fund: organization
expenses of the Fund (including out-of-pocket expenses, but not including your
overhead or employee costs); fees payable to you and to any other Fund advisors
or consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Corporation; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent, custodians,
subcustodians, transfer agents, dividend disbursing agents and registrars;
payment for portfolio pricing or valuation services to pricing agents,
4
<PAGE>
accountants, bankers and other specialists, if any; expenses of preparing share
certificates and, except as provided below in this section 5, other expenses in
connection with the issuance, offering, distribution, sale, redemption or
repurchase of securities issued by the Fund; expenses relating to investor and
public relations; expenses and fees of registering or qualifying Shares of the
Fund for sale; interest charges, bond premiums and other insurance expense;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Corporation business) of Directors,
officers and employees of the Corporation who are not affiliated persons of you;
brokerage commissions or other costs of acquiring or disposing of any portfolio
securities of the Fund; expenses of printing and distributing reports, notices
and dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Directors and officers of the Corporation; costs of
shareholders' and other meetings; and travel expenses (or an appropriate portion
thereof) of Directors and officers of the Corporation who are directors,
officers or employees of you to the extent that such expenses relate to
attendance at meetings of the Board of Directors of the Corporation or any
committees thereof or advisors thereto held outside of Boston, Massachusetts or
New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Fund if and to the extent
that (i) such expenses are required to be borne by a principal underwriter which
acts as the distributor of the Fund's Shares pursuant to an underwriting
agreement which provides that the underwriter shall assume some or all of such
expenses, or (ii) the Corporation on behalf of the Fund shall have adopted a
plan in conformity with Rule 12b-1 under the 1940 Act providing that the Fund
(or some other party) shall assume some or all of such expenses. You shall be
required to pay such of the foregoing sales expenses as are not required to be
paid by the principal underwriter pursuant to the underwriting agreement or are
not permitted to be paid by the Fund (or some other party) pursuant to such a
plan.
6. Management Fee. For all services to be rendered, payments to be made
and costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the
Corporation on behalf of the Fund shall pay you in United States Dollars on the
last day of each month the unpaid balance of a fee equal to the excess of (a)
1/12 of ____ of 1 percent of the average daily net assets as defined below of
the Fund for such month; [provided that, for any calendar month during which the
average of such values exceeds $________, the fee payable for that month based
on the portion of the average of such values in excess of $________ shall be
1/12 of __ of 1 percent of such portion;] [and provided that, for any calendar
month during which the average of such values exceeds $________, the fee payable
for that month based on the portion of the average of such values in excess of
$________ shall be 1/12 of ____ of 1 percent of such portion;] over any
compensation waived by you from time to time (as more fully described below).
You shall be entitled to receive during any month such interim payments of your
fee hereunder as you shall request, provided that no such payment shall exceed
75 percent of the amount of your fee then accrued on the books of the Fund and
unpaid.
The "average daily net assets" of the Fund shall mean the average of
the values placed on the Fund's net assets as of 4:00 p.m. (New York time) on
each day on which the net asset value of the Fund is determined consistent with
5
<PAGE>
the provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully
determines the value of its net assets as of some other time on each business
day, as of such time. The value of the net assets of the Fund shall always be
determined pursuant to the applicable provisions of the Articles and the
Registration Statement. If the determination of net asset value does not take
place for any particular day, then for the purposes of this section 6, the value
of the net assets of the Fund as last determined shall be deemed to be the value
of its net assets as of 4:00 p.m. (New York time), or as of such other time as
the value of the net assets of the Fund's portfolio may be lawfully determined
on that day. If the Fund determines the value of the net assets of its portfolio
more than once on any day, then the last such determination thereof on that day
shall be deemed to be the sole determination thereof on that day for the
purposes of this section 6.
You may waive all or a portion of your fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of your services.
You shall be contractually bound hereunder by the terms of any publicly
announced waiver of your fee, or any limitation of the Fund's expenses, as if
such waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies as expressed
in the Registration Statement. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.
Your services to the Fund pursuant to this Agreement are not to be
deemed to be exclusive and it is understood that you may render investment
advice, management and services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Corporation.
8. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Corporation
agrees that you shall not be liable under this Agreement for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which this Agreement relates, provided that nothing in this
Agreement shall be deemed to protect or purport to protect you against any
liability to the Corporation, the Fund or its shareholders to which you would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of your duties, or by reason of your reckless
disregard of your obligations and duties hereunder. Any person, even though also
employed by you, who may be or become an employee of and paid by the Fund shall
be deemed, when acting within the scope of his or her employment by the Fund, to
be acting in such employment solely for the Fund and not as your employee or
agent.
6
<PAGE>
9. Duration and Termination of This Agreement. This Agreement shall
remain in force until September 30, 19__, and continue in force from year to
year thereafter, but only so long as such continuance is specifically approved
at least annually (a) by the vote of a majority of the Directors who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Directors of the Corporation, or by the vote of a majority of the
outstanding voting securities of the Fund. The aforesaid requirement that
continuance of this Agreement be "specifically approved at least annually" shall
be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Fund or by the Corporation's Board of Directors on 60
days' written notice to you, or by you on 60 days' written notice to the
Corporation. This Agreement shall terminate automatically in the event of its
assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the SEC by any rule, regulation or
order.
This Agreement shall be construed in accordance with the laws of the
State of Maryland, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, or in a manner which would cause the Fund to
fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or
management agreements entered into between you and the Corporation on behalf of
the Fund.
7
<PAGE>
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Corporation, whereupon this letter shall become a binding
contract effective as of the date of this Agreement.
Yours very truly,
[NAME OF CORPORATION],on
behalf of
Scudder _______________
Fund
By:
------------------------------
President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By:
------------------------------
Managing Director
-47-
<PAGE>
Institutional
DRAFT 8/25/97
Exhibit B
---------
Other Investment Companies
Advised by Scudder
EXHIBIT B
Investment Objectives and Advisory Fees
For Funds Advised by Scudder, Stevens & Clark, Inc.
<TABLE>
<CAPTION>
FUND OBJECTIVE FEE RATE
---- --------- --------
<S> <C> <C>
Money Market
Scudder U.S. Treasury Money Fund Safety, liquidity, and stability of 0.500% of net assets
capital and, consistent therewith,
current income.
Scudder Cash Investment Trust Stability of capital while maintaining 0.500% to $250 million
liquidity of capital and providing 0.450% next $250 million
current income from money market securities. 0.400% next $500 million
0.350% thereafter
Scudder Money Market Series High level of current income consistent 0.250% of net assets
with preservation of capital and liquidity
by investing in a broad range of short-term
money market instruments.
Scudder Government Money Market Series High level of current income consistent with 0.250% of net assets
preservation of capital and liquidity by investing
exclusively in obligations issued or guaranteed by
the U.S. Government or its agencies or instrumentalities
and in certain repurchase agreements.
Tax Free Money Market
Scudder Tax Free Money Fund Income exempt from regular federal income taxes and 0.500% to $500 million
stability of principalthrough investments in 0.480% thereafter
municipal securities.
Scudder Tax Free Money Market Series High level of current income consistent with 0.250% of net assets
preservation of capital and liquidity exempt from
federal income tax by investing primarily in high
quality municipal obligations.
Scudder California Tax Free Money Fund Stability of capital and the maintenance of a 0.500% of net assets
constant net asset value of $1.00 per share while
providing California tax payers income exempt from both
California personal and regular federal income tax
through investment in high quality, short- term
tax-exempt California municipal securities.
<PAGE>
Scudder New York Tax Free Money Fund Stability of capital and income exempt from New York 0.500% of net assets
state and New York City personal income taxes and
regular federal income tax through investment in
high quality, short-term municipal securities in New York.
Tax Free
Scudder Limited Term Tax Free Fund High level of income exempt from regular federal 0.600% of net assets
income tax consistent with a high degree of
principal stability.
Scudder Medium Term Tax Free Fund High level of income exempt from regular federal 0.600% to $500 million
income tax and limited principal fluctuation 0.500% thereafter
through investment primarily in high grade
intermediate term municipal securities.
Scudder Managed Municipal Bonds Income exempt from regular federal income tax 0.550% to $200 million
primarily through investments in high-grade 0.500% next $500 million
long-term municipal securities. 0.475% thereafter
Scudder High Yield Tax Free Fund High level of income, exempt from regular 0.650% to $300 million
federal income tax, from an actively managed 0.600% thereafter
portfolio consisting primarily of investment
grade municipal securities.
Scudder California Tax Free Fund Income exempt from both California state personal 0.625% to $200 million
income tax and regular federal income tax 0.600% thereafter
primarily through investment grade municipal
securities.
Scudder Massachusetts Limited A high level of income exempt from both 0.600% of net assets
Term Tax Free Fund Massachusetts personal income tax and
regular federal income tax as is consistent
with a high degree of price stability.
Scudder Massachusetts Tax Free Fund A high level of income exempt from both 0.600% of net assets
Massachusetts personal income tax and
regular federal income tax through investment
primarily in long-term investment-grade
municipal securities in Massachusetts.
Scudder New York Tax Free Fund Income exempt from New York state and New York 0.625% to $200 million
City personal income taxes and regular federal 0.600% thereafter
income tax through investment primarily in long-term
investment-grade municipal securities in New York.
Scudder Ohio Tax Free Fund Income exempt from Ohio personal income tax and 0.600% of net assets
regular federal income tax through investment
primarily in investment-grade municipal
securities in Ohio.
Scudder Pennsylvania Tax Free Fund Income exempt from Pennsylvania personal income tax 0.600% of net assets
and regular federal income tax through investment
primarily in investment-grade municipal securities
in Pennsylvania.
-2-
<PAGE>
U.S. Income
Scudder Short Term Bond Fund High level of income consistent with a high degree 0.600% to $500 million
of principal stability through investments 0.500% next $500 million
primarily in high quality short-term bonds. 0.450% next $500 million
0.400% next $500 million
0.375% next $1 billion
0.350% thereafter
Scudder Zero Coupon 2000 Fund High investment returns over a selected period 0.600% of net assets
as is consistent with investment in U.S. Government
securities and the minimization of reinvestment risk.
Scudder GNMA Fund High current income and safety of principal 0.650% to $200 million
primarily from investment in U.S. 0.600% next $300 million
Government mortgage-backed GNMA securities. 0.550% thereafter
Scudder Income Fund A high level of income, consistent with the 0.650% to $200 million
prudent investment of capital, through a 0.600% next $300 million
flexible investment program emphasizing 0.550% thereafter
high-grade bonds.
Scudder High Yield Bond Fund A high level of current income and capital 0.700% of net assets
appreciation through investment primarily
in below investment-grade domestic debt
securities.
Global Income
Scudder Global Bond Fund Total return with an emphasis on current 0.750% to $1 billion
income by investing primarily in high-grade 0.700% thereafter
bonds denominated in foreign currencies
and the U.S. dollar.
Scudder International Bond Fund Income primarily by investing in high-grade 0.850% to $1 billion
international bonds and protection and 0.800% thereafter
possible enhancement of principal value by
actively managing currency, bond market and
maturity exposure and by security selection.
Scudder Emerging Markets Income Fund High current income and, secondarily, long-term 1.000% of net assets
capital appreciation by investing primarily
in high-yielding debt securities issued in
emerging markets.
Asset Allocation
Scudder Pathway Conservative Portfolio Current income and, secondarily, long-term growth 0.000%
of capital by investing substantially in bond
mutual funds, but will have some exposure to
equity mutual funds.
Scudder Pathway Balanced Portfolio Balance of growth and income by investing in a 0.000%
mix of money market, bond and equity mutual funds.
-3-
<PAGE>
Scudder Pathway Growth Portfolio Long-term growth of capital by investing 0.000%
predominantly in equity mutual funds
designed to provide long-term growth.
Scudder Pathway International Portfolio Maximize total return by investing in a 0.000%
select mix of established international
and global Scudder Funds.
U.S. Growth and Income
Scudder Balanced Fund A balance of growth and income from a 0.700% of net assets
diversified portfolio of equity and
fixed income securities and long-term
preservation of capital through a
quality oriented investment approach
designed to reduce risk.
Scudder Growth and Income Fund Long-term growth of capital, current income 0.600% to $500 million
and growth of income primarily from 0.550% next $500 million
common stocks, preferred stocks and securities 0.500% next $500 million
convertible into common stocks. 0.475% next $500 million
0.450% next $1 billion
0.425% next $1 billion
0.405% thereafter
U.S. Growth
Scudder Large Company Value Fund Maximize long-term capital appreciation through 0.750% to $500 million
(formerly Scudder Capital Growth Fund) a value driven investment program emphasizing 0.650% next $500 million
common stocks and preferred stocks.
Scudder Value Fund Long-term growth of capital through investment 0.700% of net assets
in undervalued equity securities.
Scudder Small Company Value Fund Long-term growth of capital by investing 0.750% of net assets
primarily in undervalued equity
securities of small U.S. companies.
Scudder Micro Cap Fund Long-term growth of capital by investing 0.750% of net assets
primarily in a diversified portfolio
of U.S. micro-cap common stocks.
Scudder Classic Growth Fund Long-term growth of capital while keeping the 0.700% of net assets
value of its shares more stable than other
growth mutual funds.
Scudder Large Company Growth Fund Long-term growth of capital through investment 0.700% of net assets
(formerly Scudder Quality Growth Fund) primarily in the equity securities of
seasoned, financially strong U.S. growth
companies.
Scudder Development Fund Long-term growth of capital by investing 1.000% to $500 million
primarily in equity securities of 0.950% next $500 million
emerging growth companies. 0.900% thereafter
-4-
<PAGE>
Scudder 21st Century Growth Fund Long-term growth of capital by investing 1.000% of net assets
primarily in the securities of emerging
growth companies poised to be leaders in
the 21st century.
Global Growth
Scudder Global Fund Long-term growth of capital through investment Effective 9/11/97:
in a diversified portfolio of 1.000% to $500 million
marketable foreign and domestic securities, 0.950% next $500 million
primarily equity securities. 0.900% next $500 million
0.850% thereafter
Institutional International Long-term growth of capital primarily 0.900% of net assets
Equity Portfolio through a diversified portfolio of
marketable foreign equity securities.
Scudder International Growth Long-term growth of capital and current income 1.000% of net assets
and Income Fund primarily from foreign equity securities.
Scudder International Fund Long-term growth of capital primarily through 0.900% to $500 million
a diversified portfolio of marketable 0.850% next $500 million
foreign equity securities. 0.800% next $1 billion
0.750% next $1 billion
0.700% thereafter
Scudder Global Discovery Fund Above-average capital appreciation over the 1.100% of net assets
long-term by investing primarily
in the equity securities of small companies
located throughout the world.
Scudder Emerging Markets Growth Fund Long-term growth of capital primarily through 1.25% of net assets
equity investments in emerging
markets around the globe.
Scudder Gold Fund Maximum return consistent with investing 1.000% of net assets
in a portfolio of gold-related
equity securities and gold.
Scudder Greater Europe Growth Fund Long-term growth of capital through investment 1.000% of net assets
primarily in the equity securities of
European companies.
Scudder Pacific Opportunities Fund Long-term growth of capital primarily 1.100% of net assets
through investment in the equity
securities of Pacific Basin companies,
excluding Japan.
Scudder Latin America Fund Long-term capital appreciation through Effective 9/11/97:
investment primarily in the securities 1.250% to $1 billion
of Latin American issuers. 1.150% thereafter
-5-
<PAGE>
The Japan Fund, Inc. Long-term capital appreciation through 0.850% to $100 million
investment primarily in equity 0.750% next $200 million
securities of Japanese companies. 0.700% next $300 million
0.650% thereafter
Closed-End Funds
The Argentina Fund, Inc. Long-term capital appreciation through Advisor:
investment primarily in equity Effective 11/1/97:
securities of Argentine issuers. 1.100% of net assets
Sub-Advisor:
Paid by Advisor.
0.160% of net assets
The Brazil Fund, Inc. Long-term capital appreciation through 1.200% to $150 million
investment primarily in equity 1.050% next $150 million
securities of Brazilian issuers. 1.000% thereafter
Effective 10/29/97:
1.200% to $150 million
1.050% next $150 million
1.000% next $200 million
0.900% thereafter
Administrator:
Receives an annual fee of
$50,000
The Korea Fund, Inc. Long-term capital appreciation through Advisor:
investment primarily in equity 1.150% to $50 million
securities of Korean issuers. 1.100% next $50 million
1.000% next $250 million
0.950% next $400 million
0.900% thereafter
Sub-Advisor - Daewoo:
Paid by Advisor.
0.2875% to $50 million
0.275% next $50 million
0.250% next $250 million
0.2375% next $400 million
0.225% thereafter
-6-
<PAGE>
The Latin America Dollar Income High level of current income and, secondarily, 1.200% of net assets
Fund, Inc. capital appreciation through investment
principally in dollar-denominated Latin
American debt instruments.
Montgomery Street Income Securities, High level of current income consistent with 0.500% to $150 million
Inc. prudent investment risks through a 0.450% next $50 million
diversified portfolio primarily of debt 0.400% thereafter
securities.
Scudder New Asia Fund, Inc. Long-term capital appreciation through 1.250% to $75 million
investment primarily in equity 1.150% next $125 million
securities of Asian companies. 1.100% thereafter
Scudder New Europe Fund, Inc. Long-term capital appreciation through 1.250% to $75 million
investment primarily in equity securities 1.150% next $125 million
of companies traded on smaller or emerging 1.100% thereafter
European markets and companies that are
viewed as likely to benefit from changes
and developments throughout Europe.
Scudder Spain and Portugal Fund, Inc. Long-term capital appreciation through Advisor:
investment primarily in equity 1.000% of net assets
securities of Spanish & Portuguese issuers Administrator:
0.200% of net assets
Scudder World Income Opportunities High income and, consistent therewith, 1.200% of net assets
Fund, Inc. capital appreciation.
Insurance Products
Balanced Portfolio Balance of growth and income consistent with 0.475% of net assets
long-term preservation of capital through
a diversified portfolio of equity and fixed
income securities.
Bond Portfolio High level of income consistent with a high 0.475% of net assets
quality portfolio of debt securities.
Capital Growth Portfolio Long-term capital growth from a portfolio 0.475% to $500 million
consisting primarily of equity 0.450% thereafter
securities.
Global Discovery Portfolio Above-average capital appreciation over the 0.975% of net assets
long-term by investing primarily in the
equity securities of small companies located
throughout the world.
Growth and Income Portfolio Long-term growth of capital, current income 0.475% of net assets
and growth of income.
International Portfolio Long-term growth of capital primarily through 0.875% to $500 million
diversified holdings of marketable 0.775% thereafter
foreign equity investments.
-7-
<PAGE>
Money Market Portfolio Stability of capital and, consistent therewith, 0.370% of net assets
liquidity of capital and current income.
AARP Funds
AARP High Quality Money Fund Current income and liquidity, consistent Fee Rate Program Assets
with maintaining stability and safety 0.350% to $2 billion
of principal, through investment in 0.330% next $2 billion
high quality securities. 0.300% next $2 billion
0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.100% of net assets
AARP Balanced Stock and Bond Fund Long-term growth of capital and income, Fee Rate Program Assets
consistent with a stable share price, 0.350% to $2 billion
through investment in a combination of 0.330% next $2 billion
stocks, bonds and cash reserves. 0.300% next $2 billion
0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.190% of net assets
AARP Capital Growth Fund Long-term capital growth, consistent with Fee Rate Program Assets
a stable share price, through 0.350% to $2 billion
investment primarily in common stocks 0.330% next $2 billion
and securities convertible into common 0.300% next $2 billion
stocks. 0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.320% of net assets
-8-
<PAGE>
AARP Global Growth Fund Long-term growth of capital, consistent Fee Rate Program Assets
with a stable share price, through 0.350% to $2 billion
investment primarily in a diversified 0.330% next $2 billion
portfolio of equity securities of 0.300% next $2 billion
corporations worldwide. 0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.550% of net assets
AARP Growth and Income Fund Long-term growth of capital and income, Fee Rate Program Assets
consistent with a stable share price, 0.350% to $2 billion
through investment primarily in common 0.330% next $2 billion
stocks and securities convertible into 0.300% next $2 billion
common stocks. 0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.190% of net assets
AARP International Stock Fund Long-term growth of capital, consistent Fee Rate Program Assets
with a stable share price, through 0.350% to $2 billion
investment primarily in foreign 0.330% next $2 billion
equity securities. 0.300% next $2 billion
0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.600% of net assets
-9-
<PAGE>
AARP Small Company Stock Fund Long-term growth of capital, consistent Fee Rate Program Assets
with a stable share price, through 0.350% to $2 billion
investment primarily in stocks of 0.330% next $2 billion
small U.S. companies. 0.300% next $2 billion
0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.550% of net assets
AARP U.S. Stock Index Fund Long-term growth of capital, consistent Fee Rate Program Assets
with greater share price stability 0.350% to $2 billion
than a S&P 500 index fund, by taking 0.330% next $2 billion
an indexing approach to investing in 0.300% next $2 billion
common stocks, emphasizing higher 0.280% next $2 billion
dividend stocks while maintaining 0.260% next $3 billion
investment characteristics otherwise 0.250% next $3 billion
similar to the S&P 500 index. 0.240% thereafter
Individual Fund Fee
0.000% of net assets
AARP Bond Fund for Income High level of current income, consistent Fee Rate Program Assets
with greater share price stability 0.350% to $2 billion
than a long term bond, through investment 0.330% next $2 billion
primarily in investment-grade debt 0.300% next $2 billion
securities. 0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.280% of net assets
-10-
<PAGE>
AARP GNMA and U.S. Treasury Fund High level of current income, consistent Fee Rate Program Assets
with greater share price stability 0.350% to $2 billion
than a long-term bond, through investment 0.330% next $2 billion
principally in U.S. Government-guaranteed 0.300% next $2 billion
GNMA securities and U.S. Treasury obligations. 0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.120% of net assets
AARP High Quality Bond Fund High level of income, consistent with greater Fee Rate Program Assets
share price stability than a long-term bond, 0.350% to $2 billion
through investment primarily in a portfolio of 0.300% next $2 billion
high quality securities . 0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.190% of net assets
AARP Diversified Growth Portfolio Long-term growth of capital through There will be no fee as the manager
investment primarily in AARP stock will receive a fee from the
mutual funds. underlying funds.
AARP Diversified Income Portfolio Current income with modest capital There will be no fee as the manager
appreciation through investment primarily will receive a fee from the
in AARP bond mutual funds. underlying funds.
AARP High Quality Tax Free Money Fund Current income exempt from federal income Fee Rate Program Assets
taxes and liquidity, consistent 0.350% to $2 billion
with maintaining stability and safety 0.330% next $2 billion
of principal, through investment in 0.300% next $2 billion
high-quality municipal securities. 0.280% next $2 billion
0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.100% of net assets
-11-
<PAGE>
AARP Insured Tax Free General Bond Fund High level of income free from federal Fee Rate Program Assets
income taxes, consistent with greater 0.350% to $2 billion
share price stability than a long-term 0.330% next $2 billion
municipal bond, through investment 0.300% next $2 billion
primarily in municipal securities covered 0.280% next $2 billion
by insurance. 0.260% next $3 billion
0.250% next $3 billion
0.240% thereafter
Individual Fund Fee
0.190% of net assets
</TABLE>
-12-
-48-
<PAGE>
Institutional
DRAFT 8/25/97
Exhibit C
---------
Form of Agreement and Plan of Reorganization
Exhibit C
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this ________ day of __________________, 1997, by and between Scudder
International Fund, Inc. (the "Acquiring Company"), a Maryland Corporation with
its principal place of business at 345 Park Avenue, New York, New York 10154, on
behalf of Scudder International Fund (the "Acquiring Fund"), a separate series
of the Acquiring Company, and Scudder Institutional Fund, Inc. (the "Acquired
Company"), on behalf of Institutional International Equity Portfolio (the
"Acquired Fund"), a separate series of the Acquired Company.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1)of the Internal Revenue
Code of 1986, as amended (the "Code"). The reorganization (the "Reorganization")
will consist of the transfer of all or substantially all of the assets of the
Acquired Fund to the Acquiring Fund in exchange solely for the Barrett
International Shares class (the "Barrett Shares class") of voting shares of
common stock ($__ par value per share) of the Acquiring Fund (the "Acquiring
Fund Shares"), the assumption by the Acquiring Fund of all of the identified and
stated liabilities of the Acquired Fund, and the distribution of the Acquiring
Fund Shares to the shareholders of the Acquired Fund in complete liquidation of
the Acquired Fund as provided herein, all upon the terms and conditions
hereinafter set forth in this Agreement.
WHEREAS, the purpose of the Reorganization is to [combine the assets of the
Acquiring Fund with those of the Acquired Fund in an attempt to achieve greater
operating economies and increased portfolio diversification];
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE
FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL OF THE IDENTIFIED AND
STATED ACQUIRED FUND LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, the Acquired Fund agrees
to transfer to the Acquiring Fund all or substantially all of the Acquired
Fund's assets as set forth in section 1.2, and the Acquiring Fund agrees in
exchange therefor (i) to deliver to the Acquired Fund that number of full and
fractional Barrett Shares class Acquiring Fund Shares determined by dividing the
value of the Acquired Fund's assets, computed in the manner and as of the time
and date set forth in section 2.1, by the net asset value of one Acquiring Fund
<PAGE>
Share of the same Class, computed in the manner and as of the time and date set
forth in section 2.2; and (ii) to assume all of the identified and stated
liabilities of the Acquired Fund, as set forth in section 1.3. Such transactions
shall take place at the closing provided for in section 3.1 (the "Closing").
1.2 The assets of the Acquired Fund to be acquired by the Acquiring Fund
(collectively "Assets") shall consist of all assets, including, without
limitation, all cash, cash equivalents, securities, commodities and futures
interests and dividends or interest or other receivables that are owned by the
Acquired Fund and any deferred or prepaid expenses shown on the unaudited
statement of assets and liabilities of the Acquired Fund prepared as of the
effective time of the closing (the "Effective Time Statement"), prepared in
accordance with generally accepted accounting principles ("GAAP") applied
consistently with those of the Acquired Fund's most recent audited balance
sheet. The assets shall constitute at least 90% of the fair market value of the
net assets, and at least 70% of the fair market value of the gross assets, held
by Acquired Fund immediately before the Closing (including, for these purposes,
amounts, if any, used by the Acquired Fund to pay its reorganization expenses,
if any, retained by the Acquired Fund to pay its liabilities, and all
redemptions and distributions (except for redemptions and distributions
occurring in the ordinary course of the Acquired Fund's business as a series of
an open-end investment company, as required by Section 22(e) of the Investment
Company Act of 1940, as amended (the "1940 Act"), and not in connection with the
Reorganization) made by the Acquiring Fund immediately prior to the
Reorganization).
1.3 The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date as defined in section 3.1.
The Acquiring Fund shall assume all of the identified and stated liabilities,
expenses, costs, charges and reserves (including,without limitation, expenses
incurred in the ordinary course of business of the Acquired Fund's operations,
such as accounts payable relating to custodian and transfer agency fees,
investment management and administrative fees, legal and audit fees, and
expenses of state securities registration of the Acquired Fund's shares
reflected in the Effective Time Statement).
1.4 On or as soon as practicable prior to the Closing Date as defined in
section 3.1, the Acquired Fund will declare and pay to its shareholders of
record one or more dividends and/or other distributions so that it will have
distributed all of its investment company taxable income (computed without
2
<PAGE>
regard to any deduction for dividends paid) and realized net capital gain, if
any, that has accrued through the Closing Date.
1.5 Immediately after the transfer of assets provided for in section 1.1
(the "Liquidation Time"), the Acquired Fund will distribute to the Acquired
Fund's shareholders of record, determined as of the Valuation Time (the
"Acquired Fund Shareholders"), on a pro rata basis, the Barrett Shares class
Acquiring Fund Shares received by the Acquired Fund pursuant to section 1.1 and
will completely liquidate. Such distribution and liquidation will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Acquired Fund on the books of the Acquiring Fund to open accounts
on the share records of the Acquiring Fund in the names of the Acquired Fund
Shareholders. The aggregate net asset value of Barrett Shares class Acquiring
Fund Shares to be so credited to Barrett Shares class Acquired Fund Shareholders
shall be equal to the aggregate net asset value of the Acquired Fund shares
owned by such shareholders as of the Valuation Time. All issued and outstanding
shares of the Acquired Fund will simultaneously be cancelled on the books of the
Acquired Fund, although share certificates representing interests in shares of
the Acquired Fund will represent a number Barrett Shares class Acquiring Fund
Shares after the Closing Date as determined in accordance with section 2.3. The
Acquiring Fund will not issue certificates representing Barrett Shares class
Acquiring Fund Shares in connection with such exchange.
1.6 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund. Shares of the Acquiring Fund will be issued in the manner
described in the Acquiring Fund's then-current prospectus and statement of
additional information.
[As soon as is reasonably practicable after the Liquidation Time, but not
until the earlier of (i) payment by Acquiring Fund of all assumed liabilities or
(ii) 90 days after the Closing Date, Acquired Fund shall be dissolved under
Maryland law and deregistered under the 1940 Act. The Acquired Fund shall not
conduct any business on and after the Closing Date except in connection with its
liquidation, dissolution and deregistration.]
1.7 Any reporting responsibility of the Acquired Fund including, without
limitation, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "Commission"),
any state securities commission, and any federal, state or local tax authorities
or any other relevant regulatory authority, is and shall remain the
responsibility of the Acquired Fund.
3
<PAGE>
1.8 All books and records of the Acquired Fund, including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder, shall be available to the Acquiring Fund from and after
the Closing Date and shall be turned over to the Acquiring Fund on or prior to
liquidation of Acquired Fund/ as soon as practicable following the Closing Date.
[All such books and records shall be available to Acquired Fund thereafter until
Acquired Fund is dissolved and deregistered.]
2. VALUATION
2.1 The value of the Assets shall be computed as of the close of regular
trading on the New York Stock Exchange on the business day immediately preceding
the Closing Date, as defined in Section 3.1 (such time and date being
hereinafter called the "Valuation Time") after the declaration and payment of
any dividends and/or other distributions on that date, using the valuation
procedures set forth in the Acquiring Fund's Declaration of Trust, as amended,
and then-current prospectus or statement of additional information.
2.2 The net asset value of a Barrett Shares class Acquiring Fund share
shall be the net asset value per share computed with respect to that Class as of
the Valuation Time using the valuation procedures referred to in section 2.1.
2.3 The number of the Barrett Shares class Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Assets shall be
determined by dividing the value of the Assets with respect to shares of the
Acquired Fund, determined in accordance with section 2.1 by the net asset value
of a Barrett Shares class Acquiring Fund Share determined in accordance with
section 2.2.
2.4 All computations of value hereunder shall be made by or under the
direction of each Fund's respective accounting agent, if applicable, in
accordance with its regular practice and the requirements of the 1940 Act and
shall be subject to confirmation by each Fund's respective independent
accountants.
3. CLOSING AND CLOSING DATE
3.1 The Closing of the transactions contemplated by this Agreement shall be
[date] , or such later date as the parties may agree in writing (the "Closing
Date"). All acts taking place at the Closing shall be deemed to take place
simultaneously as of ___:_____M., Eastern time, on the Closing Date, unless
4
<PAGE>
otherwise agreed to by the parties. The Closing shall be held at the offices of
Dechert Price & Rhoads, Ten Post Office Square, Boston, MA 02109 or at such
other place and time as the parties may agree.
3.2 The Acquired Fund shall deliver to the Acquiring Fund on the Closing
Date a schedule of assets.
3.3 Brown Brothers Harriman & Co., as custodian for the Acquired Fund,
shall (a) deliver at the Closing a certificate of an authorized officer stating
that the Assets shall have been delivered in proper form to Brown Brothers
Harriman & Co., custodian for the Acquiring Fund, prior to or on the Closing
Date and (b) all necessary taxes in connection with the delivery of the Assets,
including all applicable federal and state stock transfer stamps, if any, have
been paid or provision for payment has been made. Acquired Fund's portfolio
securities represented by a certificate or other written instrument shall be
presented by Custodian for Acquired Fund to Custodian for Acquiring Fund for
examination no later than five business days preceding the Closing Date and
transferred and delivered by the Acquired Fund as of the Closing Date by the
Acquired Fund for the account of Acquiring Fund duly endorsed in proper form for
transfer in such condition as to constitute good delivery thereof. Acquired
Fund's portfolio securities and instruments deposited with a securities
depository, as defined in Rule 17f-4 under the 1940 Act, shall be delivered as
of the Closing Date by book entry in accordance with the customary practices of
such depositories and Custodian for Acquiring Fund. The cash to be transferred
by the Acquired Fund shall be delivered by wire transfer of federal funds on the
Closing Date.
3.4 The Transfer Agent, on behalf of the Acquired Fund, shall deliver at
the Closing a certificate of an authorized officer stating that its records
contain the names and addresses of the Acquired Fund Shareholders and the number
and percentage ownership to __ decimal places) of outstanding shares owned by
each such shareholder immediately prior to the Closing. The Acquiring Fund shall
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Acquired Fund or provide evidence
satisfactory to the Acquired Fund that such Acquiring Fund Shares have been
credited to the Acquired Fund's account on the books of the Acquiring Fund. At
the Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts or other documents as such
other party or its counsel may reasonably request to effect the transactions
contemplated by this Agreement.
5
<PAGE>
3.5 In the event that immediately prior to the Valuation Time (a) the New
York Stock Exchange or another primary trading market for portfolio securities
of the Acquiring Fund or the Acquired Fund shall be closed to trading or trading
thereupon shall be restricted, or (b) trading or the reporting of trading on
such Exchange or elsewhere shall be disrupted so that, in the judgment of the
Board of Directors of the Acquiring Company and Board of Directors of the
Acquired Company, accurate appraisal of the value of the net assets with respect
to the Barrett Shares class shares of the Acquiring Fund or the Acquired Fund is
impracticable, the Closing Date shall be postponed until the first business day
after the day when trading shall have been fully resumed and reporting shall
have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Acquired Company, on behalf of the Acquired Fund, represents and
warrants to the Acquiring Fund as follows:
(a) The Acquired Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland with power under
the Company's charter to own all of its properties and assets and to carry on
its business as it is now being conducted;
(b) The Acquired Company is registered with the Commission as an open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and such registration is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund of
the transactions contemplated herein, except such as have been obtained under
the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange
Act of 1934, as amended (the "1934 Act") and the 1940 Act and such as may be
required by state securities laws;
(d) Other than with respect to contracts entered into in connection with
the portfolio management of the Acquired Fund which shall terminate on or prior
to the Closing Date, the Acquired Company is not, and the execution, delivery
and performance of this Agreement by the Company will not result, in violation
of Maryland law or of the Company's charter, or By-Laws, or of any material
agreement, indenture, instrument, contract, lease or other undertaking known to
counsel to which the Acquired Fund is a party or by which it is bound, and the
execution, delivery and performance of this Agreement by the Acquired Fund will
not result in the acceleration of any obligation, or the imposition of any
6
<PAGE>
penalty, under any agreement, indenture, instrument, contract, lease, judgment
or decree to which the Acquired Fund is a party or by which it is bound;
(e) No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to its
knowledge threatened against the Acquired Fund or any properties or assets held
by it. The Acquired Fund knows of no facts which might form the basis for the
institution of such proceedings which would materially and adversely affect its
business and is not a party to or subject to the provisions of any order, decree
or judgment of any court or governmental body which materially and adversely
affects its business or its ability to consummate the transactions herein
contemplated;
(f) The Statements of Assets and Liabilities, Operations, and Changes in
Net Assets, the Financial Highlights, and the Investment Portfolio of the
Acquired Fund at and for the fiscal year ended December 31, 1996, have been
audited by Price Waterhouse L.L.P., independent certified public accountants,
and are in accordance with GAAP consistently applied, and such statements
(copies of which has been furnished to the Acquiring Fund) present fairly, in
all material respects, the financial position of the Acquired Fund as of such
date in accordance with GAAP, and there are no known contingent liabilities of
the Acquired Fund required to be reflected on a balance sheet (including the
notes thereto) in accordance with GAAP as of such date not disclosed therein;
(g) Since December 31, 1996, there has not been any material adverse change
in the Acquired Fund's financial condition, assets, liabilities or business
other than changes occurring in the ordinary course of business, or any
incurrence by the Acquired Fund of indebtedness maturing more than one year from
the date such indebtedness was incurred except as otherwise disclosed to and
accepted in writing by the Acquiring Fund. For purposes of this subsection (g),
a decline in net asset value per share of the Acquired Fund due to declines in
market values of securities in the Acquired Fund's portfolio, the discharge of
Acquired Fund liabilities, or the redemption of Acquired Fund shares by Acquired
Fund Shareholders shall not constitute a material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other tax
returns and reports of the Acquired Fund required by law to have been filed by
such dates (including any extensions) shall have been filed and are or will be
correct in all material respects, and all federal and other taxes shown as due
or required to be shown as due on said returns and reports shall have been paid
7
<PAGE>
or provision shall have been made for the payment thereof, and, to the best of
the Acquired Fund's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
(i) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met the requirements of
Subchapter M of the Code for qualification as a regulated investment company and
has elected to be treated as such, has been eligible to and has computed its
federal income tax under Section 852 of the Code, and will have distributed all
of its investment company taxable income and net capital gain (as defined in the
Code) that has accrued through the Closing Date;
(j) All issued and outstanding shares of the Acquired Fund (i) have been
offered and sold in every state and the District of Columbia in compliance in
all material respects with applicable registration or qualification requirements
of the 1933 Act and state securities laws, (ii) are, and on the Closing Date
will be, duly and validly issued and outstanding, fully paid and non-assessable,
and (iii) will be held at the time of the Closing by the persons and in the
amounts set forth in the records of the Transfer Agent, as provided in section
3.3. The Acquired Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any of the Acquired Fund shares, nor is
there outstanding any security convertible into any of the Acquired Fund shares;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to the Acquired Fund's assets to be transferred to the Acquiring Fund
pursuant to section 1.2 and full right, power, and authority to sell, assign,
transfer and deliver such assets hereunder free of any liens or other
encumbrances, except those liens or encumbrances as to which the Acquiring Fund
has received notice at or prior to the Closing, and upon delivery and payment
for such assets, the Acquiring Fund will acquire good and marketable title
thereto, subject to no restrictions on the full transfer thereof, including such
restrictions as might arise under the 1933 Act, except those restrictions as to
which the Acquiring Fund has received notice and necessary documentation at or
prior to the Closing;
(l) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on the
part of the Directors of the Acquired Company, and, subject to the approval of
the Acquired Fund Shareholders, this Agreement constitutes a valid and binding
obligation of the Acquired Company, on behalf of the Acquired Fund, enforceable
in accordance with its terms, subject, as to enforcement, to bankruptcy,
8
<PAGE>
insolvency, fraudulent transfer, reorganization, moratorium and other laws
relating to or affecting creditors' rights and to general equity principles;
(m) The information to be furnished by the Acquired Fund for use in
applications for orders, registration statements or proxy materials or for use
in any other document filed or to be filed with any federal, state or local
regulatory authority (including the National Association of Securities Dealers,
Inc.), which may be necessary in connection with the transactions contemplated
hereby, shall be accurate and complete in all material respects and shall comply
in all material respects with federal securities and other laws and regulations
applicable thereto; and
(n) The current prospectus and statement of additional information of the
Acquired Fund conform in all material respects to the applicable requirements of
the 1933 Act and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not materially misleading; and
(o) The proxy statement of the Acquired Fund to be included in the
Registration Statement referred to in section 5.7 (the "Proxy Statement"),
insofar as it relates to the Acquired Fund, will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements are made, not materially misleading;
provided, however, that the representations and warranties in this section shall
not apply to statements in or omissions from the Proxy Statement and the
Registration Statement made in reliance upon and in conformity with information
that was furnished or should have been furnished by the Acquiring Fund for use
therein.
4.2 The Acquiring Company, on behalf of the Acquiring Fund, represents and
warrants to the Acquired Fund as follows:
(a) The Acquiring Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland with power under
the Company's charter, to own all of its properties and assets and to carry on
its business as it is now being conducted;
9
<PAGE>
(b) The Acquiring Company is registered with the Commission as an open-end
management investment company under the 1940 Act, and such registration is in
full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act and such as may be required by state
securities laws;
(d) The Acquiring Company is not, and the execution, delivery and
performance of this Agreement by the Company will not result, in violation of
Maryland law or of the Company's charter, or By-Laws, or of any material
agreement, indenture, instrument, contract, lease or other undertaking known to
counsel to which the Acquiring Fund is a party or by which it is bound, and the
execution, delivery and performance of this Agreement by the Acquiring Fund will
not result in the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease, judgment
or decree to which the Acquiring Fund is a party or by which it is bound;
(e) No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to its
knowledge threatened against the Acquiring Fund or any properties or assets held
by it. The Acquiring Fund knows of no facts which might form the basis for the
institution of such proceedings which would materially and adversely affect its
business and is not a party to or subject to the provisions of any order, decree
or judgment of any court or governmental body which materially and adversely
affects its business or its ability to consummate the transactions herein
contemplated;
(f) The Statements of Assets and Liabilities, Operations, and Changes in
Net Assets, the Financial Highlights, and the Investment Portfolio of the
Acquiring Fund at and for the fiscal year ended March 31, 1997 have been audited
by Coopers & Lybrand L.L.P., independent certified public accountants, and are
in accordance with GAAP consistently applied, and such statements ( copies of
which has been furnished to the Acquired Fund) present fairly, in all material
respects, the financial position of the Acquiring Fund as of such date in
accordance with GAAP, and there are no known contingent liabilities of the
Acquiring Fund required to be reflected on a balance sheet (including the notes
thereto) in accordance with GAAP as of such date not disclosed therein;
10
<PAGE>
(g) Since March 31, 1997, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities or business other
than changes occurring in the ordinary course of business, or any incurrence by
the Acquiring Fund of indebtedness maturing more than one year from the date
such indebtedness was incurred except as otherwise disclosed to and accepted in
writing by the Acquired Fund. For purposes of this subsection (g), a decline in
net asset value per share of the Acquiring Fund due to declines in market values
of securities in the Acquiring Fund's portfolio, the discharge of Acquiring Fund
liabilities, or the redemption of Acquiring Fund shares by Acquiring Fund
shareholders shall not constitute a material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other tax
returns and reports of the Acquiring Fund required by law to have been filed by
such dates (including any extensions) shall have been filed and are or will be
correct in all material respects, and all federal and other taxes shown as due
or required to be shown as due on said returns and reports shall have been paid
or provision shall have been made for the payment thereof, and, to the best of
the Acquiring Fund's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
(i) For each taxable year of its operation, the Acquiring Fund has met the
requirements of Subchapter M of the Code for qualification as a regulated
investment company and has elected to be treated as such, has been eligible to
and has computed its federal income tax under Section 852 of the Code, and will
do so for the taxable year including the Closing Date;
(j) All issued and outstanding shares of the Acquiring Fund (i) have been
offered and sold in every state and the District of Columbia in compliance in
all material respects with applicable registration or qualification requirements
of the 1933 Act and state securities laws and (ii) are, and on the Closing Date
will be, duly and validly issued and outstanding, fully paid and non-assessable.
The Acquiring Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any of the Acquiring Fund shares, nor is
there outstanding any security convertible into any of the Acquiring Fund
shares;
(k) The Barrett Shares class Acquiring Fund Shares to be issued and
delivered to the Acquired Fund, for the account of the Acquired Fund
Shareholders, pursuant to the terms of this Agreement, will at the Closing Date
have been duly authorized and, when so issued and delivered, will be duly and
validly issued and outstanding Acquiring Fund Shares, and will be fully paid and
non-assessable;
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<PAGE>
(l) At the Closing Date, the Acquiring Fund will have good and marketable
title to the Acquiring Fund's assets, free of any liens or other encumbrances,
except those liens or encumbrances as to which the Acquired Fund has received
notice at or prior to the Closing;
(m) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on the
part of the Directors of the Acquiring Company and this Agreement will
constitute a valid and binding obligation of the Company, on behalf of the
Acquiring Fund, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other laws relating to or affecting creditors' rights and to
general equity principles;
(n) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements or proxy materials or for use
in any other document filed or to be filed with any federal, state or local
regulatory authority (including the National Association of Securities Dealers,
Inc.), which may be necessary in connection with the transactions contemplated
hereby, shall be accurate and complete in all material respects and shall comply
in all material respects with federal securities and other laws and regulations
applicable thereto;
(o) The current prospectus and statement of additional information of the
Acquiring Fund conform in all material respects to the applicable requirements
of the 1933 Act and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not materially misleading;
(p) The Proxy Statement to be included in the Registration Statement, only
insofar as it relates to the Acquiring Fund, will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not materially misleading;
provided, however, that the representations and warranties in this section shall
not apply to statements in or omissions from the Proxy Statement and the
Registration Statement made in reliance upon and in conformity with information
that was furnished or should have been furnished by the Acquired Fund for use
therein; and
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<PAGE>
(q) The Acquiring Fund agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and such of
the state securities laws as may be necessary in order to continue its
operations after the Closing Date.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 The Acquiring Fund and the Acquired Fund each covenants to operate its
business in the ordinary course between the date hereof and the Closing Date, it
being understood that (a) such ordinary course of business will include (i) the
declaration and payment of customary dividends and other distributions, (ii)
such changes as are contemplated by the Funds' normal operations, and [(iii) in
the case of the Acquired Fund, preparing for its liquidation, dissolution and
deregistration and] (b) each Fund shall retain exclusive control of the
composition of its portfolio until the Closing Date.
5.2 Upon reasonable notice, the Acquiring Fund's officers and agents shall
have reasonable access to the Acquired Fund's books and records necessary to
maintain current knowledge of the Acquired Fund and to ensure that the
representations and warranties made by the Acquired Fund are accurate.
5.3 The Acquired Fund covenants to call a meeting of the Acquired Fund
Shareholders entitled to vote thereon to consider and act upon this Agreement
and to take all other reasonable action necessary to obtain approval of the
transactions contemplated herein. Such meeting shall be scheduled for no later
than [date] .
5.4 The Acquired Fund covenants that the Barrett Shares class Acquiring
Fund Shares to be issued hereunder are not being acquired for the purpose of
making any distribution thereof other than in accordance with the terms of this
Agreement.
5.5 The Acquired Fund covenants that it will assist the Acquiring Fund in
obtaining such information as the Acquiring Fund reasonably requests concerning
the beneficial ownership of the Acquired Fund Shares and will provide the
Acquiring Fund with a list of affiliates of the Acquired Fund.
5.6 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund will each take, or cause to be taken, all actions, and do or cause
to be done, all things reasonably necessary, proper, and/or advisable to
consummate and make effective the transactions contemplated by this Agreement.
13
<PAGE>
5.7 Each Fund covenants to prepare the Registration Statement on Form N-14
(the "Registration Statement"), in compliance with the 1933 Act, the 1934 Act
and the 1940 Act in connection with the meeting of the Acquired Fund
Shareholders to consider approval of this Agreement and the transactions
contemplated herein. The Acquiring Fund will file the Registration Statement,
including the Proxy Statement, with the Commission. The Acquired Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the Proxy Statement referred to
in section 4.1(o), all to be included in the Registration Statement, in
compliance in all material respects with the 1933 Act, the 1934 Act and the 1940
Act.
5.8 The Acquired Fund covenants that it will, from time to time, as and
when reasonably requested by the Acquiring Fund, execute and deliver or cause to
be executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action as the Acquiring Fund may
reasonably deem necessary or desirable in order to vest in and confirm the
Acquiring Fund's title to and possession of all the assets and otherwise to
carry out the intent and purpose of this Agreement.
5.9 The Acquiring Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act and 1940 Act, and such
of the state securities laws as it deems appropriate in order to continue its
operations after the Closing Date and to consummate the transactions
contemplated herein; provided, however, that the Acquiring Fund may take such
actions it reasonably deems advisable after the Closing Date as circumstances
change.
5.10 The Acquiring Fund covenants that it will, from time to time, as and
when reasonably requested by the Acquired Fund, execute and deliver or cause to
be executed and delivered all such assignments, assumption agreements, releases,
and other instruments, and will take or cause to be taken such further action,
as the Acquired Fund may reasonably deem necessary or desirable in order to (i)
vest and confirm to the Acquired Fund title to and possession of all Acquiring
Fund shares to be transferred to Acquired Fund pursuant to this Agreement and
(ii) assume the assumed liabilities from the Acquired Fund.
5.11 As soon as reasonably practicable after the Closing, the Acquired Fund
shall make a liquidating distribution to its shareholders consisting of the
Barrett Shares class Acquiring Fund Shares received at the Closing.
5.12 The Acquiring Fund and the Acquired Fund shall each use its reasonable
best efforts to fulfill or obtain the fulfillment of the conditions precedent to
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<PAGE>
effect the transactions contemplated by this Agreement as promptly as
practicable.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations and warranties of the Acquiring Company, with
respect to the Acquiring Fund, contained in this Agreement shall be true and
correct in all material respects as of the date hereof and, except as they may
be affected by the transactions contemplated by this Agreement, as of the
Closing Date, with the same force and effect as if made on and as of the Closing
Date; and there shall be (i) no pending or threatened litigation brought by any
person (other than Acquiring Fund, its adviser or any of their affiliates)
against the Acquired Fund, the Acquiring Fund or their advisers, directors,
trustees or officers arising out of this Agreement and (ii) no facts known to
the Acquired Fund which the Acquired Fund reasonably believes might result in
such litigation.
6.2 The Acquiring Fund shall have delivered to the Acquired Fund on the
Closing Date a certificate executed in its name by its President or a Vice
President, in a form reasonably satisfactory to the Acquired Fund and dated as
of the Closing Date, to the effect that the representations and warranties of
the Acquiring Company with respect to the Acquiring Fund made in this Agreement
are true and correct on and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquired Fund shall reasonably request;
6.3 The Acquired Fund shall have received on the Closing Date an opinion of
________________, in a form reasonably satisfactory to the Acquired Fund, and
dated as of the Closing Date, to the effect that:
(a) The Acquiring Company has been duly formed and is an existing
corporation in good standing; (b) the Acquiring Fund has the power to carry on
its business as presently conducted in accordance with the description thereof
in the Trust's registration statement under the 1940 Act; (c) the Agreement has
been duly authorized, executed and delivered by the Company, on behalf of the
Acquiring Fund, and constitutes a valid and legally binding obligation of the
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<PAGE>
Company, on behalf of the Acquiring Fund, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and laws of general applicability relating to or affecting creditors'
rights and to general equity principles; (d) the execution and delivery of the
Agreement did not, and the exchange of the Acquired Fund's assets for Barrett
Shares class Shares of the Acquiring Fund pursuant to the Agreement will not,
violate the Company's charter, or By-laws; and (e) to the knowledge of such
counsel, all regulatory consents, authorizations, approvals or filings required
to be obtained or made by the Acquiring Fund under the Federal laws of the
United States or the laws of the State of Maryland for the exchange of the
Acquired Fund's assets for Barrett Shares class Shares of the Acquiring Fund,
pursuant to the Agreement have been obtained or made; and
6.4 The Acquiring Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquiring Fund on or before the Closing Date.
6.5 The Board of Directors of Acquiring Fund shall have approved the
establishment of a new class of shares of Acquiring Fund to be known as "Barrett
Shares class" and such class of shares shall be duly organized and validly
existing under the laws of the State of Maryland on or before the Closing Date.
6.6 The Registration Statement on Form N-1A covering such Barrett Shares
class of Acquiring Fund shall have become effective under the 1933 Act and no
stop orders suspending the effectiveness thereof shall have been issued and, to
the best knowledge of the Acquiring Fund, no investigation or proceeding for
that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquired Fund of all of the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following further
conditions:
7.1 All representations and warranties of the Acquired Company, with
respect to the Acquired Fund, contained in this Agreement shall be true and
correct in all material respects as of the date hereof and, except as they may
be affected by the transactions contemplated by this Agreement, as of the
16
<PAGE>
Closing Date, with the same force and effect as if made on and as of the Closing
Date; and there shall be (i) no pending or threatened litigation brought by any
person (other than Acquired Fund, its adviser or any of their affiliates)
against the Acquiring Fund, the Acquired Fund or their advisers, directors,
trustees or officers arising out of this Agreement and (ii) no facts known to
the Acquiring Fund which the Acquiring Fund reasonably believes might result in
such litigation.
7.2 The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities as of the Closing Date,
certified by the Treasurer of the Acquired Fund;
7.3 The Acquired Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its President or a Vice
President, in a form reasonably satisfactory to the Acquiring Fund and dated as
of the Closing Date, to the effect that the representations and warranties of
the Acquired Company with respect to the Acquired Fund made in this Agreement
are true and correct on and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquiring Fund shall reasonably request; 7.4 The Acquiring
Fund shall have received on the Closing Date an opinion of Dechert Price &
Rhoads, in a form reasonably satisfactory to the Acquiring Fund, and dated as of
the Closing Date, to the effect that:
(a) The Acquired Company has been duly formed and is an existing
corporation in good standing; (b) the Acquired Fund has the corporate power to
carry on its business as presently conducted in accordance with the description
thereof in the Company's registration statement under the 1940 Act; (c) the
Agreement has been duly authorized, executed and delivered by the Company, on
behalf of the Acquired Fund, and constitutes a valid and legally binding
obligation of the Company, on behalf of the Acquired Fund, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and laws of general applicability relating
to or affecting creditors' rights and to general equity principles; (d) the
execution and delivery of the Agreement did not, and the exchange of the
Acquired Fund's assets for Barrett Shares class Shares of the Acquiring Fund
17
<PAGE>
pursuant to the Agreement will not, violate the Company's charter or By-laws;
and (e) to the knowledge of such counsel, all regulatory consents,
authorizations, approvals or filings required to be obtained or made by the
Acquired Fund under the Federal laws of the United States or the laws of the
State of Maryland for the exchange of the Acquired Fund's assets for Barrett
Shares class shares of the Acquiring Fund, pursuant to the Agreement have been
obtained or made; and
7.5 The Acquired Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquired Fund on or before the Closing Date.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
If any of the conditions set forth below have not been met on or before the
Closing Date with respect to the Acquired Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of the Acquired Company's
charter, and By-Laws, applicable Maryland law and the 1940 Act, and certified
copies of the resolutions evidencing such approval shall have been delivered to
the Acquiring Fund. Notwithstanding anything herein to the contrary, neither the
Acquiring Fund nor the Acquired Fund may waive the conditions set forth in this
section 8.1;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending or to its knowledge threatened before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain material damages or
other relief in connection with, this Agreement or the transactions contemplated
herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed necessary by
the Acquiring Fund or the Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions;
8.4 The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
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<PAGE>
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.5 The parties shall have received an opinion of Dechert Price & Rhoads
addressed to each Company substantially to the effect that, based upon certain
facts, assumptions and representations, the transaction contemplated by this
Agreement constitutes a tax-free reorganization for Federal income tax purposes.
The delivery of such opinion is conditioned upon receipt by Dechert Price &
Rhoads of representations it shall request of each Company. Notwithstanding
anything herein to the contrary, neither the Acquiring Fund nor the Acquired
Fund may waive the condition set forth in this section 8.5.
9. INDEMNIFICATION
9.1 The Acquiring Fund agrees to indemnify and hold harmless the Acquired
Fund and each of the Acquired Fund's directors and officers from and against any
and all losses, claims, damages, liabilities or expenses (including, without
limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally, the Acquired Fund or any of its
directors or officers may become subject, insofar as any such loss, claim damage
liability or expense (or actions with respect thereto) arises out of or is based
on any breach by the Acquiring Fund of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
9.2 The Acquired Fund agrees to indemnify and hold harmless the Acquiring
Fund and each of the Acquiring Fund's directors and officers from and against
any and all losses, claims, damages, liabilities or expenses (including, without
limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally, the Acquiring Fund or any of its
directors or officers may become subject, insofar as any such loss, claim damage
liability or expense (or actions with respect thereto) arises out of or is based
on any breach by the Acquired Fund of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
10. FEES AND EXPENSES
10.1 The Acquiring Company, on behalf of the Acquiring Fund, and the
Acquired Company, on behalf of the Acquired Fund, represents and warrants to the
other that it has no obligations to pay any brokers or finders fees in
connection with the transactions provided for herein.
19
<PAGE>
10.2 [The Acquired Fund will bear __% of the expenses arising in connection
with the Reorganization, including, without limitation, all legal, accounting,
printing, postage and solicitation expenses, and the Acquiring Fund will bear
the remaining __% of such expenses/Each party will bear its own expenses in
connection with the Reorganization, including, without limitation, all legal,
accounting, printing, postage and solicitation expenses; provided, however, that
the Acquiring Fund shall be solely responsible for the payment of the
Commission's registration fees and Blue Sky expenses relating to the
Reorganization.]; provided, however, that any such expenses relating to the
Acquired Fund that are borne by the Acquiring Fund will be solely and directly
related to the Reorganization within the meaning of Revenue Ruling 73-54, 1973-1
C.B. 187.
11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
11.1 The Acquiring Fund and the Acquired Fund agree that neither party has
made any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
11.2 Except as specified in the next sentence set forth in this section
11.2, the representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall not
survive the consummation of the transactions contemplated hereunder. The
covenants to be performed after the Closing and the obligations of each of the
Acquired Fund and Acquired Fund in Sections 9.1 and 9.2 shall survive the
Closing.
12. TERMINATION
This Agreement may be terminated and the transactions contemplated hereby
may be abandoned by either party by (i) mutual agreement of the parties, or (ii)
by either party if the Closing shall not have occurred on or before [date] ,
unless such date is extended by mutual agreement of the parties, or (iii) by
either party if the other party shall have materially breached its obligations
under this Agreement or made a material and intentional misrepresentation herein
or in connection herewith. In the event of any such termination, this Agreement
shall become void and there shall be no liability hereunder on the part of any
party or their respective directors/trustees or officers, except for any such
material breach or intentional misrepresentation, as to each of which all
remedies at law or in equity of the party adversely affected shall survive.
20
<PAGE>
13. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the
Acquired Fund and the Acquiring Fund; provided, however, that following the
meeting of the Acquired Fund Shareholders called by the Acquired Fund pursuant
to section 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Barrett Shares class
Acquiring Fund shares to be issued to the Acquired Fund shareholders under this
Agreement to the detriment of such shareholders without their further approval.
14. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly given
if delivered by hand (including by Federal Express or similar express courier)
or transmitted by facsimile or three days after being mailed by prepaid
registered or certified mail, return receipt requested, addressed to the
Acquired Fund, 345 Park Avenue, New York, New York 10154 with a copy to Dechert
Price & Rhoads, Ten Post Office Square, Boston, MA 02109, Attention: Sheldon A.
Jones, Esq., or to the Acquiring Fund, 345 Park Avenue, New York, New York
10154, with a copy to_________________, Attention: __________, or to any other
address that the Acquired Fund or the Acquiring Fund shall have last designated
by notice to the other party.
15. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY
15.1 The Article and section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
15.3 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and the shareholders of the
Acquiring Fund and the Acquired Fund and their respective successors and
21
<PAGE>
assigns, any rights or remedies under or by reason of this Agreement.
15.4 No series of the Corporation other than the Acquiring Fund and the
Acquired Fund shall be responsible for the obligations of the Corporation
hereunder, and all persons shall look only to the respective assets of each of
the Acquiring Fund and the Acquired Fund to satisfy the obligations of the
Corporation hereunder.
15.5 This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of_______________ , without regard to its
principles of conflicts of laws.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President and its seal to be affixed
thereto and attested by its Secretary or Assistant Secretary.
Attest: Scudder International Fund, Inc.
on behalf of Scudder International Fund
------------------------------
By:___________________________
Its:____________________________
Attest: Scudder Institutional Fund, Inc.
on behalf of Institutional International
Equity Portfolio
------------------------------
By:___________________________
Its:____________________________
22
<PAGE>
This prospectus sets forth concisely the information about Scudder International
Fund, a series of Scudder International Fund, Inc., an open-end management
investment company, that a prospective investor should know before investing.
Please retain it for future reference.
If you require more detailed information, a Statement of Additional Information
dated August 1, 1997, as amended from time to time, may be obtained without
charge by writing Scudder Investor Services, Inc., Two International Place,
Boston, MA 02110-4103 or calling 1-800-225-2470. The Statement, which is
incorporated by reference into this prospectus, has been filed with the
Securities and Exchange Commission and is available along with other related
materials on the SEC's Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Contents--see page 4.
NOT FDIC-INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
Scudder International Fund
Prospectus
August 1, 1997
A pure no-load(TM) (no sales charges) mutual fund seeking long-term growth of
capital primarily from foreign equity securities.
<PAGE>
Expense information
How to compare a Scudder pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder International Fund (the "Fund"). By reviewing
this table and those in other mutual funds' prospectuses, you can compare the
Fund's fees and expenses with those of other funds. With Scudder's pure
no-load(TM) funds, you pay no commissions to purchase or redeem shares, or to
exchange from one fund to another. As a result, all of your investment goes to
work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended March 31, 1997.
Investment management fee 0.82%
12b-1 fees NONE
Other expenses 0.33%
-----
Total Fund operating expenses 1.15%
=====
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$12 $37 $63 $140
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Fund. If you wish to receive your
redemption proceeds via wire, there is a $5 wire service fee. For additional
information, please refer to "Transaction information --Redeeming shares."
2
<PAGE>
Financial highlights
The following table includes selected data for a share outstanding throughout
each period (a) and other performance information derived from the audited
financial statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated March 31, 1997 and may be obtained without charge by
writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended March 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
---------------------------------------------------------------------------------------
period ........................ $45.71 $39.72 $42.96 $35.69 $34.36 $34.69 $37.00 $34.79 $33.43 $44.05
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............ .30 .38 .21 .31 .38 .44 .80 .49 .40 .45
Net realized and unrealized gain
(loss) on investment
transactions .................. 4.53 7.19 (1.03) 7.74 2.64 (.37) (.39) 5.30 4.15 (.86)
Total from investment
---------------------------------------------------------------------------------------
operations .................... 4.83 7.57 (.82) 8.05 3.02 .07 .41 5.79 4.55 (.41)
---------------------------------------------------------------------------------------
Less distributions:
From net investment income ....... (1.28) (.40) -- (.63) (.83) -- (.74) (.43) (.13) (.82)
In excess of net investment income -- -- -- (.06) -- -- -- -- -- --
From net realized gains on
investment transactions ....... (1.19) (1.18) (2.42) (.09) (.86) (.40) (1.98) (3.15) (3.06) (9.39)
---------------------------------------------------------------------------------------
Total distributions .............. (2.47) (1.58) (2.42) (.78) (1.69) (.40) (2.72) (3.58) (3.19) (10.21)
---------------------------------------------------------------------------------------
Net asset value, end of
---------------------------------------------------------------------------------------
period ........................ $48.07 $45.71 $39.72 $42.96 $35.69 $34.36 $34.69 $37.00 $34.79 $33.43
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) ................. 10.74 19.25 (2.02) 22.69 9.12 .18 1.46 17.08 14.34 (.47)
Ratios and Supplemental Data
Net assets, end of period
($ millions) .................... 2,583 2,515 2,192 2,198 1,180 933 929 783 550 559
Ratio of operating expenses to
average net assets (%) ........ 1.15 1.14 1.19 1.21 1.26 1.30 1.24 1.18 1.22 1.21
Ratio of net investment income to
average net assets (%) ........ .64 .86 .48 .75 1.13 1.25 2.22 1.33 1.20 1.16
Portfolio turnover rate (%) ...... 35.8 45.2 46.3 39.9 29.2 50.4 70.1 49.4 48.3 54.8
Average commission rate paid (b) . $.0002 -- -- -- -- -- -- -- -- --
</TABLE>
(a) Based on monthly average share Based on monthly average shares outstanding
during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years ending on or after March 31, 1997.
3
<PAGE>
A message from Scudder's chairman
Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $115 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
Scudder International Fund
Investment objective
o long-term growth of capital primarily from foreign equity securities
Investment characteristics
o professional management to help investors without the time or expertise to
invest directly in foreign securities
o international diversification which helps reduce international investment
risk
o convenient participation in investments denominated in foreign currencies
o daily liquidity at current net asset value
Contents
Investment objective and policies 5
Why invest in the Fund? 5
International investment experience 6
Additional information about policies
and investments 7
Investment results 9
Distribution and performance information 10
Fund organization 11
Transaction information 12
Shareholder benefits 16
Purchases 18
Exchanges and redemptions 19
Directors and Officers 21
Investment products and services 22
How to contact Scudder 23
4
<PAGE>
Investment objective and policies
Scudder International Fund (the "Fund"), a series of Scudder International Fund,
Inc., seeks long-term growth of capital primarily through a diversified
portfolio of marketable foreign equity securities. These securities are selected
primarily to permit the Fund to participate in non-United States companies and
economies with prospects for growth. The Fund invests in companies, wherever
organized, which do business primarily outside the United States. The Fund
intends to diversify investments among several countries and to have represented
in the portfolio, in substantial proportions, business activities in not less
than three different countries. The Fund does not intend to concentrate
investments in any particular industry.
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
Investments
The Fund generally invests in equity securities of established companies, listed
on foreign exchanges, which the Fund's investment adviser, Scudder, Stevens &
Clark, Inc. (the "Adviser"), believes have favorable characteristics.
When the Adviser believes that it is appropriate to do so in order to achieve
the Fund's investment objective of long-term capital growth, the Fund may invest
up to 20% of its total assets in debt securities. Such debt securities include
debt securities of foreign governments, supranational organizations and private
issuers, including bonds denominated in the European Currency Unit (ECU).
Portfolio debt investments will be selected on the basis of, among other things,
yield, credit quality, and the fundamental outlooks for currency and interest
rate trends in different parts of the globe, taking into account the ability to
hedge a degree of currency or local bond price risk. The Fund may purchase
"investment-grade" bonds, which are those rated Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") or AAA, AA, A or BBB by Standard & Poor's
("S&P") or, if unrated, judged by the Adviser to be of equivalent quality. The
Fund may also invest up to 5% of its total assets in debt securities which are
rated below investment-grade (see "Risk factors").
In addition, the Fund may enter into repurchase agreements, and invest in
illiquid and restricted securities, and may engage in securities lending and
strategic transactions, which may include derivatives.
When the Adviser determines that exceptional conditions exist abroad, the Fund
may, for temporary defensive purposes, invest all or a portion of its assets in
Canadian or U.S. Government obligations or currencies, or securities of
companies incorporated in and having their principal activities in Canada or the
U.S. It is impossible to accurately predict for how long such alternative
strategies may be utilized.
Why invest in the Fund?
The Fund is designed for investors seeking investment opportunity and
diversification through an actively managed portfolio of foreign securities.
One reason that some investors may wish to invest overseas is that certain
foreign economies may grow more rapidly than the U.S. economy and may offer
opportunities for achieving superior investment returns. Another reason is that
foreign stock and bond markets do not always move in step with each other or
with the U.S. markets. A portfolio invested in a number of markets worldwide
will be better diversified than one which is subject to the movements of a
5
<PAGE>
single market.
Another benefit of the Fund is that it eliminates the complications and extra
costs associated with direct investment in individual foreign securities.
Individuals investing directly in foreign stocks may find it difficult to make
purchases and sales, to obtain current information, to hold securities in
safekeeping, and to convert the value of their investments from foreign
currencies into U.S. dollars. The Fund manages these tasks for the investor.
With a single investment, the investor has a diversified international
investment portfolio, which is actively managed by experienced professionals.
The Adviser has had long experience in dealing in foreign markets and with
brokers and custodian banks around the world. The Adviser also has the benefit
of an established information network and believes the Fund affords a convenient
and cost-effective method of investing internationally.
The Fund's investments are generally denominated in foreign currencies. The
strength or weakness of the U.S. dollar against these currencies is responsible
for part of the Fund's investment performance. If the dollar falls in value
relative to the Japanese yen, for example, the dollar value of a Japanese stock
held in the portfolio will rise even though the price of the stock remains
unchanged. Conversely, if the dollar rises in value relative to the yen, the
dollar value of the Japanese stock will fall.
In addition, the Fund offers all the benefits of the Scudder Family of Funds.
Scudder, Stevens & Clark, Inc. manages a diverse family of pure no-load(TM)
funds and provides a wide range of services to help investors meet their
investment needs. Please refer to "Investment products and services" for
additional information.
International investment experience
The Adviser has been a leader in international investment management and trading
for over 40 years. In addition to the Fund, which was initially incorporated in
Canada in 1953 as the first foreign investment company registered with the
United States Securities and Exchange Commission, its investment company clients
include Scudder International Bond Fund and Scudder International Growth and
Income Fund, which invest internationally, Scudder Global Fund, Scudder Global
Bond Fund, and Scudder Global Discovery Fund, which invest worldwide, Scudder
Greater Europe Growth Fund, which invests primarily in securities of European
companies, The Japan Fund, Inc., which invests primarily in securities of
Japanese companies, Scudder Latin America Fund, which invests primarily in Latin
American issuers, Scudder Pacific Opportunities Fund, which invests primarily in
issuers located in the Pacific Basin, with the exception of Japan, Scudder
Emerging Markets Income Fund, which invests in debt securities issued in
emerging markets, and Scudder Emerging Markets Growth Fund, which invests in
equity investments in emerging markets. The Adviser also manages the assets of
eight closed-end investment companies investing in foreign securities: The
Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc., The Latin
America Dollar Income Fund, Inc., Scudder New Asia Fund, Inc., Scudder New
Europe Fund, Inc., Scudder Spain and Portugal Fund, Inc. and Scudder World
Income Opportunities Fund, Inc. Assets of Scudder's international investment
company clients exceeded $8.5 billion as of June 30, 1997.
6
<PAGE>
Additional information about policies and investments
Investment restrictions
The Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Fund's
investment risk.
The Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes, and may not make loans except through the lending of
portfolio securities, the purchase of debt securities or through repurchase
agreements.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Fund's Statement of Additional
Information.
Repurchase agreements
As a means of earning income for periods as short as overnight, the Fund may
enter into repurchase agreements with selected banks and broker/dealers. Under a
repurchase agreement, the Fund acquires securities, subject to the seller's
agreement to repurchase them at a specified time and price.
Securities lending
The Fund may lend portfolio securities to registered broker/dealers as a means
of increasing its income. These loans may not exceed 30% of the Fund's total
assets taken at market value. Loans of portfolio securities will be secured
continuously by collateral consisting of U.S. Government securities or
fixed-income obligations that are maintained at all times in an amount at least
equal to the current market value of the loaned securities. The Fund will earn
any interest or dividends paid on the loaned securities and may share with the
borrower some of the income received on the collateral for the loan or will be
paid a premium for the loan.
Strategic Transactions and derivatives
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly 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
7
<PAGE>
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management or
portfolio management purposes and not for speculative purposes. Please refer to
"Risk factors--Strategic Transactions and derivatives" for more information.
Risk factors
The Fund's risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Fund may use from time to time.
Foreign securities. Investments in foreign securities involve special
considerations due to limited information, higher brokerage costs, different
accounting standards, thinner trading markets as compared to domestic markets
and the likely impact of foreign taxes on the income from securities. They may
also entail other risks, such as the possibility of one or more of the
following: imposition of dividend or interest withholding or confiscatory taxes;
currency blockages or transfer restrictions; expropriation, nationalization or
other adverse political or economic developments; less government supervision
and regulation of securities exchanges, brokers and listed companies; and the
difficulty of enforcing obligations in other countries. Purchases of foreign
securities are usually made in foreign currencies and, as a result, the Fund may
incur currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U.S. dollar. Further, it
may be more difficult for the Fund's agents to keep currently informed about
corporate actions which may affect the prices of portfolio securities.
Communications between the U.S. and foreign countries may be less reliable than
within the U.S., increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. The Fund's
ability and decisions to purchase and sell portfolio securities may be affected
by laws or regulations relating to the convertibility and repatriation of
assets.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted, or
the value of the securities may decline before the Fund is able to dispose of
them. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities, before being able to sell
the securities.
Securities lending. From time to time the Fund may lend its portfolio securities
to registered broker/dealers as described above. The risks of lending portfolio
securities, as with other extensions of secured credit, consist of possible
delays in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will be made to registered broker/dealers deemed by the
Adviser to be in good standing and will not be made unless, in the judgment of
8
<PAGE>
the Adviser, the consideration to be received in exchange for such loans would
justify the risk.
Debt securities. The Fund may invest no more than 5% of its total assets in debt
securities which are rated below investment-grade; that is, rated below Baa by
Moody's or BBB by S&P (commonly referred to as "junk bonds"). The lower the
ratings of such debt securities, the greater their risks render them like equity
securities. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics. The Fund may invest in securities
which are rated D by S&P or, if unrated, are of equivalent quality. Securities
rated D may be in default with respect to payment of principal or interest.
Investment results
- --------------------------------------------------------------------------------
Scudder International Fund is designed for long-term investors who can accept
international investment risk. The dollar value of the Fund's portfolio
securities fluctuates with changes in market and economic conditions abroad and
with changes in relative currency values. Changes in the Fund's share price may
not be related to changes in the U.S. stock and bond markets. As with any
long-term investment, the value of shares when sold may be higher or lower than
when purchased. For additional information concerning risks of international
investment, see "Risk factors."
Annual capital changes--past ten years*
- ---------------------------------------
<TABLE>
<CAPTION>
Years Ended Net Asset Capital Gains
March 31, Value/Share Dividends Distributions Capital Change
--------- ----------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1987 $44.05 -- -- --
1988 33.43 $ 0.82 $ 9.39 - 2.45%
1989 34.79 0.13 3.06 + 13.91
1990 37.00 0.43 3.15 + 15.81
1991 34.69 0.74 1.98 - 0.67
1992 34.36 -- 0.40 - 0.95
1993 35.69 0.83 0.86 + 6.53
1994 42.96 0.69 0.09 + 21.59
1995 39.72 -- 2.42 - 2.02
1996 45.71 0.40 1.18 + 18.19
1997 48.07 1.28 1.19 +7.84
</TABLE>
Growth of a $10,000 investment
------------------------------
<TABLE>
Years Ended Value of Initial Total Return
March 31, 1997 $10,000 Investment Average Annual Cumulative
-------------- ------------------ -------------- ----------
<S> <C> <C> <C> <C>
One Year $ 11,074 +10.74% + 10.74%
Five Years $ 17,322 +11.61% + 73.22%
Ten Years $ 23,456 + 8.90% + 134.56%
</TABLE>
* For definition of "capital change" please see "Distribution and performance
information."
Performance figures are historical and all total return calculations assume
reinvestment of capital gains and income distributions.
The investment return and principal value of the Fund's shares represent past
performance and will vary due to market conditions, and the shares may be worth
more or less at redemption than at original purchase.
- --------------------------------------------------------------------------------
9
<PAGE>
Additional information about policies and investments (cont'd)
Illiquid and restricted securities. The absence of a trading market can make it
difficult to ascertain a market value for illiquid and restricted securities.
Disposing of illiquid and restricted securities 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.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the 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 contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.
Distribution and performance information
Dividends and capital gains distributions
The Fund intends to distribute dividends from its net investment income and any
net realized capital gains after utilization of capital loss carryforwards, if
any, in November or December to prevent application of federal excise tax. An
additional distribution may be made if necessary. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. According to preference, shareholders may receive
distributions in cash or have them reinvested in additional shares of the Fund.
If an investment is in the form of a retirement plan, all dividends and capital
gains distributions must be reinvested into the account.
10
<PAGE>
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable as
long-term capital gains regardless of the length of time shareholders have owned
their shares. Short-term capital gains and any other taxable income
distributions are taxable as ordinary income.
Shareholders may be able to claim a credit or deduction on their income tax
returns for their pro rata portion of qualified taxes paid by the Fund to
foreign countries.
The Fund sends detailed tax information about the amount and type of its
distributions by January 31 of the following year.
Performance information
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. "Total return" is the change in value
of an investment in the Fund for a specified period. The "average annual total
return" of the Fund is the average annual compound rate of return of an
investment in the Fund assuming the investment has been held for one year, five
years and ten years as of a stated ending date. "Cumulative total return"
represents the cumulative change in value of an investment in the Fund for
various periods. All types of total return calculations assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund. "Capital change" measures return from capital, including
reinvestment of any capital gains distributions but does not include the
reinvestment of dividends. Performance will vary based upon, among other things,
changes in market conditions and the level of the Fund's expenses.
Fund organization
Scudder International Fund is a diversified series of Scudder International
Fund, Inc. (the "Corporation"), an open-end, management investment company
registered under the Investment Company Act of 1940 (the "1940 Act"). The
Corporation is a Maryland corporation whose predecessor was organized in 1953.
The Fund's activities are supervised by the Corporation's Board of Directors.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Corporation is not required to and has no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Directors, changing
fundamental investment policies or approving an investment advisory contract.
Shareholders will be assisted in communicating with other shareholders in
connection with removing a Director as if Section 16(c) of the 1940 Act were
applicable.
Investment adviser
The Fund retains the investment management firm of Scudder, Stevens & Clark,
Inc., a Delaware corporation, to manage the Fund's daily investment and business
affairs subject to the policies established by the Board of Directors. The
Directors have overall responsibility for the management of the Fund under
Maryland law.
The Adviser receives an investment management fee for these services. As of
September 5, 1996, the Fund pays the Adviser an annual fee of 0.90% of the first
$500 million of average daily net assets, 0.85% of such assets in excess of $500
million, 0.80% of such assets in excess of $1 billion, 0.75% of such assets in
excess of $2 billion and 0.70% of such assets in excess of $3 billion. The
Fund's fee is graduated so that increases in the Fund's net assets may result in
a lower annual fee rate and decreases in the Fund's net assets may result in a
higher annual fee rate.
11
<PAGE>
The fee is payable monthly, provided that 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 fee is higher than
that charged by many funds which invest primarily in U.S. securities but not
necessarily higher than the fees charged to funds with investment objectives
similar to that of the Fund.
Prior to September 5, 1996 the investment management fee was equal, on an annual
basis, to 0.90% of the first $500 million of average daily net assets, 0.85% of
such assets in excess of $500 million, 0.80% of such assets in excess of $1
billion, and 0.75% of such assets in excess of $2 billion.
For the fiscal year ended March 31, 1997, the Adviser received an investment
management fee of 0.82% of the Fund's average daily net assets.
All the Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment services.
Scudder, Stevens & Clark, Inc., is located at 345 Park Avenue, New York, New
York.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Fund.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Fund's
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of the Fund. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Fund.
Custodian
Brown Brothers Harriman & Co. is the Fund's custodian.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone prior to the expiration of the seven-day period will not
be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).
12
<PAGE>
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By telephone order. Existing shareholders may purchase shares at a certain day's
price by calling 1-800-225-5163 before the close of regular trading on the New
York Stock Exchange (the "Exchange"), normally 4 p.m. eastern time, on that day.
Orders must be for $10,000 or more and cannot be for an amount greater than four
times the value of your account at the time the order is placed. A confirmation
with complete purchase information is sent shortly after your order is received.
You must include with your payment the order number given at the time the order
is placed. If payment by check or wire is not received within three business
days, the order will be canceled and the shareholder will be responsible for any
loss to the Fund resulting from this cancelation. Telephone orders are not
available for shares held in Scudder IRA accounts and most other Scudder
retirement plan accounts.
By "QuickBuy." If you elected "QuickBuy" for your account, you can call
toll-free to purchase shares. The money will be automatically transferred from
your predesignated bank checking account. Your bank must be a member of the
Automated Clearing House for you to use this service. If you did not elect
"QuickBuy," call 1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases may not be for
more than $250,000. Proceeds in the amount of your purchase will be transferred
from your bank checking account in two or three business days following your
call. For requests received by the close of regular trading on the Exchange,
shares will be purchased at the net asset value per share calculated at the
close of trading on the day of your call. "QuickBuy" requests received after the
close of regular trading on the Exchange will begin their processing and be
purchased at the net asset value calculated the following business day.
If you purchase shares by "QuickBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "QuickBuy" transactions are not
available for most retirement plan accounts. However, "QuickBuy" transactions
are available for Scudder IRA accounts.
By exchange. The Fund may be exchanged for shares of other funds in the Scudder
Family of Funds unless otherwise determined by the Board of Directors. Your new
account will have the same registration and address as your existing account.
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
Redeeming shares
The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
provided your banking information on your application, you can call to request
that federal funds be sent to your authorized bank account. If you did not
provide your banking information on your application, call 1-800-225-5163 for
more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
13
<PAGE>
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL by calling
1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
By "QuickSell." If you elected "QuickSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "QuickSell,"
call 1-800-225-5163 for more information.
To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, 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.
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $100,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (The Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $100,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If the 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.
Share price
Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines net asset value per share as of
the close of regular trading on the Exchange, normally 4 p.m. eastern time, on
each day the Exchange is open for trading. Net asset value per share is
calculated by dividing the value of total Fund assets, less all liabilities, by
14
<PAGE>
the total number of shares outstanding.
Processing time
All purchase and redemption requests must be received in good order by the
Fund's transfer agent. Those requests received by the close of regular trading
on the Exchange are executed at the net asset value per share calculated at the
close of regular trading that day.
Purchase and redemption requests received after the close of regular trading on
the Exchange will be executed the following business day.
If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.
The Fund will normally send your redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of Fund shares (including exchanges) for any reason including when a
pattern of frequent purchases and sales made in response to short-term
fluctuations in the Fund's share price appears evident.
Tax information
A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. The Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
The Fund also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500, which amount
may be changed by the Board of Directors. Scudder retirement plans and certain
other accounts have similar or lower minimum share balance requirements. A
shareholder may open an account with at least $1,000, if an automatic investment
plan of $100/month is established.
Shareholders who maintain a non-fiduciary account balance of less than $2,500 in
the Fund, without establishing an automatic investment plan, will be assessed an
annual $10.00 per fund charge with the fee to be paid to the Fund. The $10.00
charge will not apply to shareholders with a combined household account balance
in any of the Scudder Funds of $25,000 or more. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
accounts below $250, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange 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. Retirement accounts and certain other accounts will not be assessed
the $10.00 charge or be subject to automatic liquidation. Please refer to
"Exchanges and Redemptions--Other Information" in the Fund's Statement of
15
<PAGE>
Additional Information for more information.
Third party transactions
If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
Redemption-in-kind
The Fund 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 to cash. The Corporation 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.
Shareholder benefits
Experienced professional management
Scudder, Stevens & Clark, Inc., one of the nation's most experienced investment
management firms, actively manages your Scudder fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.
A team approach to investing
Scudder International Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by Scudder's large staff
of economists, research analysts, traders and other investment specialists who
work in Scudder's offices across the United States and abroad. Scudder believes
its team approach benefits Fund investors by bringing together many disciplines
and leveraging Scudder's extensive resources.
Lead Portfolio Manager Irene Cheng joined Scudder in 1993. Ms. Cheng, who has
over 13 years of industry experience, focuses on portfolio management and equity
strategy for Scudder's international equity accounts.
Nicholas Bratt, Portfolio Manager, directs Scudder's overall global equity
investment strategies. Mr. Bratt joined Scudder and the team in 1976.
Carol L. Franklin joined Scudder International Fund's portfolio management team
in 1986. Ms. Franklin, who has over 20 years of experience in finance and
investing, joined Scudder in 1981.
Joan Gregory, Portfolio Manager, focuses on stock selection, a role she has
played since she joined Scudder in 1992. Ms. Gregory, who joined the team in
1994, has been involved with investment in global and international stocks.
Marc Joseph, Portfolio Manager, managed international portfolios prior to
joining Scudder in 1997 and is a member of Scudder's Global Equity Group where
he focuses on managing international equity portfolios. Mr. Joseph has over 10
years of industry experience.
Sheridan Reilly joined Scudder in 1995 and is a member of Scudder's Global
Equity Group. Mr. Reilly has over 10 years of industry experience focusing on
strategies for global portfolios, currency hedging and foreign equity markets.
SAIL(TM)--Scudder Automated Information Line
For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
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<PAGE>
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such an
event you should write to the Fund; please see "How to contact Scudder" for the
address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Personal Counsel(SM) -- A Managed Fund Portfolio Program
If you would like to receive direct guidance and management of your overall
mutual fund portfolio to help you pursue your investment goals, you may be
interested in Personal Counsel from Scudder. Personal Counsel, a program of
Scudder Investor Services, Inc., a registered investment adviser and a
subsidiary of Scudder, Stevens & Clark, Inc., combines the benefits of a
customized portfolio of pure no-load Scudder Funds with ongoing portfolio
monitoring and individualized service, for an annual fee of generally 1% or less
of assets (with a $1,000 minimum). In addition, it draws upon Scudder's more
than 75-year heritage of providing investment counsel to large corporate and
private clients. If you have $100,000 or more to invest initially and would like
more information about Personal Counsel, please call 1-800-700-0183.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Investor Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Investor Centers in Boca Raton, Boston,
Chicago, New York and San Francisco.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
17
<PAGE>
<TABLE>
<CAPTION>
Purchases
<S> <C>
Opening Minimum initial investment: $2,500; IRAs $1,000
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send your completed and signed application and check
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds Scudder Shareholder Service
P.O. Box 2291 Center
Boston, MA 42 Longwater Drive
02107-2291 Norwell, MA
02061-1612
o By Wire Please see Transaction information--Purchasing shares-- By
wire for details, including the ABA wire transfer number. Then call
1-800-225-5163 for instructions.
o In Person Visit one of our Investor Centers to complete your application with the
help of a Scudder representative. Investor Center locations are listed
under Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
shares See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a
payable to "The letter instruction including your account number and the
Scudder Funds." complete Fund name, to the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares-- By
wire for details, including the ABA wire transfer number.
o In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor Center locations
are listed under Shareholder benefits.
o By Telephone Please see Transaction information--Purchasing shares--
By QuickBuy for more details.
o By Automatic You may arrange to make investments on a regular basis
Investment Plan through automatic deductions deductions from your bank
($50 minimum) checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exchanges and redemptions
<S> <C>
Exchanging Minimum investments: $2,500 to establish a new account;
shares $100 to exchange among existing accounts
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds Scudder Shareholder 1-800-821-6234
P.O. Box 2291 Service Center
Boston, MA 02107-2291 42 Longwater Drive
Norwell, MA
02061-1612
-----------------------------------------------------------------------------------------------------------------------
Redeeming o By Telephone To speak with a service representative, call 1-800-225-5163
shares from 8 a.m. to 8 p.m. eastern time or to access SAIL(TM),
Scudder's Automated Information Line, call 1-800-343-2890
(24 hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$100,000 sent to your address of record.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
A signature guarantee is required for redemptions over $100,000.
See Transaction information--Redeeming shares.
o By Automatic You may arrange to receive automatic cash payments periodically.
Withdrawal Call 1-800-225-5163 for more information and an enrollment form.
Plan
</TABLE>
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<PAGE>
Scudder tax-advantaged retirement plans
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
o Scudder No-Fee IRAs. These retirement plans allow a maximum annual
contribution of up to $2,000 per person for anyone with earned income (up
to $2,000 per individual for married couples if only one spouse has earned
income). Many people can deduct all or part of their contributions from
their taxable income, and all investment earnings accrue on a tax-deferred
basis. The Scudder No-Fee IRA charges you no annual custodial fee.
o 401(k) Plans. 401(k) plans allow employers and employees to make
tax-deductible retirement contributions. Scudder offers a full service
program that includes recordkeeping, prototype plan, employee
communications and trustee services, as well as investment options.
o Profit Sharing and Money Purchase Pension Plans. These plans allow
corporations, partnerships and people who are self-employed to make annual,
tax-deductible contributions of up to $30,000 for each person covered by
the plans. Plans may be adopted individually or paired to maximize
contributions. These are sometimes known as Keogh plans. The Scudder Keogh
charges you no annual custodial fee.
o 403(b) Plans. Retirement plans for tax-exempt organizations and school
systems to which employers and employees may both contribute.
o SEP-IRAs. Easily administered retirement plans for small businesses and
self-employed individuals. The maximum annual contribution to SEP-IRA
accounts is adjusted each year for inflation. The Scudder SEP-IRA charges
you no annual custodial fee.
o Scudder Horizon Plan. A no-load variable annuity that lets you build assets
by deferring taxes on your investment earnings. You can start with $2,500
or more.
Scudder Trust Company (a subsidiary of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, Profit Sharing
or Pension Plan accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life Insurance
Company (in New York State, Intramerica Life Insurance Company [S 1802]). The
contract is offered by Scudder Insurance Agency, Inc. (in New York State, Nevada
and Montana, Scudder Insurance Agency of New York, Inc.). CNL, Inc. is the
Principal Underwriter. Scudder Horizon Plan is not available in all states.
Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.
19
<PAGE>
Directors and Officers
Daniel Pierce*
Chairman of the Board and Director
Nicholas Bratt*
President and Director
Paul Bancroft III
Director; Venture Capitalist and Consultant
Thomas J. Devine
Director; Consultant
Keith R. Fox
Director; President, Exeter Capital Management Corporation
William H. Gleysteen, Jr.
Director; Consultant; Guest Scholar, Brookings Institute
David S. Lee*
Director, Vice President and Assistant Treasurer
William H. Luers
Director; President, The Metropolitan Museum of Art
Wilson Nolen
Director; Consultant
Kathryn L. Quirk*
Director, Vice President and Assistant Secretary
Dr. Gordon Shillinglaw
Director; Professor Emeritus of Accounting, Columbia University
Graduate School of Business
Robert W. Lear
Honorary Director; Executive-in-Residence, Visiting Professor, Columbia
University Graduate School of Business
Robert G. Stone, Jr.
Honorary Director; Chairman Emeritus and Director, Kirby Corporation
Elizabeth J. Allan*
Vice President
Joyce E. Cornell*
Vice President
Richard W. Desmond*
Assistant Secretary
Carol L. Franklin*
Vice President
Edmund B. Games, Jr.*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
*Scudder, Stevens & Clark, Inc.
20
<PAGE>
Investment products and services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Premium Shares**
Managed Shares**
Scudder Government Money Market Series --
Managed Shares**
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares**
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Limited Term Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
Scudder Pennsylvania Tax Free Fund*
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Retirement Programs
IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan *+++ +++
(a variable annuity)
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
Scudder World Income Opportunities
Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed in order from
expected least risk to most risk. +A portion of the income from the tax-free
funds may be subject to federal, state, and local taxes. *Not available in all
states. **A class of shares of the Fund. +++ +++A no-load variable annuity
contract provided by Charter National Life Insurance Company and its affiliate,
offered by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised
by Scudder, Stevens & Clark, Inc., are traded on various stock exchanges.
22
<PAGE>
<TABLE>
<CAPTION>
How to contact Scudder
Account Service and Information:
<S> <C>
For existing account service and transactions
Scudder Investor Relations -- 1-800-225-5163
For 24 hour account information, fund information, exchanges, and an
overview of all the services available to you
Scudder Electronic Account Services -- http://funds.scudder.com
For personalized information about your Scudder accounts, exchanges and redemptions
Scudder Automated Information Line (SAIL) -- 1-800-343-2890
Investment Information:
For information about the Scudder funds, including additional
applications and prospectuses, or for answers to investment questions
Scudder Investor Relations -- 1-800-225-2470
[email protected]
Scudder's World Wide Web Site -- http://funds.scudder.com
For establishing 401(k) and 403(b) plans
Scudder Defined Contribution Services -- 1-800-323-6105
Scudder Brokerage Services:
To receive information about this discount brokerage service and to obtain an application
Scudder Brokerage Services* -- 1-800-700-0820
Personal Counsel(SM) -- A Managed Fund Portfolio Program:
To receive information about this mutual fund portfolio guidance and management program
Personal Counsel from Scudder -- 1-800-700-0183
Please address all correspondence to:
The Scudder Funds
P.O. Box 2291
Boston, Massachusetts
02107-2291
Or Stop by a Scudder Investor Center:
Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be
found in the following cities:
Boca Raton Chicago San Francisco
Boston New York
Scudder Investor Relations and Scudder Investor Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA
02061--Member NASD/SIPC.
</TABLE>
23
<PAGE>
Institutional Cash Portfolio
Institutional Tax Free Portfolio
Institutional Government Portfolio
345 Park Avenue, New York, New York 10154
(800) 854-8525
Investment Manager
Scudder, Stevens & Clark, Inc.
345 Park Avenue
New York, New York 10154
Distributor
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Fund Accounting Agent
Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Transfer Agent and
Dividend Disbursing Agent
Scudder Service Corporation
P.O. Box 2038
Boston, Massachusetts 02106
Legal Counsel
Sullivan & Cromwell
New York, New York
- ------------------------------
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, and information or
representations not contained herein must not be relied upon as having been
authorized by the Company or the Distributor. This Prospectus does not
constitute an offer of any security other than the registered securities to
which it relates or an offer to any person in any jurisdiction where such offer
would be unlawful.
INSTITUTIONAL CASH PORTFOLIO
INSTITUTIONAL TAX FREE PORTFOLIO
INSTITUTIONAL GOVERNMENT PORTFOLIO
PROSPECTUS
MAY 1, 1997
<PAGE>
INSTITUTIONAL CASH PORTFOLIO
INSTITUTIONAL TAX FREE PORTFOLIO
INSTITUTIONAL GOVERNMENT PORTFOLIO
345 Park Avenue, New York, New York 10154
1-800-854-8525
Scudder, Stevens & Clark, Inc. - Investment Adviser
Scudder Investor Services, Inc. - Distributor
Institutional Cash Portfolio, Institutional Tax Free Portfolio and
Institutional Government Portfolio, are series of Scudder Institutional Fund,
Inc. (the "Company"), a no-load, open-end, diversified, management investment
company designed to suit the needs of institutions, corporations and
fiduciaries.
Institutional Cash Portfolio, Institutional Tax Free Portfolio and
Institutional Government Portfolio (each, a "Portfolio" and collectively, the
"Portfolios") are money market funds that seek to provide investors with as high
a level of current income as is consistent with their investment objectives and
policies and with preservation of capital and liquidity. The Portfolios are
neither insured nor guaranteed by the U.S. Government. Each Portfolio intends to
maintain a net asset value per share of $1.00, but there is no assurance it will
be able to do so.
The minimum aggregate investment in the Company is $10 million, with a
minimum investment in any single Portfolio of $2 million. Additionally, each
investor must maintain the minimum aggregate investment of $10 million or be
subject to possible involuntary redemption by the Company.
This Prospectus sets forth concisely the information about the Company
that a prospective investor should know before investing. Please retain it for
future reference. If you require more detailed information, a Statement of
Additional Information dated May 1, 1997, as amended from time to time, may be
obtained without charge by writing or calling the Company at the address and
telephone number printed above. The Statement of Additional Information, which
is incorporated by reference into this Prospectus, has been filed with the
Securities and Exchange Commission and is available along with other related
materials on the Securities and Exchange Commission's Internet Web site
(http://www.sec.gov).
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Table of Contents
Page
Summary......................................................................2
Expense Information..........................................................5
Financial Highlights.........................................................7
Investment Objectives and Policies..........................................10
Additional Information About Policies and Investments.......................12
Distribution and Performance Information....................................15
Company Organization........................................................18
Transaction Information.....................................................19
Shareholder Benefits........................................................22
Summary
The Company Scudder Institutional Fund, Inc. is a
professionally managed, no-load, open-end,
diversified management investment company
which offers the following three investment
series: Institutional Cash Portfolio (the
"Cash Portfolio"), Institutional Tax Free
Portfolio (the "Tax Free Portfolio") and
Institutional Government Portfolio (the
"Government Portfolio"), (each, a
"Portfolio" and collectively, the
"Portfolios") See "Company Organization."
Objectives and Policies Each Portfolio seeks to provide investors
with as high a level of current income as is
consistent with its stated investment
objective and policies and with preservation
of capital and liquidity. Each Portfolio
invests exclusively in high quality
investments with remaining maturities of not
more than 397 calendar days. Each Portfolio
values its portfolio securities on the basis
of amortized cost rather than at market
value. Thus, although the market value of a
portfolio may vary inversely to changes in
prevailing interest rates and may be
affected by changes in the creditworthiness
of issuers of securities held in its
portfolio and other market factors, each
Portfolio expects to maintain a constant net
asset value of $1.00 per share. There is no
assurance, however, that this can be
achieved.
The Cash Portfolio invests in obligations
issued or guaranteed by the U.S. Government
or its agencies or instrumentalities,
obligations of certain U.S. or foreign banks
and their branches (such banks in each case
to have total assets of at least $1
billion), corporate commercial paper and
other short-term corporate obligations, and
securities issued by or on behalf of states,
cities, municipalities and other public
authorities (which may or may not be exempt
from federal income taxes).
2
<PAGE>
The Tax Free Portfolio invests in a broad
range of securities issued by or on behalf
of states, cities, municipalities and other
public authorities ("municipal obligations")
the income of which is exempt from federal
income taxes. Income from the Tax Free
Portfolio may not be exempt from certain
state and local taxes. See "Investment
Objectives and Policies."
The Government Portfolio invests in
obligations issued or guaranteed by the U.S.
Government or its agencies or
instrumentalities.
Additional Investment The Cash Portfolio may invest in obligations
Activities of foreign banks, which involve different
risks than those associated with obligations
of domestic banks. In addition, certain
obligations in which each Portfolio may
invest may have a floating or variable rate
of interest. Certain obligations in which
the Cash Portfolio and Tax Free Portfolio
may invest may be backed by bank letters of
credit. Each Portfolio may enter into
repurchase agreements, and investments in
any of the Portfolios may be purchased on a
when-issued basis and with put features.
Each of these investment practices entails
certain risks. See "Additional Information
About Policies and Investments."
Investment Adviser The Portfolios' investment adviser is
Scudder, Stevens & Clark, Inc., (the
"Adviser"), a leading provider of U.S. and
international investment management services
for clients throughout the world.
The Adviser receives monthly an investment
management fee for its services, equal, on
an annual basis, to 0.15% of each
Portfolio's average daily net assets.
Distributor Scudder Investor Services, Inc., a
subsidiary of the Adviser (the
"Distributor") is the principal underwriter
for the Company.
Custodian State Street Bank and Trust Company (the
"Custodian") is the custodian for the
Company.
Purchasing Shares Shares of any Portfolio may be purchased at
net asset value by writing or calling
Scudder Service Corporation, a subsidiary of
the Adviser (the "Transfer Agent"). There is
no sales charge. There is a $10 million
minimum initial investment in the Company,
with a minimum investment in any single
Portfolio of $2 million. Subsequent
investments may be made in any Portfolio in
any amount. See "Transaction
Information--Purchasing Shares."
3
<PAGE>
Redeeming Shares Shareholders may redeem all or any part of
their investments in the Portfolios by
contacting the Transfer Agent. Shares will
be redeemed at their next determined net
asset value. There is no redemption charge.
The Company reserves the right, upon notice,
to redeem the shares in an investor's
account if the value of such shares falls
below certain levels or if the account does
not have a certified Social Security or
taxpayer identification number. See
"Transaction Information-- Redeeming
Shares."
Share Price Scudder Fund Accounting Corporation, a
subsidiary of the Adviser, determines net
asset value per share of each Portfolio on
each day the New York Stock Exchange (the
"Exchange") is open for trading. The net
asset value per share is determined at 2:00
p.m. for the Tax Free Portfolio and 4:00
p.m. for the Government Portfolio and the
Cash Portfolio. See "Transaction
Information--Share Price."
Dividends Dividends on shares of each Portfolio are
declared daily and paid monthly.
Distributions of capital gains, if any, are
paid annually. Dividends and capital gains
distributions with respect to shares of each
Portfolio are automatically paid in
additional shares of the same Portfolio
unless shareholders elect to receive
payments in cash. See "Distribution and
Performance Information--Dividends and
Capital Gains Distributions."
4
<PAGE>
Expense Information
This information is designed to help an investor understand the various costs
and expenses of investing in Cash Portfolio and Tax Free Portfolio.
1) Shareholder Transaction Expenses: Expenses charged directly to an individual
account in a Portfolio for various transactions.
Cash Tax Free
Portfolio Portfolio
--------- ---------
NONE NONE
2) Annual Portfolio Operating Expenses: Expenses paid by a Portfolio before it
distributed its net investment income, expressed as a percentage of a
Portfolio's average daily net assets for the fiscal year ended December 31,
1996.
Investment Management Fees 0.15% 0.15%
12b-1 Fees NONE NONE
Other Expenses 0.06% 0.13%
----- -----
Total Portfolio Operating Expenses 0.21% 0.28%
===== =====
Example
Based on the level of total Portfolio operating expenses listed above, the
total expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by a Portfolio before it distributes its
net investment income to shareholders.
One year $ 3 $ 4
Three years 8 11
Five years 14 20
Ten years 32 44
See "Company Organization--Investment Adviser" for further information about
investment management fees. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual
Portfolio Operating Expenses" remain the same each year. This example should
not be considered a representation of past or future expenses or return. Actual
Portfolio expenses and return vary from year to year and may be higher or lower
than those shown.
5
<PAGE>
Expense Information
This information is designed to help an investor understand the various costs
and expenses of investing in Government Portfolio.
1) Shareholder Transaction Expenses: Expenses charged directly to an individual
account in the Portfolio for various transactions.
Government
Portfolio
---------
NONE
2) Annual Portfolio Operating Expenses: Expenses paid by the Portfolio before it
distributed its net investment income, expressed as a percentage of the
Portfolio's average daily net assets for the fiscal year ended December 31,
1996.
Investment Management Fees 0.15%
12b-1 Fees NONE
Other Expenses 0.13%
-----
Total Portfolio Operating Expenses 0.28%
=====
Example
Based on the level of total Portfolio operating expenses listed above, the
total expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Portfolio before it distributes
its net investment income to shareholders.
One year $ 4
Three years 13
Five years 22
Ten years 49
See "Company Organization--Investment Adviser" for further information about
investment management fees. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual
Portfolio Operating Expenses" remain the same each year. This example should
not be considered a representation of past or future expenses or return. Actual
Portfolio expenses and return vary from year to year and may be higher or lower
than those shown.
6
<PAGE>
Financial Highlights
Cash Portfolio
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, audited financial statements are available in the Company's
Annual Report dated December 31, 1996 and may be obtained without charge by
writing or calling the Company.
The following information has been audited by Price Waterhouse LLP,
independent accountants, whose unqualified report thereon is included in the
Annual Report to Shareholders, which is incorporated by reference to the
Statement of Additional Information. The financial highlights should be read
in conjunction with the financial statements and notes thereto included in the
Annual Report.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
beginning of period... ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment
income............... .052 .057 .041 .031 .038 .059 .080 .089 .074 .065
Distributions from
net investment income
and net realized
capital gains......... (.052) (.057) (.041) (.031) (.038) (.059) (.080) (.089) (.074) (.065)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
period................ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total Return (%).......... 5.33 5.88 4.13 3.16 3.88 6.12 8.27 9.32 7.60(b) 6.73
Ratios and Supplemental Data
Net assets, end of
year ($ millions)..... $272 $249 $271 $468 $662 $308 $152 $82 $61 $51
Ratio of operating
expenses to average
daily net assets (%)(a) .21 .25 .24 .22 .25 .25 .32 .37 .33 .31
Ratio of net investment
income to average net
assets (%)............ 5.21 5.73 3.94 3.12 3.66 5.89 8.02 8.94 7.43 6.43
(a) Operating expense
ratio including expenses
reimbursed, management
fee and other expenses
not imposed (%)......... -- -- -- -- -- -- -- -- .36 --
(b) Total returns are higher due to maintenance of the Portfolio's expenses.
</TABLE>
7
<PAGE>
Tax Free Portfolio
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, audited financial statements are available in the Company's Annual
Report dated December 31, 1996 and may be obtained without charge by writing or
calling the Company.
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified report thereon is included in the Annual Report
to Shareholders, which is incorporated by reference to the Statement of
Additional Information. The financial highlights should be read in conjunction
with the financial statements and notes thereto included in the Annual Report.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment
income................ .032 .036 .027 .023 .029 .045 .058 .063 .051 .045
Distributions from
net investment income
and net realized
capital gains.......... (.032) (.036) (.027) (.023) (.029) (.045) (.058) (.063) (.051) (.045)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
period................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total Return (%)......... 3.29 3.69 2.74(b) 2.32 2.92 4.65 5.96 6.45 5.24 4.56(b)
Ratios and Supplemental Data
Net assets, end of
year ($ millions)...... $104 $79 $168 $125 $96 $75 $88 $155 $168 $103
Ratio of operating
expenses to average
daily net assets (%)(a) .28 .35 .27 .29 .31 .36 .32 .30 .30 .30
Ratio of net investment
income to average net
assets (%)............. 3.25 3.61 2.73 2.30 2.82 4.55 5.79 6.25 5.15 4.46
(a) Operating expense
ratio including expenses
reimbursed, management fee
and other expenses not
imposed (%).............. -- -- .29 -- -- -- -- -- -- .31
(b) Total returns are higher due to maintenance of the Portfolio's expenses.
</TABLE>
8
<PAGE>
Government Portfolio
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, audited financial statements are available in the Company's
Annual Report dated December 31, 1996 and may be obtained without charge by
writing or calling the Company.
The following information has been audited by Price Waterhouse LLP,
independent accountants, whose unqualified report thereon is included in the
Annual Report to Shareholders, which is incorporated by reference to the
Statement of Additional Information. The financial highlights should be read
in conjunction with the financial statements and notes thereto included in the
Annual Report.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment
income................ .051 .055 .040 .030 .037 .057 .079 .090 .073 .065
Distributions from
net investment income
and net realized
capital gains.......... (.051) (.055) (.040) (.030) (.037) (.057) (.079) (.090) (.073) (.065)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
period................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total Return (%)......... 5.17 5.60 4.09 3.01 3.74 5.94 8.19 9.36 7.58 6.69
Ratios and Supplemental Data
Net assets, end of
year ($ millions)...... $47 $80 $118 $196 $247 $192 $174 $253 $161 $146
Ratio of operating
expenses to average
daily net assets (%)(a) .32 .39 .28 .26 .24 .26 .31 .29 .28 .31
Ratio of net investment
income to average net
assets (%)............. 5.06 5.46 3.89 2.97 3.69 5.86 7.89 8.96 7.35 6.56
</TABLE>
9
<PAGE>
Investment Objectives and Policies
Set forth below is a description of the investment objective and policies
of each Portfolio. The Portfolios seek to provide investors with as high a level
of current income through investment in high-quality short-term obligations as
is consistent with their investment objectives and policies and with
preservation of capital and liquidity. The Tax Free Portfolio seeks to provide
current income that is exempt from federal income taxes. The investment
objective of a Portfolio cannot be changed without the approval of the holders
of a majority of the Portfolio's outstanding shares, as defined in the
Investment Company Act of 1940 (the "1940 Act") and a rule thereunder. There can
be no assurance that any of the Portfolios will achieve its investment
objective.
Securities in which the Portfolios invest may not yield as high a level of
current income as securities of lower quality and longer maturities which
generally have less liquidity and greater market risk.
Each Portfolio will maintain a dollar-weighted average maturity of 90 days
or less in an effort to maintain a net asset value per share of $1.00, but there
is no assurance that it will be able to do so.
Cash Portfolio
The Cash Portfolio seeks to provide investors with as high a level of
current income as is consistent with its investment policies and with
preservation of capital and liquidity. The Portfolio invests exclusively in a
broad range of short-term money market instruments that have remaining
maturities of not more than 397 calendar days and certain repurchase agreements.
These securities consist of obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, taxable and tax-exempt
municipal obligations, corporate and bank obligations, certificates of deposit,
bankers' acceptances and variable amount master demand notes.
The bank obligations in which the Portfolio may invest include negotiable
certificates of deposit, bankers' acceptances, fixed time deposits or other
short-term bank obligations. The Portfolio limits its investments in U.S. bank
obligations to obligations of U.S. banks (including foreign branches, the
obligations of which are guaranteed by the U.S. parent) that have at least $1
billion in total assets at the time of investment. "U.S. banks" include
commercial banks that are members of the Federal Reserve System or are examined
by the Comptroller of the Currency or whose deposits are insured by the Federal
Deposit Insurance Corporation. In addition, the Portfolio may invest in
obligations of savings banks and savings and loan associations insured by the
Federal Deposit Insurance Corporation that have total assets in excess of $1
billion at the time of the investment. The Portfolio limits its investments in
foreign bank obligations to U.S. dollar-denominated obligations of foreign banks
(including U.S. branches) which banks (based upon their most recent annual
financial statements) at the time of investment (i) have more than $10 billion,
or the equivalent in other currencies, in total assets; (ii) are among the 100
largest banks in the world as determined on the basis of assets; and (iii) have
branches or agencies in the U.S.; and which obligations, in the opinion of the
Adviser, are of an investment quality comparable to obligations of U.S. banks in
which the Portfolio may invest.
Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties that vary with market conditions and the
remaining maturity of the obligations. The Portfolio may not invest more than
10% of the value of its total assets in investments that are not readily
marketable including fixed time deposits subject to withdrawal penalties
maturing in more than seven calendar days.
The Portfolio may invest in U.S. dollar-denominated certificates of
deposit and promissory notes issued by Canadian affiliates of U.S. banks under
circumstances where the instruments are guaranteed as to principal and interest
by the U.S. bank. While foreign obligations generally involve greater risks than
those of domestic obligations, such as risks relating to liquidity,
marketability, foreign taxation, nationalization and exchange controls,
generally the Adviser believes that these risks are substantially less in the
case of instruments issued by Canadian affiliates that are guaranteed by U.S.
banks than in the case of other foreign money market instruments.
The Portfolio may invest in U.S. dollar-denominated obligations of foreign
banks. There is no limitation on the amount of the Portfolio's assets that may
be invested in obligations of foreign banks that meet the conditions set forth
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above. Such investments may involve greater risks than those affecting U.S.
banks or Canadian affiliates of U.S. banks. In addition, foreign banks are not
subject to examination by any U.S. Government agency or instrumentality.
Except for obligations of foreign banks and foreign branches of U.S.
banks, the Portfolio will not invest in the securities of foreign issuers.
Generally, the Portfolio may not invest less than 25% of the current value of
its total assets in bank obligations (including bank obligations subject to
repurchase agreements).
The commercial paper purchased by the Portfolio is limited to direct
obligations of domestic corporate issuers, including bank holding companies,
which obligations, at the time of investment, are (i) rated "P-1" by Moody's
Investors Service, Inc. ("Moody's"), "A-1" or better by Standard & Poor's
("S&P") or "F-1" by Fitch Investor Services, Inc. ("Fitch"), (ii) issued or
guaranteed as to principal and interest by issuers having an existing debt
security rating of "Aa" or better by Moody's or "AA" or better by S&P or Fitch,
or (iii) securities that, if not rated, are of comparable investment quality as
determined by the Adviser in accordance with procedures adopted by the Board of
Directors.
The Portfolio may invest in non-convertible corporate debt securities such
as notes, bonds and debentures that have remaining maturities of not more than
397 calendar days and that are rated "Aa" or better by Moody's or "AA" or better
by S&P or Fitch, and variable amount master demand notes. A variable amount
master demand note differs from ordinary commercial paper in that it is issued
pursuant to a written agreement between the issuer and the holder. Its amount
may from time to time be increased by the holder (subject to an agreed maximum)
or decreased by the holder or the issuer and is payable on demand. The rate of
interest varies pursuant to an agreed-upon formula. Generally, master demand
notes are not rated by a rating agency. However, the Portfolio may invest in a
master demand note that, if not rated, is in the opinion of the Adviser of an
investment quality comparable to rated securities in which the Portfolio may
invest. The Adviser monitors the issuers of such master demand notes on a daily
basis. Transfer of such notes is usually restricted by the issuer, and there is
no secondary trading market for such notes. The Portfolio may not invest in a
master demand note if, as a result, more than 10% of the value of its total net
assets would be invested in such notes.
All of the securities in which the Portfolio will invest must meet credit
standards applied by the Adviser pursuant to procedures established by the Board
of Directors. Should an issue of securities cease to be rated or if its rating
is reduced below the minimum required for purchase by the Portfolio, the Adviser
will dispose of any such security, as soon as practicable, unless the Directors
of the Company determine that such disposal would not be in the best interests
of the Portfolio.
In addition, the Portfolio may invest in variable or floating rate
obligations, obligations backed by bank letters of credit, when-issued
securities and securities with put features.
Tax Free Portfolio
The Tax Free Portfolio 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 Portfolio invests exclusively in high-quality
municipal obligations the interest on which is exempt from federal income taxes
and that have remaining maturities of not more than 397 calendar days. Opinions
relating to the exemption of interest on municipal obligations from federal
income tax are rendered by bond counsel to the municipal issuer. The Portfolio
may also invest in certain taxable obligations on a temporary defensive basis,
as described below.
From time to time the Portfolio may invest 25% or more of the current
value of its total assets in municipal obligations that are related in such a
way that an economic, business or political development or change affecting one
such obligation would also affect the other obligations. For example, certain
municipal obligations accrue interest that is paid from revenues of similar type
projects; other municipal obligations have issuers located in the same state.
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The Portfolio may, pending the investment of proceeds of sales of shares
or proceeds from sales of portfolio securities or in anticipation of
redemptions, or to maintain a "defensive" posture when, in the opinion of the
Adviser, it is advisable to do so because of market conditions, elect to invest
temporarily up to 20% of the current value of its total assets in cash reserves
or taxable securities. Under ordinary market conditions, the Portfolio will
maintain at least 80% of the value of its total assets in obligations that are
exempt from federal income taxes and are not subject to the alternative minimum
tax. The foregoing constitutes a fundamental policy that cannot be changed
without the approval of a majority of the outstanding shares of the Portfolio.
The taxable market is a broader and more liquid market with a greater
number of investors, issuers and market makers than the market for municipal
obligations. The more limited marketability of municipal obligations may make it
difficult in certain circumstances to dispose of large investments
advantageously. In addition, certain municipal obligations might lose tax-exempt
status in the event of a change in the tax laws.
All of the securities in which the Portfolio will invest must meet credit
standards applied by the Adviser pursuant to procedures established by the Board
of Directors. Should an issue of securities cease to be rated or if its rating
is reduced below the minimum required for purchase by the Portfolio, the Adviser
will dispose of any such security, as soon as practicable, unless the Directors
of the Company determine that such disposal would not be in the best interests
of the Portfolio.
In addition, the Portfolio may enter into repurchase agreements, and
invest in variable or floating rate obligations, obligations backed by bank
letters of credit, when-issued securities and securities with put features.
Government Portfolio
The Government Portfolio seeks to provide investors with as high a level
of current income as is consistent with its investment policies and with
preservation of capital and liquidity. The Portfolio invests exclusively in
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities that have remaining maturities of not more than 397 calendar
days and certain repurchase agreements.
In addition, the Portfolio may invest in variable or floating rate
obligations, when-issued securities and securities with put features.
Additional Information About Policies and Investments
Investment Restrictions
The following investment restrictions and those described in the Statement
of Additional Information are fundamental policies of each Portfolio that may be
changed only when permitted by law and approved by the holders of a majority of
such Portfolio's outstanding voting securities, as described under "Company
Organization" in the Statement of Additional Information.
The Portfolios may not issue senior securities, borrow money or pledge or
mortgage their assets, except that each Portfolio may borrow from banks up to
10% of the current value of that Portfolio's total net assets in order to meet
redemptions, and these borrowings may be secured by pledges of not more than 10%
of the Portfolio's total net assets (but investments may not be purchased by
such Portfolio while any such borrowing exists). Generally, the Cash Portfolio
may not invest less than 25% of the current value of its total assets in bank
obligations, including bank obligations subject to repurchase agreements.
For a more complete description, see "Investment Restrictions" in the
Statement of Additional Information.
Obligations of U.S. Government Agencies and Instrumentalities. Obligations
of U.S. Government agencies and instrumentalities are debt securities issued or
guaranteed by U.S. Government-sponsored enterprises and federal agencies. Some
of such obligations are supported by (a) the full faith and credit of the U.S.
Treasury (such as Government National Mortgage Association participation
certificates), (b) the limited authority of the issuer to borrow from the U.S.
Treasury (such as securities of the Federal Home Loan Bank), (c) the authority
of the U.S. Government to purchase certain obligations of the issuer (such as
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securities of the Federal National Mortgage Association) or (d) only the credit
of the issuer. In the case of obligations not backed by the full faith and
credit of the U.S., the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, which agency may be
privately owned. The Company will invest in obligations of U.S. Government
agencies and instrumentalities only when the Adviser is satisfied that the
credit risk with respect to the issuer is minimal.
Floating and Variable Rate Instruments. Certain of the obligations that
each Portfolio may purchase have a floating or variable rate of interest. Such
obligations bear interest at rates that are not fixed, but which vary with
changes in specified market rates or indices, such as the Prime Rate, and at
specified intervals. Certain of such obligations may carry a demand feature that
would permit the holder to tender them back to the issuer at par value prior to
maturity. Each Portfolio may invest in floating and variable rate obligations
even if they carry stated maturities in excess of 397 days, if certain
conditions contained in a rule of the Securities and Exchange Commission (the
"SEC") are met, in which case the obligations will be treated as having
maturities of not more than 397 days. Each Portfolio will limit its purchase of
floating and variable rate obligations to those meeting the quality standards
set forth above for such Portfolio. The Adviser will monitor on an ongoing basis
the earning power, cash flow and other liquidity ratios of the issuers of such
obligations, and will similarly monitor the ability of an issuer of a demand
instrument to pay principal and interest on demand. Each Portfolio's right to
obtain payment at par on a demand instrument could be affected by events
occurring between the date the Portfolio elects to demand payment and the date
payment is due that may affect the ability of the issuer of the instrument to
make payment when due except when such demand instruments permit same day
settlement. To facilitate settlement, the same day demand instruments must be
held in book entry form at a bank other than the Portfolio's Custodian subject
to a sub-custodian agreement approved by the Portfolio between that bank and the
Portfolio's Custodian.
The floating and variable rate obligations that the Portfolios may
purchase include certificates of participation in such obligations purchased
from banks. A certificate of participation gives the Portfolio an undivided
interest in the underlying obligations in the proportion that such Portfolio's
interest bears to the total principal amount of such obligations. Certain of
such certificates of participation may carry a demand feature that would permit
the holder to tender them back to the issuer prior to maturity. The Portfolios
may invest in certificates of participation even if the underlying obligations
carry stated maturities in excess of one year, upon compliance with certain
conditions contained in a rule of the SEC. The income received on certificates
of participation in tax-exempt municipal obligations constitutes interest from
tax-exempt obligations. It is presently contemplated that the Tax Free Portfolio
will not invest more than 20% of its total assets in these certificates.
To the extent that floating and variable rate instruments without demand
features are not readily marketable, they will be subject to the investment
restriction that no Portfolio may invest an amount equal to 10% or more of the
current value of its total assets in securities that are not readily marketable.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements
wherein the seller of a security to the Portfolio agrees to repurchase that
security from the Portfolio at a mutually agreed-upon time and price. Sellers of
repurchase agreements are banks that are issuers of eligible bank obligations
(see "Cash Portfolio" under "Investment Objectives and Policies" above) and
dealers that meet guidelines established by the Board of Directors. The period
of maturity is usually quite short, often overnight or a few days, although it
may extend over a number of months. Each Portfolio may enter into repurchase
agreements only with respect to obligations that could otherwise be purchased by
the Portfolio. While the maturities of the underlying securities may be greater
than one year, the term of the repurchase agreement is always less than one
year. If the seller defaults and the value of the underlying securities has
declined, the Portfolio may incur a loss. In addition, if bankruptcy proceedings
are commenced with respect to the seller of the security, the Portfolio's
disposition of the security may be delayed or limited.
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A Portfolio may not enter into a repurchase agreement if, as a result,
more than 10% of the market value of that Portfolio's total net assets would be
invested in repurchase agreements with a maturity of more than seven days,
illiquid securities and securities for which current market quotations or bids
are not readily available.
Municipal Obligations. Municipal obligations, which are debt obligations
issued by or on behalf of states, cities, municipalities and other public
authorities, and may be general obligation, revenue, or industrial development
bonds, include municipal bonds, municipal notes and municipal commercial paper.
The Tax Free Portfolio may invest in excess of 25% of its assets in
industrial development bonds subject to the Portfolio's fundamental investment
policy requiring that it maintain at least 80% of the value of its total assets
in obligations that are exempt from federal income tax and are not subject to
the alternative minimum tax. For purposes of the Portfolio's fundamental
investment limitation regarding concentration of investments in any one
industry, industrial development bonds will be considered representative of the
industry for which purpose the bond was issued.
The Cash and Tax Free Portfolios' investments in municipal bonds are
limited to bonds that are rated at the date of purchase "Aa" or better by
Moody's or "AA" or better by S&P or Fitch.
The Portfolios' investments in municipal notes will be limited to notes
that are rated at the date of purchase "MIG 1" or "MIG 2" (or "VMIG 1" or "VMIG
2" in the case of an issue having a variable rate demand feature) by Moody's,
"SP-1" or "SP-1+" by S&P or "F-1" or "F-1+" by Fitch.
Municipal commercial paper is a debt obligation with a stated maturity of
270 days or less that is issued to finance seasonal working capital needs or as
short-term financing in anticipation of longer-term debt. The Portfolios may
invest in municipal commercial paper that is rated at the date of purchase "P-1"
by Moody's, "A-1" or "A-1+" by S&P or "F-1" by Fitch. If a municipal obligation
is not rated, the Portfolios may purchase the obligation if, in the opinion of
the Adviser, it is of investment quality comparable to other rated investments
that are permitted in the Portfolios.
Letters of Credit. Municipal obligations, including certificates of
participation, commercial paper and other short-term obligations may be backed
by an irrevocable letter of credit of a bank which assumes the obligation for
payment of principal and interest in the event of default by the issuer. Only
banks which, in the opinion of the Adviser, are of investment quality comparable
to other permitted investments of the Portfolios may be used for letter of
credit backed investments.
Securities with Put Rights. The Portfolios may enter into put transactions
with respect to obligations held in their portfolios with broker/dealers
pursuant to a rule under the 1940 Act and with commercial banks.
The right of the Portfolios to exercise a put is unconditional and
unqualified. A put is not transferable by a Portfolio, although the Portfolio
may sell the underlying securities to a third party at any time. If necessary
and advisable, any Portfolio may pay for certain puts either separately in cash
or by paying a higher price for portfolio securities that are acquired subject
to such a put (thus reducing the yield to maturity otherwise available for the
same securities). The Portfolios expect, however, that puts generally will be
available without the payment of any direct or indirect consideration.
The Portfolios may enter into puts only with banks or broker/dealers that,
in the opinion of the Adviser, present minimal credit risks. The ability of the
Portfolios to exercise a put will depend on the ability of the bank or
broker/dealer to pay for the underlying securities at the time the put is
exercised. In the event that a bank or broker/dealer should default on its
obligation to repurchase an underlying security, the Portfolio might be unable
to recover all or a portion of any loss sustained from having to sell the
security elsewhere.
The Portfolios intend to enter into puts solely to maintain liquidity and
do not intend to exercise their rights thereunder for trading purposes. The puts
will only be for periods substantially less than the life of the underlying
security. The acquisition of a put will not affect the valuation by the
Portfolio of the underlying security. The actual put will be valued at zero in
determining net asset value of the Portfolios. Where a Portfolio pays directly
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or indirectly for a put, its cost will be reflected as an unrealized loss for
the period during which the put is held by the Portfolio and will be reflected
in realized gain or loss when the put is exercised or expires. If the value of
the underlying security increases, the potential for unrealized or realized gain
is reduced by the cost of the put. The maturity of a municipal obligation
purchased by a Portfolio will not be considered shortened by any put to which
such obligation is subject.
Third Party Puts. The Portfolios may also purchase long-term fixed rate
bonds that have been coupled with an option granted by a third party financial
institution allowing a Portfolio at specified intervals, not exceeding 397
calendar days, to tender (or "put") the bonds to the institution and receive the
face value thereof (plus accrued interest). These third party puts are available
in several different forms, may be represented by custodial receipts or trust
certificates and may be combined with other features such as interest rate
swaps. A Portfolio receives a short-term rate of interest (which is periodically
reset), and the interest rate differential between that rate and the fixed rate
on the bond is retained by the financial institution. The financial institution
granting the option does not provide credit enhancement, and in the event that
there is a default in the payment of principal or interest, or downgrading of a
bond to below investment grade, or a loss of the bond's tax-exempt status, the
put option will terminate automatically, the risk to a Portfolio will be that of
holding such a long-term bond and the dollar-weighted average maturity of the
Portfolio would be adversely affected.
When-Issued Securities. Each Portfolio may purchase securities on a
when-issued basis, in which case delivery and payment normally take place within
45 days after the date of the commitment to purchase. The Portfolios will only
make commitments to purchase securities on a when-issued basis with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable. When-issued securities are subject to
market fluctuation and no income accrues to the purchaser prior to issuance. The
purchase price, and the interest rate that will be received on debt securities,
are fixed at the time the purchaser enters into the commitment. Purchasing a
security on a when-issued basis can involve a risk that the market price at the
time of delivery may be lower than the agreed upon purchase price, in which case
there could be an unrealized loss at the time of delivery.
Each Portfolio will establish a segregated account in which it will
maintain liquid assets in an amount at least equal in value to that Portfolio's
commitments to purchase when-issued securities. If the value of these assets
declines, the Portfolio will place additional liquid assets in the account on a
daily basis so that the value of the assets in the account is equal to the
amount of such commitments.
Distribution and Performance Information
Dividends and Capital Gains Distributions
The Company declares dividends on the outstanding shares of each Portfolio
from each Portfolio's net investment income at the close of each business day to
shareholders of record at 2:00 p.m. for the Tax Free Portfolio and 4:00 p.m. for
the Cash Portfolio and Government Portfolio on the day of declaration. Realized
capital gains and losses (other than long-term capital gains) may be taken into
account in determining the daily distribution. Shares purchased will begin
earning dividends on the day the purchase order is executed and shares redeemed
will earn dividends through the previous day. Net investment income for a
Saturday, Sunday or holiday will be declared as a dividend on the previous
business day to shareholders of record at 2:00 p.m. for the Tax Free Portfolio
and 4:00 p.m. for the Cash Portfolio and Government Portfolio on that day.
Investment income for a Portfolio includes, among other things, interest
income and accretion of market and original issue discount and amortization of
premium.
Dividends declared in and attributable to the preceding month will be paid
on the first business day of each month. Net realized capital gains, after
utilization of capital loss carryforwards, if any, will be distributed annually,
although an additional distribution may be necessary to prevent the application
of a federal excise tax. Dividends and distributions will be invested in
additional shares of the same Portfolio at net asset value and credited to the
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shareholder's account on the payment date or, at the shareholder's election,
paid in cash. Dividend checks and Statements of Account will be mailed
approximately two business days after the payment date. Each Portfolio forwards
to the Custodian the monies for dividends to be paid in cash on the payment
date.
Shareholders who redeem all their shares prior to a dividend payment will
receive, in addition to the redemption proceeds, dividends declared but unpaid.
Shareholders who redeem only a portion of their shares will be entitled to all
dividends declared but unpaid on such shares on the next dividend payment date.
(See also "Transaction Information--Redeeming Shares.")
Taxes
Each of the Company's Portfolios has in the past qualified, and intends to
continue to qualify, as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986 (the "Code"). Each Portfolio will be treated as a
separate entity for tax purposes and thus the provisions of the Code applicable
to regulated investment companies generally will be applied to each Portfolio
separately, rather than to the Company as a whole. In addition, net capital
gains, net investment income, and operating expenses will be determined
separately for each Portfolio. By complying with the applicable provisions of
the Code, each Portfolio will not be subject to federal income taxes with
respect to net investment income and net capital gains distributed to its
shareholders. A 4% non-deductible excise tax will be imposed on each Portfolio
(except the Tax Free Portfolio to the extent of its tax-exempt income) to the
extent such Portfolio does not meet certain distribution requirements by the end
of each calendar year.
Dividends from net investment income (including realized net short-term
capital gains in excess of net long-term capital losses), except
"exempt-interest dividends" (described below), will be taxable as ordinary
income for federal income tax purposes. Most states exempt from personal income
tax dividends paid by a regulated investment company attributable to interest
derived from obligations of the U.S. Government and certain of its agencies and
instrumentalities. For example, shareholders of a regulated investment company
will not be subject to New York State or City personal income tax on the
dividends paid by such a fund to the extent attributable to interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities, provided that at the close of each quarter of the fund's
taxable year at least 50% of the value of the total assets of the fund consists
of such obligations. Dividends paid by the Government Portfolio may qualify for
this treatment. Dividends distributed by the Tax Free Portfolio are not excluded
in determining New York State or City franchise taxes on corporations and
financial institutions. In addition to the distributions described above, in the
case of the dividends distributed by the Tax Free Portfolio, that part of its
net investment income that is attributable to interest from tax-exempt
securities and that is distributed to shareholders will be designated by the
Company as an "exempt-interest dividend," and, as such, will be exempt from
federal income tax. In addition, the Tax Free Portfolio may not be exempt from
certain state and local taxes.
Distributions of net long-term capital gains in excess of net short-term
capital losses, if any, will be taxable as long-term capital gains, whether
received in cash or reinvested in additional shares, regardless of how long the
shareholder has held the shares. Because substantially all of the income of each
Portfolio will arise from interest, no part of the distributions to shareholders
is expected to qualify for the dividends received deduction available to
corporations. Each year the Company will notify shareholders of the federal
income tax status of distributions.
In the case of the shareholders of the Tax Free Portfolio, interest on
indebtedness incurred, or continued, to purchase or carry shares of the
Portfolio will not be deductible for federal income tax purposes to the extent
that the Portfolio's distributions are exempt from federal income tax. In
addition, a portion of an exempt-interest dividend allocable to certain
tax-exempt obligations may be treated as a preference item for purposes of the
alternative minimum tax imposed on both individuals and corporations. Persons
who may be "substantial users" (or "related persons" of substantial users) of
facilities financed by private activity bonds should consult their tax advisors
before purchasing shares in the Tax Free Portfolio.
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The Company will be required to withhold, subject to certain exemptions,
at a rate of 31% on dividends paid or credited to individual shareholders
(except shareholders of the Tax Free Portfolio to the extent it distributes
exempt-interest dividends) and on redemption proceeds, if a correct Social
Security or taxpayer identification number, certified when required, is not on
file with the Company or Transfer Agent. (See also "Transaction
Information--Redeeming Shares.")
The exemption of interest income for federal income tax purposes may not
result in similar exemptions under the tax law of state and local tax
authorities. In general, interest earned on obligations issued by the state or
locality in which the investor resides may be exempt from state and local taxes.
State and local laws differ, however, with respect to the tax treatment of
dividends attributable to interest on obligations of: (i) the U.S. Government
and certain of its agencies and instrumentalities, and (ii) obligations of
states and localities, and shareholders should consult their tax advisors about
the taxability of dividends. The Company furnishes each shareholder of record
with a statement of the portion of the previous year's income derived from: (i)
U.S. Government Obligations and (ii) various agencies and instrumentalities,
each of which is specified by name.
Shareholders are urged to consult their own tax advisors regarding
specific questions as to federal, state or local taxes.
Performance Information
From time to time, quotations of a Portfolio's performance may be included
in advertisements, sales literature or shareholder reports. All performance
figures are historical, show the performance of a hypothetical investment and
are not intended to indicate future performance. The "yield" of a Portfolio
refers to income generated by an investment in a Portfolio over a specified
seven-day period. Yield is expressed as an annualized percentage. The "effective
yield" of a Portfolio is expressed similarly but, when annualized, the income
earned by an investment in a Portfolio is assumed to be reinvested and will
reflect the effects of compounding. "Total return" is the change in value of an
investment in a Portfolio for a specified period. The "average annual total
return" of a Portfolio is the average annual compound rate of return of an
investment in a Portfolio assuming the investment has been held for one year,
five years and ten years as of a stated ending date. If a Portfolio has not been
in operation for at least ten years, the life of the Portfolio will be used
where applicable. "Cumulative total return" represents the cumulative change in
value of an investment in a Portfolio for various periods. Total return
calculations assume that all dividends and capital gains distributions during
the period were reinvested in shares of a Portfolio. Performance will vary based
upon, among other things, changes in market conditions and the level of a
Portfolio's expenses.
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Company Organization
The Company was formed on January 2, 1986 as a corporation under the laws
of the State of Maryland. The Company is a no-load, diversified, open-end
management investment company registered under the 1940 Act. The Company's
activities are supervised by its Board of Directors. The Board of Directors,
under applicable laws of the State of Maryland, in addition to supervising the
actions of the Company's Adviser and Distributor, as set forth below, decides
upon matters of general policy.
Shareholders have one vote for each share held on matters on which they
are entitled to vote. The Company is not required to and has no current
intention of holding annual shareholder meetings, although meetings may be
called for purposes such as electing or removing Directors, changing fundamental
investment policies or approving an investment advisory agreement. Shareholders
will be assisted in communicating with other shareholders in connection with
removing a Director as if Section 16(c) of the 1940 Act were applicable.
Investment Adviser
The Company retains the investment management firm of Scudder, Stevens &
Clark, Inc. (the "Adviser"), a Delaware corporation, to manage the Company's
daily investment and business affairs subject to the policies established by the
Board of Directors. The Adviser is one of the most experienced investment
counsel firms in the U.S. The Adviser was established in 1919 as a partnership
and was restructured as a Delaware corporation in 1985. The principal source of
the Adviser's income is professional fees received from providing continuing
investment advice. The Adviser provides investment counsel for many individuals
and institutions, including insurance companies, endowments, industrial
corporations and financial and banking organizations. As of December 31, 1996,
the Adviser and its affiliates had in excess of $115 billion under their
supervision, approximately two-thirds of which was invested in fixed-income
securities.
Pursuant to Investment Advisory Agreements (the "Agreements") with the
Company on behalf of each Portfolio, the Adviser regularly provides each
Portfolio with investment research, advice and supervision and furnishes
continuously an investment program for each Portfolio consistent with its
investment objective and policies. The Agreements further provide that the
Adviser will pay the compensation and certain expenses of all officers and
certain employees of the Company and make available to each such Portfolio such
of the Adviser's directors, officers and employees as are reasonably necessary
for such Portfolio's operations or as may be duly elected officers or directors
of the Company. Under the Agreements, the Adviser pays each Portfolio's office
rent and will provide investment advisory research and statistical facilities
and all clerical services relating to research, statistical and investment work.
The Adviser, including the Adviser's employees who serve the Portfolios, may
render investment advice, management and other services to others.
Each Portfolio will bear all expenses not specifically assumed by the
Adviser under the terms of the Agreements, including, among others, the fee
payable to the Adviser as Adviser, the fees of the Directors who are not
"affiliated persons" of the Adviser, the expenses of all Directors and the fees
and out-of-pocket expenses of the Company's Custodian and its Transfer Agent.
For a more complete description of the expenses to be borne by the Portfolios,
see "Investment Adviser" and "Distributor" in the Statement of Additional
Information.
Each Portfolio is charged a management fee at an annual rate of 0.15% of
its average daily net assets. Management fees are computed daily and paid
monthly.
Transfer Agent
Scudder Service Corporation, P.O. Box 2038, Boston, Massachusetts 02106, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Company.
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Distributor
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the
Company's principal underwriter. Scudder Investor Services, Inc. confirms, as
agent, all purchases of shares of the Company. Under the Underwriting Agreement
with the Company, the Distributor acts as the principal underwriter and bears
the cost of printing and mailing prospectuses to potential investors and of any
advertising expenses incurred by it in connection with the distribution of
shares.
Custodian
State Street Bank and Trust Company is the custodian for the Company.
Fund Accounting Agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the general accounting records of each Portfolio.
Transaction Information
Purchasing Shares
There is a $10 million minimum initial investment in the Company, with a
minimum investment in any single Portfolio of $2 million. Subsequent investments
may be made in the Portfolios in any amount. Investment minimums may be waived
for Directors and officers of the Company and certain other affiliates. The
Company and the Distributor reserve the right to reject any purchase order. All
funds will be invested in full and fractional shares.
Shares of any Portfolio may be purchased by writing or calling the
Company's Transfer Agent. Orders for shares of a Portfolio will be executed at
the net asset value per share next determined after an order has become
effective. See "Share Price."
Orders for shares of a Portfolio will become effective when an investor's
bank wire order or check is converted into federal funds (monies credited to the
Custodian's account with its registered Federal Reserve Bank). If payment is
transmitted by the Federal Reserve Wire System, the order will become effective
upon receipt. Orders will be executed at 2:00 p.m. for the Tax Free Portfolio
and 4:00 p.m. for the Cash Portfolio and the Government Portfolio on the same
day if a bank wire or check is converted to federal funds or received by 12:00
noon for the Tax Free Portfolio and 4:00 p.m. for the Cash Portfolio and the
Government Portfolio. In addition, if investors notify the Company by 2:00 p.m.
for the Tax Free Portfolio and 4:00 p.m. for the Cash Portfolio and the
Government Portfolio that they intend to wire federal funds to purchase shares
of a Portfolio on any business day and if monies are received in time to be
invested, orders will be executed at the net asset value per share determined at
2:00 p.m. for the Tax Free Portfolio and 4:00 p.m. for the Cash Portfolio and
the Government Portfolio the same day. Wire transmissions may, however, be
subject to delays of several hours, in which event the effectiveness of the
order may be delayed. Payments transmitted by a bank wire other than the Federal
Reserve Wire System may take longer to be converted into federal funds.
Checks drawn on a non-member bank or a foreign bank may take substantially
longer to be converted into federal funds and, accordingly, may delay the
execution of an order. Checks must be payable in U.S. dollars and will be
accepted subject to collection at full face value.
By investing in a Portfolio, a shareholder appoints the Transfer Agent to
establish an open account to which all shares purchased will be credited,
together with any dividends and capital gains distributions that are paid in
additional shares. See "Distribution and Performance Information--Dividends and
Capital Gains Distributions."
Initial Purchase by Wire
1. Shareholders may open an account by calling toll free from any
continental state: 1-800-854-8525. Give the Portfolio(s) to be invested in,
name(s) in which the account is to be registered, address, Social Security or
19
<PAGE>
taxpayer identification number, dividend payment election, amount to be wired,
name of the wiring bank and name and telephone number of the person to be
contacted in connection with the order. An account number will then be assigned.
2. Instruct the wiring bank to transmit the specified amount to:
State Street Bank and Trust Company
Boston, Massachusetts
ABA Number 011000028
Custody and Shareholder Services Division
Attention: [Name of Portfolio(s)]
Account (name(s) in which to be registered)
Account Number (as assigned by telephone) and amount
invested in each Portfolio
3. Complete a Purchase Application. Indicate the services to be used. A
completed Purchase Application must be received by the Transfer Agent before the
Expedited Redemption Service can be used. Mail the Purchase Application to:
Scudder Service Corporation
P.O. Box 2038
Boston, Massachusetts 02106
Additional Purchases by Wire
Instruct the wiring bank to transmit the specified amount to the Custodian
with the information stated above.
Initial Purchase by Mail
1. Complete a Purchase Application. Indicate the services to be used.
2. Mail the Purchase Application and check payable to the Portfolio whose
shares are to be purchased, to the Transfer Agent at the address set forth
above.
Additional Purchases by Mail
1. Make a check payable to the Portfolio whose shares are to be purchased.
Write the shareholder's Portfolio account number on the check.
2. Mail the check and the detachable stub from the Statement of Account
(or a letter providing the account number) to the Transfer Agent at the address
set forth above.
Redeeming Shares
Upon receipt by the Transfer Agent of a redemption request in proper form,
shares of any Portfolio will be redeemed at their next determined net asset
value. See "Share Price." For the shareholder's convenience, the Company has
established several different redemption procedures.
Payment of redemption proceeds may be made in securities, subject to
regulation by some state securities commissions. The Company may suspend the
right of redemption during any period when (i) trading on the New York Stock
Exchange (the "Exchange") is restricted or the Exchange is closed, other than
customary weekend and holiday closings, (ii) the SEC has by order permitted such
suspension or (iii) an emergency, as defined by rules of the SEC, exists making
disposal of portfolio securities or determination of the value of the net assets
of the Portfolios not reasonably practicable.
A shareholder's account in a Portfolio remains open for up to one year
following complete redemption, and all costs during the period will be borne by
that Portfolio.
The Company reserves the right to redeem involuntarily upon not less than
30 days' written notice all shares in a shareholder's Portfolio accounts if the
combined holdings in those accounts aggregate less than $10 million. However,
any shareholder affected by the exercise of the right will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of a Portfolio account or accounts.
20
<PAGE>
The Company also reserves the right, following 30 days' notice, to redeem
all shares in accounts without a certified Social Security or taxpayer
identification number. A shareholder may avoid involuntary redemption by
providing the Company with a taxpayer identification number during the 30-day
notice period.
Redemption by Mail
1. Write a letter of instruction. Indicate the dollar amount or number of
shares to be redeemed. Refer to the shareholder's Portfolio account number and
give Social Security or taxpayer identification number (where applicable).
2. Sign the letter in exactly the same way the account is registered. If
there is more than one owner of the shares, all must sign.
3. If shares to be redeemed have a value of $50,000 or more, the
signature(s) must be guaranteed by a commercial bank that is a member of the
Federal Deposit Insurance Corporation, a trust company, a member firm of a
domestic stock exchange or a foreign branch of any of the foregoing. In
addition, signatures may be guaranteed by other Eligible Guarantor Institutions,
i.e., other banks, other brokers and dealers, municipal securities brokers and
dealers, government securities brokers and dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. The Transfer Agent, however, may reject redemption
instructions if the guarantor is neither a member of nor a participant in a
signature guarantee program (currently known as "STAMPsm"). Signature guarantees
by notaries public are not acceptable. Further documentation, such as copies of
corporate resolutions and instruments of authority, may be requested from
corporations, administrators, executors, personal representatives, trustees or
custodians to evidence the authority of the person or entity making the
redemption request.
4. Mail the letter to the Transfer Agent at the address set forth under
"Purchasing Shares."
Checks for redemption proceeds will normally be mailed the day following
receipt of the request in proper form, although the Company reserves the right
to take up to seven days. Unless other instructions are given in proper form, a
check for the proceeds of a redemption will be sent to the shareholder's address
of record. The Custodian may benefit from the use of redemption proceeds until
the check issued to a redeeming shareholder for such proceeds has cleared.
When proceeds of a redemption are to be paid to someone other than the
shareholder, either by wire or check, the signature(s) on the letter of
instruction must be guaranteed regardless of the amount of the redemption.
Redemption by Expedited Redemption Service
If Expedited Redemption Service has been elected on the Purchase
Application on file with the Transfer Agent, redemption of shares may be
requested by telephoning the Transfer Agent on any day the Company and the
Custodian are open for business.
No redemption of shares purchased by check will be permitted pursuant to
the Expedited Redemption Service until seven business days after those shares
have been credited to the shareholder's account.
1. Telephone the request to the Transfer Agent by calling toll free from
any continental state: 1-800-854-8525, or
2. Mail the request to the Transfer Agent at the address set forth under
"Purchasing Shares."
Tax Free Portfolio: Proceeds of Expedited Redemptions will be wired to the
shareholder's bank indicated in the Purchase Application. If an Expedited
Redemption request is received by the Transfer Agent by 12:00 noon (eastern
time) on a day the Company and the Custodian are open for business, the
redemption proceeds will be transmitted to the shareholder's bank that same day.
Such expedited redemption requests received after 12:00 noon and prior to 2:00
p.m. (eastern time) will be honored the same day if such redemption can be
accomplished in time to meet the Federal Reserve Wire System schedules.
21
<PAGE>
Cash Portfolio and Government Portfolio: Proceeds of Expedited Redemptions
will be wired to the shareholder's bank indicated in the Purchase Application.
If an Expedited Redemption request is received by the Transfer Agent by 4:00
p.m. on a day the Company and the Custodian are open for business, the
redemption will be executed at the net asset value calculated at 4:00 p.m. and
proceeds will normally start transmission that same day if such redemption can
be accomplished in time to meet the Federal Reserve Wire System's schedule.
Each Portfolio uses procedures designed to give reasonable assurance that
telephone instructions are genuine, including recording telephone calls, testing
a caller's identity and sending written confirmation of telephone transactions.
If a Portfolio does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. Each Portfolio will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Exchanging Shares
Shares of any of the Portfolios that have been held for seven days or more
may be exchanged for shares of one of the other Portfolios in an identically
registered account. Shares may be exchanged for shares of another Portfolio only
if shares of such Portfolio may legally be sold under applicable state laws.
A shareholder may exchange shares by calling the Transfer Agent's toll
free number at 1-800-854-8525. Procedures applicable to redemption of a
Portfolio's shares are also applicable to exchanging shares. The Company and the
Distributor may modify or discontinue exchange privileges at any time upon 60
days' notice.
Share Price
Net asset value per share for each Portfolio is determined by Scudder Fund
Accounting Corporation on each day the Exchange is open for trading. The net
asset value per share of each Portfolio is determined at 2:00 p.m. for the Tax
Free Portfolio and 4:00 p.m. for the Cash Portfolio and Government Portfolio.
The net asset value per share of each Portfolio is computed by dividing the
value of the total assets of the Portfolio, less all liabilities, by the total
number of outstanding shares of the Portfolio.
Each Portfolio uses the amortized cost method to value its portfolio
securities and seeks to maintain a constant net asset value of $1.00 per share.
The amortized cost method involves valuing a security at its cost and accreting
any discount and amortizing any premium over the period until maturity,
regardless of the impact of fluctuating interest rates on the market value of
the security. See the Statement of Additional Information for a more complete
description of the amortized cost method.
Shareholder Benefits
Account Services
Shareholders will be sent a Statement of Account from the Distributor, as
agent of the Company, whenever a share transaction is effected in the accounts.
Shareholders can write or call the Company at the address and telephone number
on the cover of this Prospectus with any questions relating to their investment
in shares of any of the Portfolios.
Shareholder Services
The Company offers the following shareholder services. See the Statement
of Additional Information for further details about these services or call or
write the Company.
Special Monthly Summary of Accounts. A special service is available to
banks, brokers, investment advisers, trust companies and others who have a
number of accounts in one or more of the Portfolios. A monthly summary of
accounts can be provided, showing for each account the account number, the
month-end share balance and the dividends and distributions paid during the
month.
22
<PAGE>
Shareholder Reports. The fiscal year of the Company ends on December 31 of
each year. The Company sends to its shareholders, semi-annually, reports showing
the investments in each of the Company's Portfolios and other information
(including unaudited financial statements) pertaining to the Company. An annual
report, containing financial statements audited by the Company's independent
accountants, is sent to shareholders each year.
Shareholder inquiries should be addressed to Scudder Institutional Fund,
Inc., 345 Park Avenue, New York, New York 10154.
23
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24
<PAGE>
<PAGE>
Institutional International Equity Portfolio
345 Park Avenue, New York, New York 10154
(800) 854-8525
Investment Adviser
Scudder, Stevens & Clark, Inc.
345 Park Avenue
New York, New York 10154
Distributor
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Fund Accounting Agent
Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Transfer Agent and
Dividend Disbursing Agent
Scudder Service Corporation
P.O. Box 9242
Boston, Massachusetts 02205
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, and information or
representations not contained herein must not be relied upon as having been
authorized by the Company or the Distributor. This Prospectus does not
constitute an offer of any security other than the registered securities to
which it relates or an offer to any person in any jurisdiction where such offer
would be unlawful.
Institutional International
Equity Portfolio
BARRETT INTERNATIONAL SHARES
Prospectus
May 1, 1997
<PAGE>
Institutional
DRAFT 8/25/97
PART B
SCUDDER INTERNATIONAL FUND, INC.
------------------------------------------------------------------------------
Statement of Additional Information
September __, 1997
------------------------------------------------------------------------------
<TABLE>
<S> <C>
<CAPTION>
Acquisition of the Assets of By and in Exchange for Shares of Scudder International
Institutional International Equity Portfolio (a Series of Fund (a Series of Scudder International Fund, Inc.)
Scudder Institutional Fund, Inc.) 345 Park Avenue
345 Park Avenue New York, New York 10154 New York, New York 10154
</TABLE>
This Statement of Additional Information is available to the Stockholders of
Institutional International Equity Portfolio ("International Equity Portfolio")
in connection with a proposed transaction whereby Scudder International Fund, a
series of Scudder International Fund, Inc., ("International Fund") will acquire
all or substantially all of the assets of International Equity Portfolio, a
series of Scudder Institutional Fund, Inc., and certain liabilities, in exchange
for shares of International Fund.
This Statement of Additional Information of Scudder International Fund, Inc.
consists of this cover page and the following documents, each of which is
attached hereto and incorporated by reference herein:
(1) The Statement of Additional Information of International Fund dated
August 1, 1997, containing financial statements of the Fund for the year ended
March 31, 1997;
(2) Financial statements and report of independent accountants included in
the December 31, 1996 Annual Report of International Equity Portfolio;
(3) Financial statements included in the June 30, 1996 Semi-Annual Report
of International Equity Portfolio.
This Statement of Additional Information is not a prospectus. A Prospectus/Proxy
Statement dated September __, 1997 relating to the reorganization of
International Equity Portfolio may be obtained by writing the Institutional
International Equity Portfolio at 345 Park Avenue, New York, NY 10154 or by
calling Scudder Investor Services at (800) 854-8525. This Statement of
Additional Information should be read in conjunction with the Prospectus/Proxy
Statement.
-50-
<PAGE>
SCUDDER INTERNATIONAL FUND
A Pure No-Load(TM) (No Sales Charges) Mutual Fund Seeking
Long-Term Growth of Capital Primarily
From Foreign Equity Securities
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of Scudder International Fund dated
August 1, 1997, 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.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES..........................................................................1
General Investment Objective and Policies....................................................................1
Investment Restrictions.....................................................................................11
PURCHASES............................................................................................................13
Additional Information About Opening An Account.............................................................13
Additional Information About Making Subsequent Investments..................................................13
Additional Information About Making Subsequent Investments by QuickBuy......................................13
Checks......................................................................................................14
Wire Transfer of Federal Funds..............................................................................14
Share Price.................................................................................................14
Share Certificates..........................................................................................14
Other Information...........................................................................................15
EXCHANGES AND REDEMPTIONS............................................................................................15
Exchanges...................................................................................................15
Redemption By Telephone.....................................................................................16
Redemption by QuickSell.....................................................................................17
Redemption by Mail or Fax...................................................................................17
Redemption-in-Kind..........................................................................................17
Other Information...........................................................................................18
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................18
The Pure No-Load(TM) Concept................................................................................18
Internet access.............................................................................................19
Dividend and Capital Gain Distribution Options..............................................................20
Diversification.............................................................................................20
Scudder Investor Centers....................................................................................20
Reports to Shareholders.....................................................................................21
Transaction Summaries.......................................................................................21
THE SCUDDER FAMILY OF FUNDS..........................................................................................21
SPECIAL PLAN ACCOUNTS................................................................................................25
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations and
Self-Employed Individuals..............................................................................25
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........25
Scudder IRA: Individual Retirement Account.................................................................26
Scudder 403(b) Plan.........................................................................................27
Automatic Withdrawal Plan...................................................................................27
Group or Salary Deduction Plan..............................................................................27
Automatic Investment Plan...................................................................................27
Uniform Transfers/Gifts to Minors Act.......................................................................28
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................28
PERFORMANCE INFORMATION..............................................................................................28
Average Annual Total Return.................................................................................29
Cumulative Total Return.....................................................................................29
Total Return................................................................................................29
Capital Change..............................................................................................30
Comparison of Fund Performance..............................................................................30
FUND ORGANIZATION....................................................................................................34
i
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TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISER...................................................................................................35
Personal Investments by Employees of the Adviser............................................................38
DIRECTORS AND OFFICERS...............................................................................................38
REMUNERATION.........................................................................................................40
Responsibilities of the Board--Board and Committee Meetings.................................................40
Compensation of Officers and Directors......................................................................41
DISTRIBUTOR..........................................................................................................42
TAXES................................................................................................................43
PORTFOLIO TRANSACTIONS...............................................................................................46
Brokerage Commissions.......................................................................................46
Portfolio Turnover..........................................................................................47
NET ASSET VALUE......................................................................................................47
ADDITIONAL INFORMATION...............................................................................................48
Experts.....................................................................................................48
Other Information...........................................................................................48
FINANCIAL STATEMENTS.................................................................................................49
APPENDIX
</TABLE>
ii
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THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
(See "Investment objective and policies" and "Additional information
about policies and investments" in the Fund's prospectus.)
Scudder International Fund (the "Fund"), a series of Scudder
International Fund, Inc. (the "Corporation"), is a pure no-load(TM), open-end
management investment company which continuously offers and redeems its shares
at net asset value. It is a company of the type commonly known as a mutual fund.
The Fund is a diversified series of the Corporation.
General Investment Objective and Policies
The Fund's investment objective is to seek long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities. These securities are selected primarily to permit the Fund to
participate in non-U.S. companies and economies with prospects for growth.
The Fund invests in companies, wherever organized, which do business
primarily outside the United States.
The Fund intends to diversify investments among several countries and
to have represented in the portfolio, in substantial proportions, business
activities in not less than three different countries. The Fund does not intend
to concentrate investments in any particular industry.
Except as otherwise indicated, the Fund's investment objective and
policies are not fundamental and may be changed without a vote of shareholders.
If there is a change in investment objective, shareholders should consider
whether the Fund remains an appropriate investment in light of their then
current financial position and needs. There can be no assurance that the Fund's
objective will be met.
The major portion of the Fund's assets consists of equity securities of
established companies listed on recognized exchanges; the Adviser expects this
condition to continue, although the Fund may invest in other securities. Up to
20% of the total assets of the Fund may be invested in debt securities of
foreign governments, supranational organizations and private issuers, including
bonds denominated in the European Currency Unit (ECU). In determining the
location of the principal activities and interests of a company, the Adviser
takes into account such factors as the location of the company's assets,
personnel, sales and earnings. In selecting securities for the Fund's portfolio,
the Adviser seeks to identify companies whose securities prices do not
adequately reflect their established positions in their fields. In analyzing
companies for investment, the Adviser ordinarily looks for one or more of the
following characteristics: above-average earnings growth per share, high return
on invested capital, healthy balance sheets and overall financial strength,
strong competitive advantages, strength of management and general operating
characteristics which will enable the companies to compete successfully in the
marketplace. Investment decisions are made without regard to arbitrary criteria
as to minimum asset size, debt-equity ratios or dividend history of portfolio
companies.
The Fund may invest in any type of security including, but not limited
to shares, preferred or common; bonds and other evidences of indebtedness; and
other securities of issuers wherever organized, and not excluding evidences of
indebtedness of governments and their political subdivisions. The Fund, in view
of its investment objective, intends under normal conditions to maintain a
portfolio consisting primarily of a diversified list of equity securities.
Under exceptional economic or market conditions abroad, the Fund may,
for temporary defensive purposes, until normal conditions return, invest all or
a major portion of its assets in Canadian or U.S. Government obligations or
currencies, or securities of companies incorporated in and having their
principal activities in such countries. It is impossible to accurately predict
for how long such alternate strategies may be utilized.
Foreign securities such as those purchased by the Fund may be subject
to foreign government taxes which could reduce the yield on such securities,
although a shareholder of the Fund may, subject to certain limitations, be
entitled to claim a credit or deduction for U.S. federal income tax purposes for
his or her proportionate share of such foreign taxes paid by the Fund. (See
"TAXES.")
<PAGE>
Foreign Securities. The Fund is intended to provide individual and institutional
investors with an opportunity to invest a portion of their assets in a
diversified group of securities of companies, wherever organized, which do
business primarily outside the U.S., and foreign governments. The Adviser
believes that diversification of assets on an international basis decreases the
degree to which events in any one country, including the U.S., will affect an
investor's entire investment holdings. In certain periods since World War II,
many leading foreign economies and foreign stock market indices have grown more
rapidly than the U.S. economy and leading U.S. stock market indices, although
there can be no assurance that this will be true in the future. Because of the
Fund's investment policy, the Fund is not intended to provide a complete
investment program for an investor.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in U.S. securities and which may
favorably or unfavorably affect the Fund's performance. As foreign companies are
not generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the U.S. and, at times, volatility of
price can be greater than in the U.S. Fixed commissions on some foreign
securities exchanges and bid to asked spreads in foreign bond markets are
generally higher than commissions or bid to asked spreads on U.S. markets,
although the Fund will endeavor to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers and listed companies than in the
U.S. It may be more difficult for the Fund's agents to keep currently informed
about corporate actions which may affect the prices of portfolio securities.
Communications between the U.S. and foreign countries may be less reliable than
within the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. Payment for
securities without delivery may be required in certain foreign markets. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. The management of the Fund seeks to mitigate the risks
associated with the foregoing considerations through continuous professional
management.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because the Fund may hold foreign
currencies and forward contracts, futures contracts and options on foreign
currencies and foreign currency futures contracts, the value of the assets of
the Fund as measured in U.S. dollars may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations, and
the Fund may incur costs in connection with conversions between various
currencies. Although the Fund values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into options or forward or futures contracts to purchase or sell
foreign currencies.
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 growth, the Fund may
invest up to 20% of its total assets in debt securities including bonds of
foreign governments, supranational organizations and private issuers, including
bonds denominated in the ECU. Portfolio debt investments will be selected on the
basis of, among other things, yield, credit quality, and the fundamental
outlooks for currency and interest rate trends in different parts of the globe,
taking into account the ability to hedge a degree of currency or local bond
price risk. The Fund may purchase "investment-grade" bonds, which are those
rated Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's) or AAA,
AA, A or BBB by Standard & Poor's ("S&P") or, if unrated, judged to be of
equivalent quality as determined by the Adviser. Moody's considers bonds it
rates Baa to have speculative elements as well as investment-grade
characteristics.
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High Yield/High Risk Bonds. The Fund may also purchase, to a limited extent,
debt securities which are rated below investment-grade, that is, rated below Baa
by Moody's or below BBB by S&P and unrated securities, which usually entail
greater risk (including the possibility of default or bankruptcy of the issuers
of such securities), generally involve greater volatility of price and risk of
principal and income, and may be less liquid, than securities in the higher
rating categories. The lower the ratings of such debt securities, the greater
their risks render them like equity securities. The Fund will invest no more
than 5% of its total assets in securities rated BB or lower by Moody's or Ba by
S&P, and may invest in securities which are rated D by S&P. Securities rated D
may be in default with respect to payment of principal or interest. See the
Appendix to this Statement of Additional Information for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.
An economic downturn could disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would have a greater adverse impact on the value of such
obligations than on higher quality debt securities. During an economic downturn
or period of rising interest rates, highly leveraged issues may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations. Prices and yields of high yield
securities will fluctuate over time and, during periods of economic uncertainty,
volatility of high yield securities may adversely affect the 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. A thin trading market may
limit the ability of the Fund to accurately value high yield securities in its
portfolio and to dispose of those securities. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.
These securities may also involve special registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties.
Credit quality in the high-yield securities market can change suddenly
and unexpectedly, and even recently-issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interest of the Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
On average, for the fiscal year ended March 31, 1997, the Fund's
holdings in debt securities rated below investment grade by one or more
nationally recognized rating services, or judged by the Adviser to be of
equivalent quality to the established categories of such rating services
comprised less than 5% of the Fund's total assets. For more information
regarding tax issues related to high yield securities, see "TAXES."
Illiquid and Restricted Securities. The Fund may occasionally purchase
securities other than in the open market. While such purchases may often offer
attractive opportunities for investment not otherwise available on the open
market, the securities so purchased are often "restricted securities" or "not
readily marketable," i.e., securities which cannot be sold to the public without
registration under the Securities Act of 1933 or the availability of an
exemption from registration (such as Rules 144 or 144A) or because they are
subject to other legal or contractual delays in or restrictions on resale.
Repurchase Agreements. The Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System and any broker-dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker-dealer has been determined by the Adviser to be at least
as high as that of other obligations the Fund may purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's or S&P.
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A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. Securities subject to a repurchase agreement are held in a segregated
account and the value of such securities kept at least equal to the repurchase
price on a daily basis. The repurchase price may be higher than the purchase
price, the difference being income to the Fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Fund together
with the repurchase price upon repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the Obligation itself. Obligations
will be held by the Custodian or in the Federal Reserve Book Entry system.
For purposes of the Investment Company Act of 1940, as amended (the
"1940 Act"), a repurchase agreement is deemed to be a loan from the Fund to the
seller of the Obligation subject to the repurchase agreement and is therefore
subject to the Fund's investment restriction applicable to loans. It is not
clear whether a court would consider the Obligation purchased by the Fund
subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in price of
the Obligation. If the court characterizes the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the Obligation, in which
case the Fund may incur a loss if the proceeds to the Fund of the sale to a
third party are less than the repurchase price. However, if the market value of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
Obligation to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in
cash, U.S. Government Securities and liquid high grade debt obligations
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. The Fund has the right to call a
loan and obtain the securities loaned on no more than five days' notice. During
the existence of a loan, the Fund will continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and will also receive
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms deemed by the Adviser to be in good standing.
The value of the securities loaned will not exceed 30% of the value of the
Fund's total assets at the time any loan is made.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities in the Fund's portfolio, or to
enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly 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
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possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the 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
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guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, are determined to be of equivalent credit quality by the Adviser.
The staff of the SEC currently takes the position that OTC options purchased by
the Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 10% of its total assets in illiquid
securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
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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, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Fund, as seller, to deliver to the
buyer the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
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
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of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
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rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act, and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO or is determined to be of equivalent credit quality by the Adviser.
If there is a default by the Counterparty, the Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. 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.
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Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate 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 assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid assets
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
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or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "TAXES.")
Investment Restrictions
The policies set forth below are fundamental policies of the Fund and
may not be changed without the approval of a majority of the Fund's outstanding
shares. As used in this Statement of Additional Information, a "majority of the
outstanding voting securities of the Fund" means the lesser of (1) 67% or more
of the voting securities present at such meeting, if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy; or (2) more than 50% of the outstanding voting securities of the Fund.
The Fund may not:
(1) with respect to 75% of its total assets, taken at market
value, purchase more than 10% of the voting securities of any
one issuer, or invest more than 5% of the value of its total
assets in the securities of any one issuer, except obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and except securities of other investment
companies;
(2) borrow money, except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse
repurchase agreements; provided that the Fund maintains asset
coverage of 300% for all borrowings;
(3) act as an underwriter of securities issued by others, except
to the extent that it may be deemed an underwriter in
connection with the disposition of portfolio securities of the
Fund;
(4) make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent the entry into repurchase
agreements and the purchase of debt securities in accordance
with its investment objectives and investment policies may be
deemed to be loans;
(5) purchase or sell real estate (except that the Fund may invest
in (i) securities of companies which deal in real estate or
mortgages, and (ii) securities secured by real estate or
interests therein, and that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of
the Fund's ownership of securities); and
(6) purchase or sell physical commodities or contracts relating to
physical commodities.
The Fund will not as a matter of nonfundamental policy:
(a) purchase or retain securities of any open-end investment
company, or securities of closed-end investment companies
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchases, or
except when such purchase, though not made in the open market,
is part of a plan of merger, consolidation, reorganization or
acquisition of assets; in any event the Fund may not purchase
more than 3% of the outstanding voting securities of another
investment company, may not invest more than 5% of its assets
in another investment company, and may not invest more than
10% of its assets in other investment companies;
(b) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(c) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer, director or trustee of the Fund or a member, officer,
director or trustee of the investment adviser of the Fund if
one or more of such individuals owns beneficially more than
one-half of one percent (1/2%) of the outstanding shares or
securities or both (taken at market value) of such issuer and
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such individuals owning more than one-half of one percent
(1/2%) of such shares or securities together own beneficially
more than 5% of such shares or securities or both;
(d) purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions, except in connection with
arbitrage transactions and except that the Fund may obtain
such short-term credits as may be necessary for the clearance
of purchases and sales of securities;
(e) invest more than 10% of its total assets in securities which
are not readily marketable, the disposition of which is
restricted under Federal securities laws, or in repurchase
agreements not terminable within 7 days, and the Fund will not
invest more than 10% of its total assets in restricted
securities;
(f) purchase securities of any issuer with a record of less than
three years continuous operations, including predecessors, and
in equity securities which are not readily marketable except
U.S. Government securities, and obligations issued or
guaranteed by any foreign government or its agencies or
instrumentalities, if such purchase would cause the
investments of the Fund in all such issuers to exceed 5% of
the total assets of the Fund taken at market value;
(g) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of its net assets; or sell put
options on securities if, as a result, the aggregate value of
the obligations underlying such put options would exceed 50%
of the Fund's net assets;
(h) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
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;
(i) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which
own or invest in such interests);
(j) borrow money in excess of 5% of its total assets (taken at
market value) except for temporary or emergency purposes or
borrow other than from banks;
(k) purchase warrants if as a result warrants taken at the lower
of cost or market value would represent more than 5% of the
value of the Fund's total net assets or more than 2% of its
net assets in warrants that are not listed on the New York or
American Stock Exchanges or on an exchange with comparable
listing requirements (for this purpose, warrants attached to
securities will be deemed to have no value);
(l) invest more than 20% of its total assets in debt securities
(including convertible securities) or more than 5% of its
total assets in securities rated BB/Ba or below by Moody's or
S&P or the equivalent;
(m) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund's total assets at the
time the loan is made; all loans of portfolio securities will
be fully collateralized and marked to market daily; or
(n) purchase or sell real estate limited partnership interests.
In addition to the foregoing restrictions, it is not the policy of the
Fund to concentrate its investments in any particular industry and the Fund's
management does not intend to make acquisitions in particular industries which
would increase the percentage of the market value of the Fund's assets above 25%
for any one industry. The Fund may not deviate from such policy without a vote
of a majority of the outstanding shares as provided by the 1940 Act.
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Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Fund.
PURCHASES
(See "Purchases" and "Transaction information" in the Fund's prospectus.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. by letter, telegram, fax, TWX, 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 number or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, Boston, MA 02101, ABA Number 011000028, DDA
Account 9903-5552. The investor must give the Scudder fund name, account name
and the new account number. Finally, the investor must send a completed and
signed application to the Fund promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
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, telegram, etc. by established shareholders (except by Scudder
Individual Retirement Account (IRA), Scudder pension and profit sharing, 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 Scudder Investor Services, Inc.
office listed in the Fund's prospectus. A two-part invoice of the purchase will
be mailed out promptly following receipt of a request to buy. Payment should be
attached to a copy of the invoice for proper identification. Federal regulations
require that payment be received within three (3) business days. If payment is
not received within that time, the shares may be canceled. 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 Fund 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 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
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a period of up to seven business days. If you purchase shares and there are
insufficient funds in your bank account the purchase will be canceled and you
will be subject to any losses or fees incurred in the transaction. QuickBuy
transactions are not available for most retirement plan accounts. However,
QuickBuy transactions are available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing an QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 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 only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, the Fund 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 Fund 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. 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 New York Stock Exchange ("the Exchange") on a selected day, your
bank must forward federal funds by wire transfer and provide the required
account information so as to be available to the Fund prior to the regular close
of trading on the Exchange (normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Fund pays a fee for receipt by the Custodian of
"wired funds," but the right to charge investors for this service is reserved.
Boston banks are presently closed on certain holidays although the
Exchange may be open. These holidays are Martin Luther King, Jr. Day (the 3rd
Monday in January), Columbus Day (the 2nd Monday in October) and Veterans' Day
(November 11). Investors are not able to purchase shares by wiring federal funds
on such holidays because the Custodian is not open to receive such federal funds
on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the purchase order in good order. Net asset value
normally will be computed as of the close of regular trading on each day 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 Scudder Investor
Services, Inc., it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") in Boston by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Fund's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Fund's
Transfer Agent for cancellation and credit to such shareholder's account.
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Shareholders who prefer may hold the certificates in their possession until they
wish to exchange or redeem such shares.
Other Information
If purchases or redemptions of Fund shares are arranged and settlement
is made at an investor's election through a member of the NASD, other than
Scudder Investor Services, Inc., that member may, at its discretion, charge a
fee for that service.
The Board of Directors of the Fund and Scudder Investor Services, Inc.,
the Fund's principal underwriter, each has the right to limit the amount of
purchases by and to refuse to sell to any person and each may suspend or
terminate the offering of shares of the Fund at any time.
The "Tax Identification Number" section of the Application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations a certification of exempt status), may be
returned to the investor if a correct, certified tax identification number and
certain other required certificates are not supplied.
The Fund may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and redemptions" and "Transaction information"
in the Fund's prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration,
address, and account options/features as the account of origin. Exchanges into
an existing account must be for $100 or more. If the account receiving the
exchange proceeds is to be different in any respect, the exchange request must
be in writing and must contain an original signature guarantee as described
under "Transaction Information--Redeeming shares--Signature guarantees" in the
Fund's prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Corporation 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.")
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Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Fund
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder Funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated.
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 to their address of record.
Shareholders may also request by telephone to have the proceeds mailed or wired
to their predesignated bank account. In order to request wire redemptions by
telephone, shareholders must have completed and returned to the Transfer Agent
the application, including the designation of a bank account to which the
redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish the telephone redemption
privilege must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA, Scudder
pension and profit-sharing, Scudder 401(k) and Scudder 403(b)
Planholders) who wish to establish telephone redemption to a
predesignated bank account or who want to change the bank account
previously designated to receive redemption proceeds should
either return a Telephone Redemption Option Form (available upon
request), or send a letter identifying the account and specifying
the exact information to be changed. The letter must be signed
exactly as the shareholder's name(s) appears on the account. An
original signature and an original signature guarantee are
required for each person in whose name the account is registered.
If a request for a redemption to a shareholder's bank account is made
by telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a participant in
the Federal Reserve System, redemption proceeds must be wired through a
commercial bank which is a correspondent of the savings bank. As this may delay
receipt by the shareholder's account, it is suggested that investors wishing to
use a savings bank discuss wire procedures with their bank and submit any
special wire transfer information with the telephone redemption authorization.
If appropriate wire information is not supplied, redemption proceeds will be
mailed to the designated bank.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
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Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of the Fund by telephone. To sell shares
by QuickSell, shareholders should call before 4 p.m. eastern time. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. 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
after 4 p.m. eastern time will begin their processing the following business
day. QuickSell transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing an QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding share certificates or shares
registered in other than individual names contact the Transfer Agent prior to
any redemptions to ensure that all necessary documents accompany the request.
When shares are held in the name of a corporation, trust, fiduciary agent,
attorney or partnership, the Transfer Agent requires, in addition to the stock
power, certified evidence of authority to sign. These procedures are for the
protection of shareholders and should be followed to ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption will be sent within seven (7) business days
after receipt by the Transfer Agent of a request for redemption that complies
with the above requirements. Delays of more than seven (7) days of payment for
shares tendered for repurchase or redemption may result, but only until the
purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information call 1-800-225-5163.
Redemption-in-Kind
The Fund 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
Corporation 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 that Fund at the beginning of the
period.
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<PAGE>
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. 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 redemptions undertaken to effect an exchange for
shares of another Scudder fund, may result in tax consequences (gain or loss) to
the shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefore may be
suspended at times (a) during which the Exchange is closed, other than customary
weekend and holiday closings, (b) during which trading on the Exchange is
restricted for any reason, (c) during which an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during which the Securities and Exchange
Commission (the "Commission"), by order permits a suspension of the right of
redemption or a postponement of the date of payment or of redemption; provided
that applicable rules and regulations of the Commission (or any succeeding
governmental authority) shall govern as to whether the conditions prescribed in
(b), (c) or (d) exist.
If transactions at any time reduce a shareholder's account balance in
the Fund to below $2,500 in value, the Fund will notify the shareholder that,
unless the account balance is brought up to at least $2,500, the Fund will
redeem all shares and close the account by sending redemption proceeds to the
shareholder. The shareholder has sixty days to bring the account balance up to
$2,500 before any action will be taken by the Fund. (This policy applies to
accounts of new shareholders, but does not apply to certain Special Plan
Accounts.) The Directors have the authority to change the minimum account size.
FEATURES AND SERVICES OFFERED BY THE FUND
(See "Shareholder benefits" in the Fund's prospectus.)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its 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 Rule 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the NASD
Rules of Fair Practice, a mutual fund can call itself a "no-load" fund only if
the 12b-1 fee and/or service fee does not exceed 0.25% of a fund's average
annual net assets.
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<PAGE>
Because Scudder funds do not pay any asset-based sales charges or
service fees, Scudder developed and trademarked the phrase pure no-load(TM) to
distinguish Scudder funds from other no-load mutual funds. Scudder pioneered the
no-load concept when it created the nation's first no-load fund in 1928, and
later developed the nation's first family of no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder 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) 8.50% Load Fund Load Fund with 0.25% 12b-1
Fund 0.75% 12b-1 Fee Fee
--------------- --------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
15 41,772 38,222 37,698 40,371
20 67,275 61,557 58,672 64,282
</TABLE>
Investors are encouraged to review the fee tables on page 2 of the
Fund's prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties
on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
19
<PAGE>
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call MeTM 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.
Dividend and Capital Gain 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 the Fund. A change of instructions for the method
of payment may be given to the Transfer Agent in writing at least five days
prior to a dividend record date. Shareholders may change their dividend option
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request. See "How to
Contact Scudder" in the Prospectus for the address.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the Fund.
Investors may also have dividends and distributions automatically
deposited to 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 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 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 or
in a specific market section.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by Scudder
Investor Services, Inc. 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 find 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 "How to contact Scudder" in the prospectus.
20
<PAGE>
Reports to Shareholders
The Fund issues to its shareholders audited semiannual financial
statements, including a list of investments held and statements of assets and
liabilities, operations, changes in net assets and financial highlights. The
Fund presently intends to distribute to shareholders informal quarterly reports
during the intervening quarters, containing certain performance and investment
highlights of the Fund. Each distribution will be accompanied by a brief
explanation of the source of the distribution.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' prospectuses.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
Initial purchases in most Scudder funds must be at least $2,500 or $1,000 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and consistent therewith to provide current income
through investment in a supervised portfolio of U.S. Government and
U.S. Government guaranteed obligations with maturities of not more than
762 calendar days. The Fund intends to seek to maintain a constant net
asset value of $1.00 per share, although in certain circumstances this
may not be possible.
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 through investment in a
supervised portfolio of short-term debt securities. SCIT intends to
seek to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible.
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 and declares
dividends daily. 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
invests exclusively in obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities that have remaining
maturities of not more than 397 calendar days and certain repurchase
agreements. The institutional class of shares of this Fund is not
within the Scudder Family of Funds.
INCOME
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 in
emerging markets.
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.
21
<PAGE>
Scudder GNMA Fund seeks to provide investors with high current income
from a portfolio of high-quality GNMA securities.
Scudder High Yield Bond Fund seeks to provide a high level of current
income and, secondarily, capital appreciation through investment
primarily in below investment grade domestic debt securities.
Scudder Income Fund seeks to earn a high level of income consistent
with the prudent investment of capital through a flexible investment
program emphasizing high-grade bonds.
Scudder International Bond Fund seeks to provide income from a
portfolio of high-grade bonds denominated in foreign currencies. 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 Short Term Bond Fund seeks to provide a higher and more stable
level of income than is normally provided by money market investments,
and more price stability than investments in intermediate- and
long-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with the minimization of
reinvestment risks through investments primarily in zero coupon
securities.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") is designed to provide investors
with income exempt from regular federal income tax while seeking
stability of principal. STFMF seeks to maintain a constant net asset
value of $1.00 per share, although in certain 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
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* is designed to provide
California taxpayers income exempt from California state and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
Scudder New York Tax Free Money Fund* is designed to provide New York
taxpayers income exempt from New York state, New York City and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
TAX FREE
Scudder High Yield Tax Free Fund seeks to provide high income which is
exempt from regular federal income tax by investing in municipal
securities.
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 Managed Municipal Bonds seeks to provide income which is exempt
from regular federal income tax primarily through investments in
high-grade, long-term municipal securities.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
22
<PAGE>
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation by investing in high-grade municipal securities of
intermediate maturities.
Scudder California Tax Free Fund* seeks to provide income exempt from
both California and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
California state, municipal and local government obligations.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide as
high a level of income exempt from Massachusetts personal and regular
federal income tax as is consistent with a high degree of principal
stability.
Scudder Massachusetts Tax Free Fund* seeks to provide income exempt
from both Massachusetts and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
Massachusetts state, municipal and local government obligations.
Scudder New York Tax Free Fund* seeks to provide income exempt from New
York state, New York City and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
investments in New York state, municipal and local government
obligations.
Scudder Ohio Tax Free Fund* seeks to provide income exempt from both
Ohio and regular federal income taxes through the professional and
efficient management of a portfolio consisting of Ohio state, municipal
and local government obligations.
Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
both Pennsylvania and regular federal income taxes through a portfolio
consisting of Pennsylvania state, municipal and local government
obligations.
GROWTH AND INCOME
Scudder Balanced Fund seeks to provide a balance of growth and income,
as well as long-term preservation of capital, from a diversified
portfolio of equity and fixed income securities.
Scudder Growth and Income Fund seeks to provide long-term growth of
capital, current income, and growth of income through a portfolio
invested primarily in common stocks and convertible securities by
companies which offer the prospect of growth of earnings while paying
current dividends.
GROWTH
Scudder Classic Growth Fund seeks long-term growth of capital with
reduced share price volatility compared to other growth mutual funds.
Scudder Development Fund seeks to achieve long-term growth of capital
primarily through investments in marketable securities, principally
common stocks, of relatively small or little-known companies which in
the opinion of management have promise of expanding their size and
profitability or of gaining increased market recognition for their
securities, or both.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
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.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Global Fund seeks long-term growth of capital primarily through
a diversified portfolio of marketable equity securities selected on a
worldwide basis. It may also invest in debt securities of U.S.
and foreign issuers. Income is an incidental consideration.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder International Fund seeks long-term growth of capital through
investment principally in a diversified portfolio of marketable equity
securities selected primarily to permit participation in non-U.S.
companies and economies with prospects for growth. It also invests in
fixed-income securities of foreign governments and companies, with a
view toward total investment return.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in equity securities of large U.S.
growth companies.
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a broad and flexible investment program
emphasizing common stocks.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-cap stocks.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in securities of emerging growth companies poised
to be leaders in the 21st century.
Scudder Value Fund seeks long-term growth of capital through investment
in undervalued equity securities.
The Japan Fund, Inc. seeks capital appreciation through investment
in Japanese securities, primarily in common stocks of Japanese
companies.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio will, under normal market conditions, 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 a balance of growth
and income by investing in a select mix of Scudder money market, bond
and equity mutual funds.
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<PAGE>
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return. Total return consists of any capital appreciation plus dividend
income and interest. To achieve this objective, the Portfolio invests
in a select mix of international and global Scudder Funds.
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.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By Automatic
Investment Plan" and "Exchanges and redemptions--By Automatic Withdrawal Plan"
in the Fund's prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. 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
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
25
<PAGE>
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples if only one spouse has
earned income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
------------- -------------- -------------------------- -------------------
Age of -------------------------------------------------------------
Contributions 5% 10% 15%
------------- -------------- -------------------------- -------------------
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
------------- --------------- -------------------------- -------------------
Starting Annual Rate of Return
Age of --------------------------------------------------------------
Contributions 5% 10% 15%
------------- --------------- -------------------------- -------------------
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
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Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal 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 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 Corporation or its agent on
written notice, and will be terminated when all shares of the Fund under the
Plan have been liquidated or upon receipt by the Corporation 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 Corporation and its agents reserve the right to establish a
maintenance charge in the future depending on the services required by the
investor.
The Corporation reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
27
<PAGE>
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 Corporation 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"Distribution and performance information -- Dividends and
capital gains distributions" in the Fund's prospectus.)
The Fund intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However,
the Fund may retain all or part of such gain for reinvestment after paying the
related federal income taxes for which the shareholders may then be asked to
claim a credit against their federal income tax liability. (See "TAXES.")
If the Fund does not distribute 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.
Earnings and profits distributed to shareholders on redemptions of Fund
shares may be utilized by the Fund, to the extent permissible, as part of the
Fund's dividends paid deduction on its federal tax return.
The Fund intends to distribute its investment company taxable income
and any net realized capital gains in November or December to avoid federal
excise tax, although an additional distribution may be made if necessary.
Both types of distributions will be made in shares of the Fund and
confirmations will be mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check will be sent. Distributions of
investment company taxable income and net realized capital gains are taxable
(See "TAXES"), whether made in shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
(See "Distribution and performance information--Performance
information" in the Fund's prospectus.)
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures will be calculated in the following manner:
28
<PAGE>
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, all ended on the
last day of a recent calendar quarter. Average annual total return quotations
reflect changes in the price of the Fund's shares and assume that all dividends
and capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment over such periods,
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Return for years ended March 31, 1997
One Year Five Years Ten Years
10.74% 11.61% 8.90%
Cumulative Total Return
Cumulative Total Return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
Total Return quotations reflect changes in the price of the Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative Total Return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (Cumulative Total Return is then expressed as
a percentage):
C = (ERV/P) -1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Cumulative Total Return for years ended March 31, 1997
One Year Five Years Ten Years
10.74% 73.22% 134.56%
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.
29
<PAGE>
Capital Change
Capital Change measures the return from invested capital including
reinvested capital gains distributions. Capital Change does not include the
reinvestment of income dividends.
Quotations of the Fund's performance are historical and are not
intended to indicate future performance. An investor's shares when redeemed may
be worth more or less than their original cost. Performance of the Fund will
vary based on changes in market conditions and the level of the Fund's expenses.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
Because some or all of the Fund's investments are denominated in
foreign currencies, the strength or weakness of the U.S. dollar as against these
currencies may account for part of the Fund's investment performance. Historical
information on the value of the dollar versus foreign currencies may be used
from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which the Fund invests, including, but not limited to, the
following: population growth, gross domestic product, inflation rate, average
stock market price-earnings ratios and the total value of stock markets. Sources
for such statistics may include official publications of various foreign
governments and exchanges.
From time to time, in advertising and marketing literature, this Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations. In addition, the Fund's performance may also be
compared to the performance of broad groups of comparable mutual funds.
Unmanaged indices with which the Fund's performance may be compared include, but
are not limited to, the following:
The Europe/Australia/Far East (EAFE) Index
International Finance Corporation's Latin America Investable
Total Return Index
Morgan Stanley Capital International World Index
J.P. Morgan Global Traded Bond Index
Salomon Brothers World Government Bond Index
Nasdaq Composite Index
Wilshire 5000 Stock Index
From time to time, in marketing and other Fund literature, Directors
and officers of the Fund, the Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
30
<PAGE>
current shareholders a better sense of the outlook and approach of those who
manage the Fund. In addition, the amount of assets that the Adviser has under
management in various geographical areas may be quoted in advertising and
marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
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.
31
<PAGE>
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
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.
32
<PAGE>
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
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.
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because
they assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
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Investing beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S.
investments strike the best balance between risk and reward.
Scudder's 30% Solution
The 30 Percent Solution -- A Global Guide for Investors Seeking Better
Performance With Reduced Portfolio Risk is a booklet, created by Scudder, to
convey its vision about the new global investment dynamic. This dynamic is a
result of the profound and ongoing changes in the global economy and the
financial markets. The booklet explains how Scudder believes an equity
investment portfolio with up to 30% in international holdings and 70% in
domestic holdings can improve long-term performance while simultaneously helping
to reduce overall risk.
FUND ORGANIZATION
(See "Fund organization" in the Fund's prospectus.)
The Corporation was organized as Scudder Fund of Canada Ltd. in Canada
in 1953 by the investment management firm of Scudder, Stevens & Clark. On March
16, 1964, the name of the Corporation was changed to Scudder International
Investments Ltd. On July 31, 1975, the corporate domicile of the Corporation was
changed to the U.S. through the transfer of its net assets to a newly formed
Maryland corporation, Scudder International Fund, Inc., in exchange for shares
of the Corporation which then were distributed to the shareholders of the
Corporation.
The authorized capital stock of the Corporation consists of 700 million
shares of a par value of $.01 each--all of one class and all having equal rights
as to voting, redemption, dividends and liquidation. Shareholders have one vote
for each share held. The Corporation's capital stock is comprised of six series:
Scudder International Fund, the original series; Scudder Latin America Fund,
Scudder Pacific Opportunities Fund, both organized in December 1992, Scudder
Greater Europe Growth Fund, organized in October 1994, Scudder Emerging Markets
Growth Fund, organized in May 1996 and Scudder International Growth and Income
Fund, organized in June 1997. Each series consists of 100 million shares except
for the Fund which consists of 200 million shares. The Directors have the
authority to issue additional series of shares and to designate the relative
rights and preferences as between the different series. All shares issued and
outstanding are fully paid and non-assessable, transferable, and redeemable at
net asset value at the option of the shareholder. Shares have no pre-emptive or
conversion rights.
The shares of the Corporation have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so, and, in such
event, the holders of the remaining less than 50% of the shares voting for the
election of Directors will not be able to elect any person or persons to the
Board of Directors. The assets of the Corporation 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 such a share of
the general liabilities of the Corporation. 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
34
<PAGE>
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Corporation, subject to the general supervision of the Directors, have the power
to determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Corporation or any series, the holders of the shares of any
series are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Shares of the Corporation 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 Directors, in their discretion, may authorize the division of
shares of the Corporation (or shares of a series) into different classes
permitting shares of different classes to be distributed by different methods.
Although shareholders of different classes of a series would have an interest in
the same portfolio of assets, shareholders of different classes may bear
different expenses in connection with different methods of distribution. The
Directors have no present intention of taking the action necessary to effect the
division of shares into separate classes, or of changing the method of
distribution of shares of the Fund.
The Corporation's Amended and Restated Articles of Incorporation (the
"Articles") provide that the Directors of the Corporation, to the fullest extent
permitted by Maryland General Corporation Law and the 1940 Act, shall not be
liable to the Corporation or its shareholders for damages. Maryland law
currently provides that Directors shall be immune from liability for any action
taken by them in good faith, in a manner reasonably believed to be in the best
interests of the Corporation and with the care that an ordinarily prudent person
in a like position would use under similar circumstances. In so acting, a
Director shall be fully protected in relying in good faith upon the records of
the Corporation and upon reports made to the Corporation by persons selected in
good faith by the Directors as qualified to make such reports. The Articles and
the By-Laws provide that the Corporation will indemnify its Directors, officers,
employees or agents against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Corporation consistent with applicable law. Nothing in the Articles or the
By-Laws protects or indemnifies a Director, officer, employee or agent against
any liability to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
INVESTMENT ADVISER
(See "Fund organization--Investment adviser" in the Fund's prospectus.)
Scudder, Stevens & Clark, Inc., an investment counsel firm, acts as
investment adviser to the Fund. This organization is one of the most experienced
investment management 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 the Fund, the first mutual fund
available in the U.S. investing internationally in securities of issuers in
several foreign countries. The firm reorganized from a partnership to a
corporation on June 28, 1985.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder Institutional Fund,
Inc., Scudder International Fund, Inc., Scudder Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder Securities Trust,
Scudder State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax Free
Trust, Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund,
Scudder World Income Opportunities Fund, Inc., The Argentina Fund, Inc., The
35
<PAGE>
Brazil Fund, Inc., The Korea Fund, Inc., The Japan Fund, Inc., The Latin America
Dollar Income Fund, Inc. and Scudder Spain and Portugal Fund, Inc. Some of the
foregoing companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between Scudder, Stevens & Clark, Inc.
("Scudder") and AMA Solutions, Inc., a subsidiary of the American Medical
Association (the "AMA"), dated May 9, 1997, Scudder has agreed, subject to
applicable state regulations, to pay AMA Solutions, Inc. royalties in an amount
equal to 5% of the management fee received by Scudder with respect to assets
invested by AMA members in Scudder funds in connection with the AMA
InvestmentLinkSM Program. Scudder will also pay AMA Solutions, Inc. a general
monthly fee, currently in the amount of $833. The AMA and AMA Solutions, Inc.
are not engaged in the business of providing investment advice and neither is
registered as an investment adviser or broker/dealer under federal securities
laws. Any person who participates in the AMA InvestmentLinkSM Program will be a
customer of Scudder (or of a subsidiary thereof) and not the AMA or AMA
Solutions, Inc. AMA InvestmentLinkSM is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
The Investment Management Agreement (the "Agreement") dated September
5, 1996 was approved by the Directors of the Fund on September 5, 1996. The
Agreement will continue in effect until September 30, 1997 and from year to year
thereafter only if its continuance is approved annually by the vote of a
majority of those Directors who are not parties to such Agreement or interested
persons of the Adviser or the Fund, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Fund's Directors
or of a majority of the outstanding voting securities of the Fund. The Agreement
may be terminated at any time without payment of penalty by either party on
sixty days' written notice, and automatically terminates in the event of its
assignment.
Under the Agreement, the Adviser regularly provides the Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objectives, policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of the Fund's
assets shall be held uninvested, subject to the Fund's Articles, By-Laws, the
1940 Act, the Code and to the Fund's investment objective, policies and
restrictions, and subject, further, to such policies and instructions as the
Board of Directors of the Fund may from time to time establish.
Under the Agreement, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Fund's
operations as an open-end investment company including, but not limited to,
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<PAGE>
preparing reports and notices to the Directors 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 Commission 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 Directors.
The Adviser pays the compensation and expenses (except those of
attending Board and committee meetings outside New York, New York or Boston,
Massachusetts) of all Directors, officers and executive employees of the Fund
affiliated with the Adviser and makes available, without expense to the Fund,
the services of such Directors, officers and employees of the Adviser as may
duly be elected officers of the Fund, subject to their individual consent to
serve and to any limitations imposed by law, and provides the Fund's office
space and facilities.
On September 5, 1996, the Fund's Board of Directors approved a new
Investment Management Agreement (the "Management Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"). The management fee payable under the
Management Agreement is equal to an annual rate of approximately 0.90% of the
first $500,000,000 of average daily net assets, 0.85% of the next $500,000,000
of such net assets, 0.80% of the next $1,000,000,000 of such net assets, 0.75%
of the next $1,000,000,000 of such net assets, and 0.70% of such net assets in
excess of $3,000,000,000, computed and accrued daily and payable monthly.
Under the Investment Management Agreement between the Fund and the
Adviser which was in effect prior to September 5, 1996 (the "Agreement"), the
Fund agreed to pay to the Adviser a fee equal to an annual rate of 0.90% on the
first $500,000,000 of the Fund's average daily net assets, 0.85% on the next
$500,000,000, 0.80% on the next $1,000,000,000, and 0.75% of such net assets in
excess of $2,000,000,000, computed and accrued daily and payable monthly.
The net investment advisory fees for the fiscal years ended March 31,
1997, 1996 and 1995 were $20,989,160, $19,502,443 and $19,032,146, respectively.
Under the Agreement the Fund is responsible for all of its other
expenses including: fees and expenses incurred in connection with membership in
investment company organizations; brokers' 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 of issue, sale, underwriting, distribution,
redemption or repurchase of shares; the expenses of and the fees for registering
or qualifying securities for sale; the fees and expenses of Directors, officers
and employees of the Fund who are not affiliated with the Adviser; the cost of
printing and distributing reports and notices to stockholders; and the fees and
disbursements of custodians. The Fund may arrange to have third parties assume
all or part of the expenses of sale, underwriting and distribution of shares of
the Fund. The Fund is also responsible for its expenses of shareholders'
meetings, the cost of responding to shareholders' inquiries, and its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Directors of the Fund with
respect thereto.
The Agreement expressly provides that the Adviser shall not be required
to pay a pricing agent of the Fund for portfolio pricing services, if any.
The Agreement also provides that the Fund may use any name derived from
the name "Scudder, Stevens & Clark" only as long as the Agreement or any
extension, renewal or amendment thereof remains in effect.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning such Agreement, the Directors of the Fund who are not
"interested persons" of the Adviser are represented by independent counsel at
the Fund's expense.
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<PAGE>
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
None of the officers or Directors of the Fund may have dealings with
the Fund as principals in the purchase or sale of securities, except as
individual subscribers to or holders of shares of the Fund.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Fund. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
- ---------------------- ------------------ ---------------------- ----------------
<S> <C> <C> <C>
Daniel Pierce (63)+* Chairman of the Board Chairman of the Board and Managing Vice President,
and Director Director of Scudder, Stevens & Director & Assistant
Clark, Inc. Treasurer
Nicholas Bratt (49)#* President and Director Managing Director of Scudder, --
Stevens & Clark, Inc.
Paul Bancroft III (67) Director Venture Capitalist and Consultant; --
1120 Cheston Lane Retired President, Chief Executive
Queenstown, MD 21658 Officer and Director, Bessemer
Securities Corporation
Thomas J. Devine (70) Director Consultant --
641 Lexington Avenue
New York, NY 10022
Keith R. Fox (43) Director President, Exeter Capital Management --
10 East 53rd Street Corporation
New York, NY 10022
William H. Gleysteen, Jr. Director Consultant; Guest Scholar, Brookings --
(71) Institute
38
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
- ---------------------- ------------------ ---------------------- ----------------
David S. Lee (63)+ *@ Director, Managing Director of Scudder, President, Assistant
Vice President and Stevens & Clark, Inc. Treasurer and Director
Assistant Treasurer
William H. Luers (68) Director President, The Metropolitan Museum --
The Metropolitan of Art (1986 to present)
Museum of Art
1000 Fifth Avenue
New York, NY 10028
Wilson Nolen (70) Director Consultant (1989 to present); --
1120 Fifth Avenue Corporate Vice President, Becton,
New York, NY 10128 Dickinson & Company (manufacturer of
medical and scientific products)
until 1989
Kathryn L. Quirk (44)#@ Director; Vice Managing Director of Scudder, Vice President
President and Stevens & Clark, Inc.
Assistant Secretary
Gordon Shillinglaw (72) Director Professor Emeritus of Accounting, --
196 Villard Avenue Columbia University Graduate School
Hastings-on-Hudson, NY 10706 of Business
Robert G. Stone, Jr. (74) Honorary Director Chairman Emeritus and Director, --
405 Lexington Avenue Kirby Corporation (inland and
New York, NY 10174 offshore marine transportation and
diesel repairs)
Robert W. Lear (80) Honorary Director Executive-in-Residence, --
429 Silvermine Road Visiting Professor,
New Canaan, CT 06840 Columbia University
Graduate School of Business
Elizabeth J. Allan (44) # Vice President Principal of Scudder, Stevens & --
Clark, Inc.
Joyce E. Cornell (53)# Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Carol L. Franklin (44)# Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Edmund B. Games, Jr. (60)+ Vice President Principal of Scudder, Stevens & --
Clark, Inc.
Jerard K. Hartman (64) # Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
39
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
- ---------------------- ------------------ ---------------------- ----------------
Thomas W. Joseph (58)+ Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer &
Assistant Clerk
Thomas F. McDonough (50)+ Vice President and Principal of Scudder, Stevens & Clerk
Secretary Clark, Inc.
Pamela A. McGrath (43)+ Vice President and Managing Director of Scudder, --
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell (52)# Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Richard W. Desmond (61)# Assistant Secretary Vice President of Scudder, Stevens & Vice President
Clark, Inc.
* Messrs. Lee, Bratt, Pierce and Ms. Quirk are considered by the Fund and its counsel to be persons who are
"interested persons" of the Adviser or of the Fund within the meaning of the 1940 Act.
** Unless otherwise stated, all officers and directors have been associated with their respective companies
for more than five years, but not necessarily in the same capacity.
@ Mr. Lee and Ms. Quirk are members of the Executive Committee which may exercise substantially all of the
powers of the Board of Directors when it is not in session.
+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
</TABLE>
As of June 30, 1997, all Directors and officers of the Fund as a group
owned beneficially (as that term is defined under Section 13(d) of the
Securities Exchange Act) less than 1% of the shares of the Fund outstanding on
such date.
As of June 30, 1997, 3,476,330 shares in the aggregate, 6.48% of the
outstanding shares of the Fund, were held in the name of Charles Schwab, c/o
Charles Schwab & Co., Inc., Attn: Mutual Fund Department, 101 Montgomery Street,
San Francisco, CA 94104-4122, who may be deemed to be the beneficial owner of
certain of these shares, but disclaims any beneficial ownership therein.
To the best of the Fund's knowledge, as of June 30, 1997 no person
owned beneficially (as so defined) more than 5% of the Fund's outstanding shares
except as stated above.
The Directors and officers of the Fund also serve in similar capacities
with other Scudder Funds.
REMUNERATION
Responsibilities of the Board--Board and Committee Meetings
The Board of Directors is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with
Scudder, Stevens & Clark, Inc. (the "Adviser"). These "Independent Directors"
have primary responsibility for assuring that each Fund is managed in the best
interests of its shareholders.
The Board of Directors meets at least quarterly to review the
investment performance of the Fund and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
40
<PAGE>
requirements. At least annually, the Independent Directors 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
Directors.
All of the Independent Directors serve on the Committee on Independent
Directors, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Directors from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
The Independent Directors met nineteen times during 1996, including
Board and Committee meetings and meetings to review each Fund's contractual
arrangements as described above. All of the Independent Directors attended 97.4%
of all such meetings.
Compensation of Officers and Directors
The Independent Directors receive the following compensation from
Funds: an annual director's fee of $4,000; a fee of $400 for attendance at each
Board meeting, audit committee meeting, or other meeting held for the purposes
of considering arrangements between the Funds and the Adviser or any affiliate
of the Adviser; $150 for any other committee meeting (although in some cases the
Independent Directors have waived committee meeting fees); and reimbursement of
expenses incurred for travel to and from Board Meetings. No additional
compensation is paid to any Independent Director for travel time to meetings,
attendance at directors' educational seminars or conferences, service on
industry or association committees, participation as speakers at directors'
conferences, service on special trustee task forces or subcommittees or service
as lead or liaison trustee. Independent Directors do not receive any employee
benefits such as pension, retirement or health insurance.
The Independent Directors also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type an complexity
and in some cases have substantially different Director fee schedules. The
following table shows the aggregate compensation received by each Independent
Director during 1996 from the Corporation and from all of Scudder funds as a
group.
<TABLE>
<CAPTION>
Name Scudder International Fund, Inc.* All Scudder Funds
---- --------------------------------- -----------------
<S> <C> <C> <C>
Paul Bancroft III, Director $41,486 $143,358 (16 funds)
Thomas J. Devine, Director $44,086 $156,058 (18 funds)
Keith R. Fox, Director $43,486 $87,508 (10 funds)
William H. Gleysteen, Jr., $44,086 $130,336 (13 funds)
Director
William H. Luers, Director $43,486 $100,486 (11 funds)
Wilson Nolen, Director $45,086 $165,608 (17 funds)
Dr. Gordon Shillinglaw, $45,086 $119,918 (19 funds)
Director
</TABLE>
41
<PAGE>
* Scudder International Fund, Inc. consists of six funds: Scudder
International Fund, Scudder Latin America Fund, Scudder Pacific
Opportunities Fund, Scudder Greater Europe Growth Fund, Scudder Emerging
Markets Growth Fund and Scudder International Growth and Income Fund.
Members of the Board of Directors who are employees of Scudder or its
affiliates receive no direct compensation from the Corporation, although they
are compensated as employees of Scudder, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
DISTRIBUTOR
The Corporation has an underwriting agreement with Scudder Investor
Services, Inc. (the "Distributor"), a Massachusetts corporation, which is a
subsidiary of the Adviser, a Delaware corporation. The Corporation's
underwriting agreement dated September 17, 1992 will remain in effect until
September 30, 1997 and from year to year thereafter only if its continuance is
approved annually by a majority of the members of the Board of Directors who are
not parties to such agreement or interested persons of any such party and either
by vote of a majority of the Board of Directors or a majority of the outstanding
voting securities of the Fund. The underwriting agreement was last approved by
the Directors on September 4-5, 1996.
Under the underwriting agreement, the Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the Commission of its registration statement and prospectus and any
amendments and supplements thereto; the registration and qualification of shares
for sale in the various states, including registering the Fund as a broker or
dealer in various states as required; the fees and expenses of preparing,
printing and mailing prospectuses annually to existing shareholders (see below
for expenses relating to prospectuses paid by the Distributor); notices, proxy
statements, reports or other communications to shareholders of the Fund; the
cost of printing and mailing confirmations of purchases of shares and any
prospectuses accompanying such confirmations; any issuance taxes and/or any
initial transfer taxes; a portion of shareholder toll-free telephone charges and
expenses of shareholder service representatives; the cost of wiring funds for
share purchases and redemptions (unless paid by the shareholder who initiates
the transaction); the cost of printing and postage of business reply envelopes;
and a portion of the cost of computer terminals used by both the Fund and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Fund's
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Fund to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by the Fund, unless a Rule 12b-1 Plan is in effect
which provides that the Fund shall bear some or all of such expenses.
Note: Although the Fund does not currently have a 12b-1 Plan, and the
Directors have no current intention of adopting one, the Fund would
also pay those fees and expenses permitted to be paid or assumed by the
Fund pursuant to a 12b-1 Plan, if any, were adopted by the Fund,
notwithstanding any other provision to the contrary in the underwriting
agreement.
As agent, the Distributor currently offers shares of the Fund on a
continuous basis to investors in all states in which shares of the Fund may from
time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of the Fund.
42
<PAGE>
TAXES
(See "Distribution and performance information -- Dividends and capital
gains distributions" and "Transaction information--Tax information,
Tax identification number" in the Fund's prospectus.)
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, or a predecessor statute and has qualified as
such since its inception. Such qualification does not involve governmental
supervision or management of investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90 percent of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.
The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses) realized during the one-year period ending October
31 during such year, and all ordinary income and capital gains for prior years
that were not previously distributed.
Investment company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of the Fund. Presently, the
Fund has no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a 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.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are not expected to comprise a
substantial part of the Fund's gross income. If any 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 70% deduction for dividends received by
corporations. Shareholders will be informed of the portion of dividends which so
qualify. The dividends-received deduction is reduced to the extent the shares of
the Fund with respect to which the dividends are received are treated as
debt-financed under federal income tax law and is eliminated if either those
shares or the shares of the Fund are deemed to have been held by the Fund or the
shareholders, as the case may be, for less than 46 days.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the Fund
have been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
43
<PAGE>
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares, including exchanges for shares of
another Scudder Fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
An individual may make a deductible IRA contribution of up to $2,000
or, if less, the amount of the individual's earned income for any taxable year
only if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,000 per individual for married couples if only one spouse has earned income)
for that year. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
The Fund intends to qualify for and may make the election permitted
under Section 853 of the Code so that shareholders may (subject to limitations)
be able to claim a credit or deduction on their federal income tax returns for,
and will be required to treat as part of the amounts distributed to them, their
pro rata portion of qualified taxes paid by the Fund to foreign countries (which
taxes relate primarily to investment income). The Fund may make an election
under Section 853 of the Code, provided that more than 50% of the value of the
total assets of the Fund at the close of the taxable year consists of securities
in foreign corporations. The foreign tax credit available to shareholders is
subject to certain limitations imposed by the Code.
If the Fund does not make the election permitted under section 853 any
foreign taxes paid or accrued will represent an expense to the Fund which will
reduce its investment company taxable income. Absent this election, shareholders
will not be able to claim either a credit or a deduction for their pro rata
portion of such taxes paid by the Fund, nor will shareholders be required to
treat as part of the amounts distributed to them their pro rata portion of such
taxes paid.
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 any stock in the Fund's portfolio similar to the stocks on which the
index is based. If the Fund writes an option, no gain is recognized upon its
receipt of a premium. If the option lapses or is closed out, any gain or loss is
treated as short-term capital gain or loss. If a call 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
44
<PAGE>
long-term capital losses. An exception to these straddle rules exists for
certain "qualified covered call options" on stock written by the Fund.
Many futures and forward contracts entered into by the Fund and listed
nonequity options written or purchased by the Fund (including options on debt
securities, options on futures contracts, options on securities indices and
options on currencies), will be governed by Section 1256 of the Code. Absent a
tax election to the contrary, gain or loss attributable to the lapse, exercise
or closing out of any such position generally will be treated as 60% long-term
and 40% short-term, and on the last trading day of the Fund's fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e., treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts, certain futures and options and
similar financial instruments entered into or acquired by the Fund will be
treated as ordinary income or loss.
Subchapter M of the Code requires the Fund to realize less than 30% of
its annual gross income from the sale or other disposition of stock, securities
and certain options, futures and forward contracts held for less than three
months. The Fund's options, futures and forward transactions may increase the
amount of gains realized by the Fund that are subject to this 30% limitation.
Accordingly, the amount of such transactions that the Fund may undertake may be
limited.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain options, futures
and forward contracts, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
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.
Proposed regulations have been issued which may allow the Fund to make
an election to mark to market its shares of these foreign investment companies
in lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Fund would report as ordinary
income the amount by which the fair market value of the foreign company's stock
exceeds the Fund's adjusted basis in these shares. No mark to market losses
would be recognized. The effect of the election would be to treat excess
distributions and gain on dispositions as ordinary income which is not subject
to a fund level tax when distributed to shareholders as a dividend.
Alternatively, the 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.
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.
The Fund will be required to report to the IRS all distributions of
investment company taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. Under the backup withholding provisions of Section 3406 of
the Code, distributions of investment company taxable income and capital gains
45
<PAGE>
and proceeds from the redemption or exchange of the shares of a regulated
investment company may be subject to withholding of federal income tax at the
rate of 31% in the case of non-exempt shareholders who fail to furnish the
investment company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law.
Withholding may also be required if a Fund is notified by the IRS or a broker
that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of 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.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
To the maximum extent feasible, the Adviser places orders for portfolio
transactions for the Fund through the Distributor which in turn places orders on
behalf of the Fund with issuers, underwriters or other brokers and dealers. The
Distributor receives no commissions, fees or other remuneration from the Fund
for this service. Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund's portfolio is to obtain the most favorable
net results taking into account such factors as price, commission where
applicable (negotiable in the case of U.S. national securities exchange
transactions but generally fixed in the case of foreign exchange transactions)
size of order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the 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.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply market quotations to the Custodian for appraisal
purposes, or who supply research, market and statistical information to the
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, and the availability of securities or purchasers or sellers
of securities; and analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. The Adviser is not authorized when placing portfolio transactions
for the Fund to pay a brokerage commission (to the extent applicable) in excess
of that which another broker might have charged for executing the same
transaction solely on account of the receipt of research, market or statistical
information. The Adviser will not place orders with brokers or dealers on the
basis that the broker or dealer has or has not sold shares of the Fund. Except
for implementing the policy stated above, there is no intention to place
portfolio transactions with particular brokers or dealers or groups thereof. In
effecting transactions in over-the-counter securities, orders are placed with
the principal market makers for the security being traded unless, after
exercising care, it appears that more favorable results are available otherwise.
46
<PAGE>
Although certain research, market and statistical information from
brokers and dealers can be useful to the Fund and to the Adviser, it is the
opinion of the Adviser that such information will only supplement the Adviser's
own research effort since the information must still be analyzed, weighed, and
reviewed by the Adviser's staff. Such information may be useful to the Adviser
in providing services to clients other than the Fund, and not all such
information will be used by the Adviser in connection with the Fund. Conversely,
such information provided to the Adviser by brokers and dealers through whom
other clients of the Adviser effect securities transactions may be useful to the
Adviser in providing services to the Fund.
The Directors intend to review 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. Within
the past three years no such recapture has been effected.
In the fiscal years ended March 31, 1997, 1996 and 1995, the Fund paid
brokerage commissions of $5,275,727, $7,301,706 and $5,463,019, respectively.
For the fiscal year ended March 31, 1997, $4,915,740 (93%) of the total
brokerage commissions paid by the Fund resulted from orders for transactions,
placed consistent with the policy of seeking to obtain the most favorable net
results, with brokers and dealers who provided supplementary research, market
and statistical information to the Fund or the Adviser. The amount of such
transactions aggregated $1,688,398,843 (92% of all brokerage transactions). The
balance of such brokerage was not allocated to particular broker or dealer with
regard to the above-mentioned or other special factors.
Portfolio Turnover
The Fund's average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. The Fund's
portfolio turnover rates for the fiscal years ended March 31, 1997 and 1996 were
35.8% and 45.2%, respectively. Purchases and sales are made for the Fund's
portfolio whenever necessary, in management's opinion, to meet the Fund's
objective.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share is determined by dividing
the value of the total assets of the Fund, less all liabilities, by the total
number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the Nasdaq
Stock Market ("Nasdaq") is valued at its most recent sale price. Lacking any
sales, the security is valued at the most recent bid quotation. The value of an
equity security not quoted on the Nasdaq System, but traded in another
over-the-counter market, is its most recent sale price. Lacking any sales, the
security is valued at the Calculated Mean. Lacking a Calculated Mean, the
security is valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
purchased with remaining maturities of sixty days or less shall be valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the 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
47
<PAGE>
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Fund included in the prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been so included or incorporated by reference in reliance on
the report of Coopers & Lybrand 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.
Other Information
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Fund. These transactions will reflect investment
decisions made by the Adviser in the light of its other portfolio holdings and
tax considerations and should not be construed as recommendations for similar
action by other investors.
The CUSIP number of the Fund is 811165-10-9.
The Fund has a fiscal year end of March 31.
The Fund employs Brown Brothers Harriman and Company, 40 Water Street,
Boston, Massachusetts 02109 as Custodian for the Fund.
The law firm of Dechert Price & Rhoads is counsel to the Fund.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts, 02107-2291, a subsidiary of the Adviser, is the transfer
and dividend disbursing agent for the Fund. Service Corporation also serves as
shareholder service agent and provides subaccounting and recordkeeping services
for shareholder accounts in certain retirement and employee benefit plans. The
Fund pays Service Corporation an annual fee of $26.00 for each retail account
and $29.00 for each retirement account. Included in services to shareholders was
$3,050,321 charged to the Fund by Scudder Service Corporation during the fiscal
year ended March 31, 1997, of which $296,627 was unpaid at March 31, 1997.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net asset value
for the Fund. The Fund pays Scudder Fund Accounting Corporation an annual fee
equal to 0.065% of the first $150 million of average daily net assets, 0.040% of
such assets in excess of $150 million, 0.020% of such assets in excess of $1
billion, plus holding and transaction charges for this service. For the year
48
<PAGE>
ended March 31, 1997, Scudder Fund Accounting Corporation's fee aggregated
$795,122, of which $65,991 was unpaid at March 31, 1997.
Scudder Trust Company, an affiliate of the Adviser, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Annual service fees are paid by the Fund
to Scudder Trust Company, Two International Place, Boston, Massachusetts
02110-4103, an affiliate of the Adviser, for such accounts. The Fund pays
Scudder Trust Company an annual fee of $17.55 per shareholder account. The Fund
incurred fees of $930,582, $520,034 and $351,249 during the fiscal years ended
March 31, 1997, 1996 and 1995, respectively, of which $111,209 was unpaid at
March 31, 1997 for the fiscal year ended March 31, 1997.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Fund has
filed with the Commission under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further information with respect
to the Fund and the securities offered hereby. This Registration Statement and
its amendments are available for inspection by the public at the Commission in
Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio of the
Fund, together with the Report of Independent Accountants, Financial Highlights
and notes to financial statements in the Annual Report to the Shareholders of
the Fund dated March 31, 1997 are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information by
reference in its entirety.
49
<PAGE>
APPENDIX
The following is a description of the ratings given by Moody's and S&P
to corporate bonds.
Ratings of Corporate Bonds
S&P: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating. The rating CC typically is applied to debt subordinated
to senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Bonds
which are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities. Bonds which are rated
A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a susceptibility
to impairment sometime in the future.
<PAGE>
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
Scudder
International
Fund
Annual Report
March 31, 1997
Pure No-Load(TM) Funds
A fund offering opportunities for long-term growth of capital primarily from
foreign equity securities.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER
<PAGE>
Table of Contents
2 In Brief
3 Letter from the Fund's Chairman
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
10 Investment Portfolio
16 Financial Statements
19 Financial Highlights
20 Notes to Financial Statements
24 Report of Independent Accountants
25 Tax Information
28 Officers and Directors
29 Investment Products and Services
30 Scudder Solutions
In Brief
o For the fiscal year ended March 31, 1997, Scudder International Fund provided
a total return of 10.74%, comparing very favorably to the unmanaged MSCI EAFE
plus Canada Index as world equity markets provided mixed performance over the
period.
o We continue to see many investment opportunities in Europe, where the Fund is
focusing on companies which are restructuring to build value for their
shareholders.
o Valuations in Japan have become more favorable, and Fund holdings there are
tilted toward globally competitive technology exporters positioned to benefit
from a weak yen.
o Morningstar assigned the Fund an overall 4-star rating for its risk-adjusted
performance among 939 international equity funds as of March 31, 1997.*
* Morningstar ratings are subject to change monthly and are calculated from the
Fund's three-, five-, and ten-year average annual returns in excess of 90-day
Treasury bill returns with appropriate fee adjustments, and a risk factor that
reflects Fund performance below 90-day T-bill returns. In an investment
category, 10% of funds receive 5 stars and the next 22.5% receive 4 stars. In
the international equity category, the Fund received a 4-star rating for the
three-, five-, and ten-year periods, among 478, 219, and 79 Funds,
respectively. Past performance is no guarantee of future results.
2 - SCUDDER INTERNATIONAL FUND
<PAGE>
Letter From the Fund's Chairman
Dear Shareholders,
We are pleased to present the annual report for Scudder International Fund
for the fiscal year ended March 31, 1997. As outlined in the portfolio
management discussion that follows, the Fund provided a strong total return over
the period of 10.74%. Economic reforms, corporate restructurings, and improving
growth prospects are providing a favorable backdrop in many non-U.S. investment
venues. We believe Scudder International Fund remains an attractive alternative
for investors seeking broad-based exposure to the opportunities for capital
appreciation to be found in overseas equity markets.
We are also pleased with the recognition that the Scudder Fund family has
recently received from Morningstar. This fund rating service recently ranked the
Scudder Family of Funds in the top 4 among 20 leading mutual fund companies for
stability in management and conformity to investment style.* According to
Morningstar, these attributes "... can be hard to come by in the fund industry.
In fact, investors can't be sure who'll sign next quarter's shareholder letter,
or that this month's large-cap growth fund will still be a large-cap growth fund
next month. But a few fund families have done a better job than most at
retaining talent and keeping their funds predictable." We will seek to maintain
this track record of consistent management.
For those of you who are interested in new products and services, we
recently introduced the Scudder Pathway Series. Pathway simplifies investing
through the "fund of funds" approach offering four distinct portfolios:
Conservative, Balanced, Growth, and International. Each portfolio invests in a
select mix of Scudder Funds, providing flexibility, diversification, and
simplicity for regular and retirement plan investors. For more complete
information on Scudder products and services, please turn to page 29.
Thank you for your continued investment in Scudder International Fund. If
you have questions about your account, please call our Investor Relations
representatives at 1-800-225-2470; they will be happy to assist you. You can
also obtain information by visiting our Internet web site at
http://funds.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
Chairman,
Scudder International Fund
* Morningstar Investor, February 1997
3 - SCUDDER INTERNATIONAL FUND
<PAGE>
PERFORMANCE UPDATE as of March 31, 1997
- ----------------------------------------------------------------
Fund Index Comparisons
- ----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/97 $10,000 Cumulative Annual
- --------------------------------------------
Scudder International Fund
- --------------------------------------------
1 Year $ 11,074 10.74% 10.74%
5 Year $ 17,322 73.22% 11.61%
10 Year $ 23,456 134.56% 8.90%
- --------------------------------------------
MSCI EAFE & Canada Index
- --------------------------------------------
1 Year $ 10,212 2.12% 2.12%
5 Year $ 16,493 64.93% 10.52%
10 Year $ 17,935 79.35% 6.01%
- --------------------------------------------
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
SCUDDER INTERNATIONAL FUND
Year Amount
- ----------------------
87 $10,000
88 $ 9,953
89 $11,379
90 $13,323
91 $13,517
92 $13,541
93 $14,776
94 $18,129
95 $17,763
96 $21,181
97 $23,456
MSCI EAFE & CANADA INDEX
Year Amount
- ----------------------
87 $10,000
88 $11,560
89 $12,907
90 $11,503
91 $11,784
92 $10,874
93 $12,068
94 $14,710
95 $15,593
96 $17,563
97 $17,935
Yearly periods ended March 31
The Morgan Stanley Capital International (MSCI) Europe, Australia, the Far
East (EAFE) & Canada Index is an unmanaged capitalization-weighted measure of
stock markets in Europe, Australia, the Far East and Canada. Index returns
assume dividends reinvested net of withholding tax and, unlike Fund returns, do
not reflect any fees or expenses.
- -----------------------------------------------------------------
Returns and Per Share Information
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly Periods Ended March 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------------------------------------------------------------------------------------------------
NET ASSET VALUE... $ 33.43 $ 34.79 $ 37.00 $ 34.69 $ 34.36 $ 35.69 $ 42.96 $ 39.72 $ 45.71 $ 48.07
INCOME DIVIDENDS.. $ .82 $ .13 $ .43 $ .74 $ - $ .83 $ .69 $ - $ .40 $ 1.28
CAPITAL GAINS
DISTRIBUTIONS..... $ 9.39 $ 3.06 $ 3.15 $ 1.98 $ .40 $ .86 $ .09 $ 2.42 $ 1.18 $ 1.19
FUND TOTAL
RETURN (%)........ -.47 14.34 17.08 1.46 .18 9.12 22.69 -2.02 19.25 10.74
INDEX TOTAL
RETURN (%)........ 15.60 11.64 -10.87 2.44 -7.73 10.99 21.87 6.02 12.62 2.12
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return and
principal value will fluctuate, so an investor's shares, when redeemed, may be
worth more or less than when purchased.
4 - SCUDDER INTERNATIONAL FUND
<PAGE>
PORTFOLIO SUMMARY as of March 31, 1997
- ---------------------------------------------------------------------------
Geographical
(Excludes 7% Cash Equivalents)
- ---------------------------------------------------------------------------
Europe 61%
Japan 15%
Pacific Basin 13%
Latin America 9%
Canada 2%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
The portfolio is overweighted in
Europe, where we see many
opportunities, at the expense of
Japan.
- --------------------------------------------------------------------------
Sectors
(Excludes 7% Cash Equivalents)
- --------------------------------------------------------------------------
Manufacturing 24%
Financial 14%
Durables 8%
Utilities 7%
Communications 6%
Energy 6%
Health 6%
Service Industries 5%
Media 4%
Other 20%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Many overseas manufacturing and
financial companies are
beneficiaries of corporate
restructuring and economic reform.
- --------------------------------------------------------------------------
Ten Largest Equity Holdings
(14% of Portfolio)
- --------------------------------------------------------------------------
1. TELECOMUNICACOES BRASILEIRAS S.A.
Telecommunication services
2. AEGON INSURANCE GROUP NV
Insurance company
3. BAYER AG CHEMICAL PRODUCER
4. ZENECA GROUP PLC
Pharmaceuticals and agrochemicals
holding company
5. L.M. ERICSSON TELEPHONE CO.
Manufacturer of cellular telephone
equipment
6. SMITHKLINE BEECHAM PLC
Maker of ethical drugs and healthcare products
7. VEBA AG
Electric utility, oil and chemical distributor
8. CENTRAIS ELECTRICAS BRASILEIRAS S/A
Electric Utility
9. DAIMLER-BENZ AG
Automobile and truck manufacturer
10. BRITISH PETROLEUM PLC
International petroleum company
Top holdings include Brazilian
telecommunications and utility
companies in the process of
being privatized.
- -----------------------------------------------------------------------------
For more complete details about the Fund's investment portfolio, see page
10. A monthly Investment Portfolio Summary and quarterly Portfolio Holdings are
available upon request.
5 - SCUDDER INTERNATIONAL FUND
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
For the fiscal year ended March 31, 1997, Scudder International Fund provided a
strong total return of 10.74%. The Fund's performance over the period compares
very favorably to the 2.12% return of the unmanaged MSCI Europe, Australia, and
Far East plus Canada Index, the Fund's benchmark.
European Equities Lead Major
Markets
The period covered by this report saw mixed performance in the world equity
markets. Japanese equities remained under pressure for much of the period, as
problems in the banking sector, lackluster growth, the selling of
cross-holdings, and the absence of domestic retail investors continued to create
uncertainty. Weakness in Japan was offset by strong performance from most
European markets. Fund performance relative to the benchmark MSCI index
benefited over the period from an overweighting of Europe at the expense of
Japan. European and Japanese holdings stood at 61% and 15% of equity assets,
respectively, as of March 31.
The developments fueling stock prices in Continental Europe were both cyclical
and structural. While European fiscal policy remains tight in advance of the
Maastricht deadline, falling interest rates and weaker currencies are providing
slightly higher-than-expected growth. Ongoing corporate restructuring provided
an additional impetus and was reflected in strong performance from core markets
such as Germany and France. Smaller European markets fared best led by Finland,
where equities were driven up by falling interest rates and excellent
performance from Nokia, a portfolio holding and substantial part of that
country's market. Despite uncertainty in the first quarter of 1997 over European
Monetary Union (EMU), peripheral markets Spain and Portugal turned in excellent
performance over the 12-month period, supported by falling interest rates and
the expectation that these countries would form part of the first round of EMU.
Emerging markets were mixed, as most Asian countries faltered. Korea and
Thailand were particularly hard hit by problems in the banking sector. Hong
Kong's market, after excellent performance in 1996, became unsettled in the
first quarter of 1997 by an upward trend in U.S. interest rates, local
government moves to dampen the property market, and renewed uncertainty over the
upcoming transition to Chinese sovereignty. Brazil continued to deliver
spectacular returns, propelled by positive news on deregulation and economic
reform.
Economic Reforms, Improved Growth Brighten Investment Outlook
Europe today offers investors a number of opportunities and challenges. From a
cyclical standpoint, the combination of low interest rates and weakening
currencies is leading to upward revisions in economic growth and corporate
earnings forecasts. In addition, there are important structural changes taking
place which we believe should have long term benefits to shareholders in
European companies. Long-standing political and economic structures are losing
viability due to the pressure of global competition, aging dependent
6 - SCUDDER INTERNATIONAL FUND
<PAGE>
populations, and the limits of fiscal support. There is widespread recognition
of the imperative to change -- to deregulate, to privatize, to reduce labor
costs, to cut social welfare spending. It will not be an easy evolution and
investors may be shaken by transitional jitters from time to time, but the
potential rewards are exciting.
The last 12 months marked an important transition point in the development of an
equity culture in Continental Europe, as governments pushed ahead with the
privatization process. The flotation of Deutsche Telecom in late 1996 was a
signal event as the largest single privatization in European stock market
history. While the German equity market is among the larger European markets, it
is still underdeveloped by international standards. The Deutsche Telecom issue
was widely publicized by the government and attracted broad domestic interest.
Given the success of the offering, German investors may well be encouraged to
consider placing more of their large savings in equities. Elsewhere, the very
successful privatization of the final government stake in Telefonica de Espana
was recently heralded as the arrival of popular capitalism in Spain, with demand
from domestic retail investors far exceeding supply. Emerging market Portugal
has made remarkable strides towards the European mainstream, with a virtual
doubling of its market capitalization over a four-year period through the
privatization process.
In Japan, a falling currency and low interest rates provided critical support
for an economy faced with an increase in the consumption tax and ongoing
problems in the banking system. Japanese authorities have announced additional
measures to deregulate the economy and financial system, most notably plans to
remove restrictions on foreign exchange. Economic recovery is forecast for 1997
with an acceleration of growth for 1998. Corporate earnings should improve in a
more positive growth environment, with a weaker yen and historically low
interest rates providing additional impetus.
The Japanese market is undergoing a secular transition to a valuation structure
more in keeping with global standards. While the transition may be a slow one, a
greater focus on international accounting standards together with increased
consolidation of disclosure from fiscal 1998 forward should bring Japanese
corporate accounting closer to that of its global peers. Though deregulation and
reform are ongoing and are as important to Japan as to Europe, Japan's pace
today is slower and there is further to go.
Smaller Asian equity markets have suffered in recent years as a combination of
cyclical forces have slowed growth: restrictive Asian central bank policy,
economic weakness in the major export markets of Europe and Japan, and a plunge
in the electronics and textile sectors. Looking forward, the outlook varies by
market. Thailand and Korea face banking and structural adjustments, while Hong
Kong has the special issue of the transition to Chinese sovereignty. In general,
though, valuations reflect these uncertainties.
7 - SCUDDER INTERNATIONAL FUND
<PAGE>
Focus on European
Restructuring Beneficiaries,
Japanese Global Competitors
In Europe, we have emphasized companies which are restructuring and focusing on
building value for shareholders, such as Daimler Benz in Germany and Alcatel
Alsthom and Generale des Eaux in France. The restructuring theme is also evident
in the purchase of VW, which is realizing substantial cost savings by trimming
production platforms from 16 to four. We are also positioned in European
companies with effective strategies and products in growth markets. These
include telecommunication infrastructure provider Nokia in Finland and
information technology leader SAP in Germany. A focus on telecommunications
stocks in Southern Europe, where restructuring, improved financials, and
developing market opportunities have had a positive impact on the bottom line,
has been rewarded by excellent stock performance from holdings in Portugal
Telecom, Telecom Italia Mobile, and Telefonica de Espana.
Industry consolidation is another theme central to the portfolio. Pharmaceutical
holdings Schering, Novartis, Zeneca, and SmithKline Beecham have benefited from
merger activity designed to cut costs and to achieve economies of scale in view
of global competition. With the German banking sector undergoing fundamental
structural change driven by deregulation, technology, and increasing foreign
competition, we have taken positions in Commerzbank and Bayerische Vereinsbank,
companies we perceive as likely winners in this sector.
Valuations in Japan have become more favorable, but there remains a dichotomy
between those companies which have not moved beyond the local economy and those
companies which are successful global competitors. We have maintained a
portfolio tilt toward high quality technology exporters such as Sony, Canon and
Hitachi. We believe that share prices in this group do not fully reflect the
increasingly competitive position of these global companies arising from a weak
yen, the recovery in semiconductors, and new products. Honda Motors turned in
excellent performance over the period as a result of strong demand at home and
abroad, including a booming recreational vehicle market. Bridgestone has a
strong global position in tires and is a beneficiary of growing demand for cars
in Asia. Among domestically-oriented holdings in Japan, telecommunications
company DDI is benefiting from high traffic growth in mobile and data
communications, has a relatively low investment burden, and is attractively
valued by global standards.
Turning to less-developed investment venues, while improving profitability
combined with attractive stock valuations following three years of market
stagnation may lead to a rebound in selected markets, we remain generally
cautious on the smaller bourses in the Pacific Rim. However, despite weakness in
the region, several of our holdings turned in excellent performance over the
period. Positions such as China Development and Far Eastern Department Store in
Taiwan were amply rewarded as the Taiwanese market bucked the regional trend,
helped by easier liquidity, relaxed criteria for government pension plan
investments, and expectations for stronger growth. In Hong Kong, market jitters
8 - SCUDDER INTERNATIONAL FUND
<PAGE>
were offset in the portfolio by positive stock selection.
Brazil remains our preferred market in Latin America, as lower inflation and
ongoing deregulation have translated into spectacular share price performance.
Our focus in Brazil has largely been on a small number of government-controlled
companies which are in the process of being restructured prior to their eventual
privatization: telecommunications company Telebras, utility Electrobras, and oil
company Petrobras. Though we remain cautious on the broader Mexican market, our
one position there, Telmex, has performed well. When purchased, the company was
one of the few value stories in a market dominated by growth stocks. Telmex has
the potential for aggressive cost cutting and is using its large cash reserves
to repurchase shares.
Going forward, we will continue to seek opportunities presented by the
structural changes well underway in Europe, globally competitive companies in
Japan, and select emerging markets. We believe Scudder International Fund
remains an appropriate vehicle for investors seeking valuable exposure to
overseas equity markets, and we thank you for your continued investment.
Sincerely,
Your Portfolio Management Team
/s/Carol L. Franklin /s/Nicholas Bratt
Carol L. Franklin Nicholas Bratt
/s/Irene T. Cheng /s/Joan R. Gregory
Irene T. Cheng Joan R. Gregory
/s/Francisco S. Rodrigo III
Francisco S. Rodrigo III
Scudder International Fund:
A Team Approach to Investing
Scudder International Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management
process. Team members work together to develop investment strategies and
select securities for the Fund's portfolio. They are supported by Scudder's
large staff of economists, research analysts, traders, and other investment
specialists who work in Scudder's offices across the United States and abroad.
Lead Portfolio Manager Carol L. Franklin joined Scudder International Fund's
portfolio management team in 1986 and has been responsible for setting the
Fund's investment strategy and overseeing security selection since 1992.
Carol, who has 19 years of experience in finance and investing, joined Scudder
in 1981. Nicholas Bratt, portfolio manager, directs Scudder's overall global
equity investment strategies. Nick joined Scudder and the team in 1976. Irene
T. Cheng joined Scudder and the team in 1993 as a portfolio manager, and has
12 years of experience in finance and investing. Joan R. Gregory, portfolio
manager, focuses on stock selection, a role she has played since she joined
Scudder in 1992. Joan, who joined the team in 1994, has been involved with
investment in global and international stocks since 1989. Francisco S. Rodrigo
III, portfolio manager, joined Scudder and the team in 1994. Francisco has
been involved with investment in global and international stocks and bonds as
a portfolio manager and analyst since 1989.
9 - SCUDDER INTERNATIONAL FUND
<PAGE>
<PAGE>
Investment Portfolio as of March 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount (c) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements 1.5%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 3/31/97 at 6.375%, to be repurchased at
$38,943,895 on 4/1/97, collateralized by a
$39,800,000 U.S. Treasury
----------
Note, 6.375%, 3/31/01 (Cost $38,937,000) ........................................... 38,937,000 38,937,000
----------
Commercial Paper 5.7%
- ------------------------------------------------------------------------------------------------------------------------------
Deutsche Bank Financial Inc. Discount Note, 4/2/97 ................................... 20,000,000 19,996,822
Dresdner US Finance Inc. Discount Note, 4/3/97 ....................................... 15,000,000 14,995,508
Ford Motor Credit Co. Discount Note, 4/2/97 .......................................... 17,000,000 16,997,497
General Electric Capital Corp. Discount Note, 4/3/97 ................................. 45,000,000 44,986,717
Sun Trust Bank Discount Note, 4/3/97 ................................................. 20,000,000 19,993,744
Texaco Inc. Discount Note, 4/2/97 .................................................... 30,000,000 29,995,600
- ------------------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost $146,965,888) 146,965,888
- ------------------------------------------------------------------------------------------------------------------------------
Convertible Bonds 0.8%
- ------------------------------------------------------------------------------------------------------------------------------
Japan 0.5%
Softbank Corp., 0.5%, 3/29/02 .................................................. JPY 1,500,000,000 12,929,571
----------
Malaysia 0.0%
Renong Berhad ICULS, 4%, 5/21/01 ............................................... MYR 1,620,000 666,761
----------
Philippines 0.3%
International Container Terminal, Inc., 1.75%, 3/13/04 ......................... 7,515,000 7,477,425
- ------------------------------------------------------------------------------------------------------------------------------
Total Convertible Bonds (Cost $23,114,612) 21,073,757
- ------------------------------------------------------------------------------------------------------------------------------
Shares
==============================================================================================================================
Common Stocks 92.0%
- ------------------------------------------------------------------------------------------------------------------------------
Argentina 0.8%
YPF S.A. "D" (ADR) (Petroleum company) ............................................... 785,000 20,802,500
----------
Australia 1.1%
National Australia Bank, Ltd. (Commercial bank) ...................................... 1,141,784 14,455,885
Woodside Petroleum Ltd. (Major oil and gas producer) ................................. 1,814,600 13,363,484
----------
27,819,369
----------
Brazil 6.9%
Centrais Eletricas Brasileiras S/A "B" (pfd.) (Electric utility) ..................... 81,586,227 35,122,322
Companhia Energetica de Minas Gerais (pfd.) (Electric power utility) ................. 673,000,000 27,701,487
Companhia Vale do Rio Doce (pfd.) (Diverse mining and industrial complex) ............ 710,000 16,187,397
Petroleo Brasileiro S/A (pfd.) (Petroleum company) ................................... 139,000,000 27,622,846
Telecomunicacoes Brasileiras S.A. (pfd.) (Telecommunication services) ................ 420,000,000 43,457,163
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 -- SCUDDER INTERNATIONAL FUND
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Usinas Siderurgicas de Minas Gerais S/A (pfd.) (Non-coated flat
products and electrolytic galvanized products) ...................................... 24,700,000,000 27,748,879
-----------
177,840,094
-----------
Canada 1.8%
Canadian National Railway Co. (Railroad operator) .................................... 670,000 23,737,585
Canadian Pacific Ltd. (Transportation and natural resource conglomerate) ............. 225,000 5,400,000
Canadian Pacific Ltd. (Ord.) ......................................................... 711,914 16,995,030
-----------
46,132,615
-----------
Finland 1.2%
Nokia AB Oy "A" (Leading manufacturer of telecommunications equipment and
cellular telephones) ............................................................... 515,000 30,772,580
-----------
France 9.1%
AXA SA (Insurance group providing insurance, finance and real estate services) ....... 302,857 20,082,583
Alcatel Alsthom (Manufacturer of transportation,
telecommunication and energy equipment) ............................................. 107,700 13,005,717
Carrefour (Hypermarket operator and food retailer) ................................... 55,800 34,695,485
Compagnie Financiere de Paribas (Finance and investment company) ..................... 309,814 21,614,417
Compagnie Generale des Eaux (Water utility) .......................................... 120,000 16,350,521
Lafarge SA (Producer of cement, concrete and aggregates) ............................. 220,000 15,274,023
Pinault-Printemps, SA (Distributor of consumer goods) ................................ 50,000 21,551,340
Rhone-Poulenc SA "A" (Medical, agricultural and consumer chemicals) .................. 681,912 23,112,985
Schneider SA (Manufacturer of electronic components and automated
manufacturing systems) .............................................................. 528,223 30,294,382
Total SA "B" (International oil and gas exploration, development and production) ..... 363,336 31,509,181
Valeo SA (Automobile and truck components manufacturer) .............................. 122,399 8,244,955
-----------
235,735,589
-----------
Germany 13.3%
BASF AG (Leading international chemical producer) .................................... 771,000 29,120,504
Bayer AG (Leading chemical producer) ................................................. 905,000 37,654,077
Bayerische Vereinsbank AG (Commercial bank) .......................................... 550,000 22,784,772
Commerzbank AG* (Worldwide multi-service bank) ....................................... 808,400 23,263,309
Daimler-Benz AG (Automobile and truck manufacturer) .................................. 437,000 34,949,520
Hoechst AG (Chemical producer) ....................................................... 804,000 32,560,072
Mannesmann AG (Bearer) (Diversified construction and technology company) ............. 83,762 32,038,463
RWE AG (pfd.) (Producer and marketer of petroleum and chemical products) ............. 846,100 30,536,703
SAP AG (pfd.) (Computer software manufacturer) ....................................... 113,000 19,375,300
Schering AG (Pharmaceutical and chemical producer) ................................... 243,000 24,518,525
VEBA AG (Electric utility, distributor of oil and chemicals) ......................... 621,500 35,192,251
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 -- SCUDDER INTERNATIONAL FUND
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Volkswagen AG* (Leading automobile manufacturer) ..................................... 39,550 21,861,571
-----------
343,855,067
-----------
Hong Kong 5.7%
First Pacific Co., Ltd. (International management and investment company) ............ 14,387,681 18,289,346
Great Eagle Holdings Ltd. (Property development) ..................................... 2,886,000 9,534,709
Guoco Group Ltd. (Investment holding company) ........................................ 516,000 2,550,467
HSBC Holdings Ltd. (Bank) ............................................................ 1,223,831 28,350,261
Hong Kong & China Gas Co., Ltd. (Gas utility) ........................................ 9,734,408 18,278,632
Hong Kong & China Gas Co., Ltd. Warrants* ............................................ 1,027,867 464,276
Hutchison Whampoa, Ltd. (Container terminal and real estate company) ................. 3,838,584 28,979,979
Kerry Properties Ltd. (Real estate company) .......................................... 8,352,000 18,539,161
Television Broadcasts, Ltd. (Television broadcasting) ................................ 5,810,000 23,618,801
-----------
148,605,632
-----------
Hungary 0.1%
First Hungary Fund (Investment company) (b) .......................................... 3,619 3,365,670
-----------
Indonesia 1.3%
Asia Pacific Resources International Holdings Ltd.* (Manufacturer of rayon
fiber for Asian textile markets, owner of world's leading paper pulp mill) .......... 126,600 609,263
Asia Pulp & Paper Co., Ltd.* (ADR) (Producer of pulp and paper) ...................... 853,495 8,855,011
HM Sampoerna (Foreign registered) (Tobacco company) .................................. 2,400,000 11,245,314
Indah Kiat Pulp & Paper (Foreign registered) (Producer of pulp and paper) ............ 9,056,893 6,695,537
Indah Kiat Pulp & Paper Warrants* .................................................... 822,101 256,800
Pabrik Kertas Tjiwi Kimia (Operator of pulp and paper factory) ....................... 5,800,240 5,797,824
-----------
33,459,749
-----------
Italy 1.3%
Telecom Italia Mobile SpA (Ord.) (Cellular telecommunication services) ............... 11,850,000 34,116,059
-----------
Japan 13.2%
Bridgestone Corp. (Leading automobile tire manufacturer) ............................. 1,505,000 28,233,201
Canon Inc. (Leading producer of visual image and information equipment) .............. 1,488,000 31,884,855
DDI Corp. (Long distance telephone and cellular operator) ............................ 2,975 18,787,701
Hitachi Ltd. (General electronics manufacturer) ...................................... 2,981,000 26,514,919
Honda Motor Co., Ltd. (Leading automobile and motorcycle manufacturer) ............... 712,000 21,244,279
Jusco Co., Ltd. (Major supermarket operator) ......................................... 662,000 18,200,049
Keyence Corp. (Specialized manufacturer of sensors) .................................. 239,800 27,340,341
Kokuyo (Leading manufacturer of paper stationery) .................................... 580,000 12,662,731
Mabuchi Motor Co., Ltd. (Manufacturer of DC motors) .................................. 80,300 3,954,290
Matsushita Electric Industrial Co., Ltd.
(Leading manufacturer of consumer electronic products) .............................. 2,096,000 32,710,277
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 -- SCUDDER INTERNATIONAL FUND
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Matsushita Electric Works, Inc. (Leading maker of
building materials and lighting equipment) .......................................... 1,400,000 12,792,108
Nichiei Co., Ltd. (Finance company for small- and medium-sized firms) ................ 255,500 19,833,428
Pioneer Electronics Corp. (Leading manufacturer of audio equipment) .................. 750,000 12,250,344
Ricoh Co., Ltd. (Leading maker of copiers and information equipment) ................. 2,130,000 24,284,790
Shiseido Co., Ltd. (Leading cosmetic producer) ....................................... 467,000 6,041,886
Sony Corp. (Consumer electronic products manufacturer) ............................... 366,400 25,627,557
Sumitomo Metal Industries, Ltd. (Leading integrated crude steel producer) ............ 7,650,000 17,320,288
Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and
copper mining company) .............................................................. 480,000 2,899,329
-----------
342,582,373
-----------
Korea 0.3%
Pohang Iron & Steel Co., Ltd. (Leading steel producer) (b) ........................... 7,030 439,856
Pohang Iron & Steel Co., Ltd. (ADR) .................................................. 292,900 6,956,375
-----------
7,396,231
-----------
Malaysia 1.4%
Malayan Banking Berhad (Leading banking and financial services group) ................ 1,350,000 15,388,883
Malaysian Airline System Berhad* (Air transportation and related services) ........... 2,481,000 6,607,324
Renong Berhad (Holding company involved in engineering, construction,
financial services, telecommunication and information technology) ................... 8,100,000 13,727,429
-----------
35,723,636
-----------
Mexico 0.6%
Telefonos de Mexico S.A. de C.V. "L" (ADR) (Telecommunication services) .............. 375,000 14,437,500
-----------
Netherlands 5.6%
AEGON Insurance Group NV (Insurance company) ......................................... 537,500 37,859,580
Akzo-Nobel NV (Chemical producer) .................................................... 120,000 17,237,463
Elsevier NV (International publisher of scientific, professional,
business, and consumer information books) ......................................... 1,676,000 27,256,392
Heineken Holdings NV "A" (Brewery) ................................................... 160,000 24,143,539
Philips Electronics NV (Leading manufacturer of electrical equipment) ................ 447,000 20,854,995
Wolters Kluwer CVA (Publisher) ....................................................... 154,963 18,665,463
-----------
146,017,432
-----------
New Zealand 0.0%
Telecom Corp. of New Zealand (Telecommunication services) ............................ 64,950 295,541
-----------
Norway 0.7%
Saga Petroleum AS "A" (Oil and gas exploration and production) ....................... 1,023,200 17,590,566
-----------
Philippines 1.6%
C & P Homes, Inc.* (Home construction company) ....................................... 30,477,000 14,449,554
Manila Electric Co. "B" (Electric utility) ........................................... 2,275,000 18,120,614
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 -- SCUDDER INTERNATIONAL FUND
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SM Prime Holdings Corp. (Leader in commercial center operations) ..................... 30,000,000 8,761,616
-----------
41,331,784
-----------
Portugal 0.7%
Cimentos de Portugal SA (Manufacturer of cement, ready mix concrete and aggregates) .. 405,015 8,449,380
Portugal Telecom SA (Telecommunication services) ..................................... 239,300 8,907,603
-----------
17,356,983
-----------
Spain 2.5%
Acerinox, S.A. (Stainless steel producer) ............................................ 147,800 20,871,421
Banco Popular Espanol, S.A. (Retail bank) ............................................ 90,983 16,370,822
Compania Telefonica Nacional de Espana SA (ADR) (Telecommunication services) ......... 381,000 27,336,750
-----------
64,578,993
-----------
Sweden 3.9%
AGA AB "B" (Free) (Producer and distributor of industrial and medical gases) ......... 766,600 11,606,821
L.M. Ericsson Telephone Co. "B" (ADR) (Leading manufacturer of cellular
telephone equipment) ............................................................... 1,075,000 36,348,438
S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ............................... 750,000 19,722,687
Skandia Foersaekrings AB (Free) (Financial conglomerate) ............................. 1,040,000 32,804,739
-----------
100,482,685
-----------
Switzerland 5.9%
ABB AG (Bearer) (Manufacturer of electrical equipment) ............................... 21,110 25,375,417
Credit Suisse Group (Registered) (Provider of bank services,
management services and life insurance) ............................................. 250,000 30,007,991
Ciba Specialty Chemical* (Registered) (Manufacturer of
chemical products for plastics, coatings, fibers and fabrics) ....................... 135,901 11,236,950
Clariant AG* (Registered) (Manufacturer of color chemicals) .......................... 48,447 23,881,457
Novartis AG* (Bearer) (Pharmaceutical company) ....................................... 18,773 23,387,986
Roche Holdings AG* (PC) (Producer of drugs and medicines) ............................ 2,960 25,595,609
SGS Holdings SA (Bearer) (Trade inspection company) .................................. 5,755 11,796,310
-----------
151,281,720
-----------
Taiwan 0.7%
China Development Corp. (Provider of loan and guarantee
services to manufacturing and service industries) ................................... 2,587,500 10,522,876
Far Eastern Department Store (Department store chain) ................................ 5,601,750 8,278,548
-----------
18,801,424
-----------
United Kingdom 12.3%
BOC Group PLC (Producer of industrial gases) ......................................... 863,709 13,611,271
British Petroleum PLC (Major integrated world oil company) ........................... 3,005,199 34,901,464
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 -- SCUDDER INTERNATIONAL FUND
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Carlton Communications PLC (Television post production products and services) ........ 3,487,500 29,832,062
General Electric Co., PLC (Manufacturer of power, communications and
defense equipment and other various electrical components) .......................... 4,450,000 27,377,723
Glaxo Wellcome PLC (Pharmaceutical company) .......................................... 1,095,000 20,102,220
Pearson PLC (Diversified media and entertainment holding company) .................... 1,619,000 19,521,651
PowerGen PLC (Electric utility) ...................................................... 2,538,059 24,800,125
RTZ Corp., PLC (Mining and finance company) .......................................... 1,688,460 26,747,474
Reuters Holdings PLC (International news agency) ..................................... 2,219,600 22,637,691
SmithKline Beecham PLC (Manufacturer of ethical drugs and healthcare products) ....... 2,383,476 35,444,179
WPP Group PLC (Advertising agency) ................................................... 6,215,000 26,070,360
Zeneca Group PLC (Holding company: manufacturing and marketing of
pharmaceutical and agrochemical products and specialty chemicals) ................... 1,285,000 37,266,716
-----------
318,312,936
- ------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost $1,716,243,233) 2,378,694,728
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio - 100.0% (Cost $1,925,260,733) (a) 2,585,671,373
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) The cost for federal income tax purposes was $1,935,783,363. At March 31,
1997, net unrealized appreciation for all securities based on tax cost was
$649,888,010. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $686,152,816 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$36,264,806.
(b) Securities valued in good faith by the Valuation Committee of the Board of
Directors at fair value amounted to $3,805,526 (.15% of net assets). Their
values have been estimated by the Valuation Committee in the absence of
readily ascertainable market values. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly
from the values that would have been used had a ready market for the
securities existed, and the difference could be material. The cost of
these securities at March 31, 1997 aggregated $4,402,614. These securities
may also have certain restrictions as to resale.
(c) Principal amount is stated in U.S. dollars unless otherwise specified.
Currency Abbreviations: JPY Japanese Yen MYR Malaysian Ringgit
Transactions in written call options during the year ended March 31, 1997
were:
Premiums
Principal Amount Received ($)
-----------------------------------------
Outstanding at
March 31, 1996 ............. JPY 32,532,000,000 12,317,038
Contracts written .......... JPY 34,500,000,000 5,801,750
Contracts closed ........... JPY (53,852,000,000) (13,849,598)
Contracts expired .......... JPY (13,180,000,000) (4,269,190)
-----------------------------------------
Outstanding at
March 31, 1997 ............. JPY -- --
=============== ===========
The accompanying notes are an integral part of the financial statements.
15 -- SCUDDER INTERNATIONAL FUND
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of March 31, 1997
<TABLE>
<CAPTION>
Assets
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Investments, at market (identified cost $1,925,260,733) ............... $2,585,671,373
Foreign currency holdings, at market (identified cost $661,283) ....... 644,512
Receivable on investments sold ........................................ 22,346,663
Receivable on Fund shares sold ........................................ 427,141
Dividends and interest receivable ..................................... 7,588,958
Foreign taxes recoverable ............................................. 1,802,579
Other assets .......................................................... 65,085
--------------
Total assets .......................................................... 2,618,546,311
Liabilities
- ----------------------------------------------------------------------------------------------------------
Payable for investments purchased ..................................... 28,939,107
Due to custodian bank ................................................. 891,121
Payable for Fund shares redeemed ...................................... 2,910,287
Accrued management fee ................................................ 1,752,228
Other payables and accrued expenses ................................... 1,022,882
--------------
Total liabilities ..................................................... 35,515,625
----------------------------------------------------------------------------------------
Net assets, at market value $2,583,030,686
----------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................................... 1,417,347
Unrealized appreciation (depreciation) on:
Investments ........................................................ 660,410,640
Foreign currency related transactions .............................. (89,236)
Accumulated net realized gain ......................................... 249,360
Paid-in capital ....................................................... 1,921,042,575
----------------------------------------------------------------------------------------
Net assets, at market value $2,583,030,686
----------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($2,583,030,686/53,734,143 shares of capital stock outstanding, --------------
$.01 par value, 200,000,000 shares authorized) ...................... $ 48.07
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 -- SCUDDER INTERNATIONAL FUND
<PAGE>
Statement of Operations
year ended March 31, 1997
<TABLE>
<CAPTION>
Investment Income
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Income:
Interest (net of foreign taxes withheld of $10,018) ................... 7,385,262
-------------
45,699,933
-------------
Expenses:
Management fee ........................................................ 20,989,160
Services to shareholders .............................................. 4,647,354
Custodian and accounting fees ......................................... 2,741,989
Directors' fees and expenses .......................................... 61,815
Reports to shareholders ............................................... 464,757
Auditing .............................................................. 138,975
Legal ................................................................. 57,268
Registration fees ..................................................... 64,044
Other ................................................................. 230,086
-------------
29,395,448
----------------------------------------------------------------------------------------
Net investment income 16,304,485
----------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------
Net realized gain from:
Investments ........................................................... 61,540,056
Written options ....................................................... 15,862,488
Foreign currency related transactions ................................. 27,424,026
-------------
104,826,570
-------------
Net unrealized appreciation (depreciation) during the period on:
Investments ........................................................... 152,717,827
Written options ....................................................... (12,108,301)
Foreign currency related transactions ................................. (36,175)
-------------
140,573,351
----------------------------------------------------------------------------------------
Net gain on investment transactions 245,399,921
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 261,704,406
----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 -- SCUDDER INTERNATIONAL FUND
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended March 31,
Increase (Decrease) in Net Assets 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .................................. $ 16,304,485 $ 20,332,419
Net realized gain from investment transactions ......... 104,826,570 97,431,462
Net unrealized appreciation on investment transactions
during the period ................................... 140,573,351 293,552,612
--------------- ---------------
Net increase in net assets resulting from operations ... 261,704,406 411,316,493
--------------- ---------------
Distributions to shareholders from:
Net investment income .................................. (68,670,750) (20,899,123)
--------------- ---------------
Net realized gains ..................................... (64,600,067) (61,655,254)
--------------- ---------------
Fund share transactions:
Proceeds from shares sold .............................. 563,459,224 566,171,226
Net asset value of shares issued to shareholders in
reinvestment of distributions ........................ 117,795,156 75,365,736
Cost of shares redeemed ................................ (741,611,600) (647,503,731)
--------------- ---------------
Net decrease in net assets from Fund share transactions (60,357,220) (5,966,769)
--------------- ---------------
Increase in net assets ................................. 68,076,369 322,795,347
Net assets at beginning of period ...................... 2,514,954,317 2,192,158,970
Net assets at end of period (including undistributed net
investment income of $1,417,347 and accumulated
distributions in excess of net investment income of
--------------- ---------------
($14,026,160), respectively) .......................... $ 2,583,030,686 $ 2,514,954,317
--------------- ---------------
Other Information
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .............. 55,022,967 55,183,581
--------------- ---------------
Shares sold ............................................ 11,978,853 12,911,834
Shares issued to shareholders in reinvestment of
distributions .......................................... 2,508,054 1,726,196
Shares redeemed ........................................ (15,775,731) (14,798,644)
--------------- ---------------
Net decrease in Fund shares ............................ (1,288,824) (160,614)
--------------- ---------------
Shares outstanding at end of period .................... 53,734,143 55,022,967
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18---SCUDDER INTERNATIONAL FUND
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period (a) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended March 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
---------------------------------------------------------------------------------------
period ........................ $45.71 $39.72 $42.96 $35.69 $34.36 $34.69 $37.00 $34.79 $33.43 $44.05
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............ .30 .38 .21 .31 .38 .44 .80 .49 .40 .45
Net realized and unrealized gain
(loss) on investment
transactions .................. 4.53 7.19 (1.03) 7.74 2.64 (.37) (.39) 5.30 4.15 (.86)
Total from investment
---------------------------------------------------------------------------------------
operations .................... 4.83 7.57 (.82) 8.05 3.02 .07 .41 5.79 4.55 (.41)
---------------------------------------------------------------------------------------
Less distributions:
From net investment income ....... (1.28) (.40) -- (.63) (.83) -- (.74) (.43) (.13) (.82)
In excess of net investment income -- -- -- (.06) -- -- -- -- -- --
From net realized gains on
investment transactions ....... (1.19) (1.18) (2.42) (.09) (.86) (.40) (1.98) (3.15) (3.06) (9.39)
---------------------------------------------------------------------------------------
Total distributions .............. (2.47) (1.58) (2.42) (.78) (1.69) (.40) (2.72) (3.58) (3.19) (10.21)
---------------------------------------------------------------------------------------
Net asset value, end of
---------------------------------------------------------------------------------------
period ........................ $48.07 $45.71 $39.72 $42.96 $35.69 $34.36 $34.69 $37.00 $34.79 $33.43
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) ................. 10.74 19.25 (2.02) 22.69 9.12 .18 1.46 17.08 14.34 (.47)
Ratios and Supplemental Data
Net assets, end of period
($ millions) .................... 2,583 2,515 2,192 2,198 1,180 933 929 783 550 559
Ratio of operating expenses to
average net assets (%) ........ 1.15 1.14 1.19 1.21 1.26 1.30 1.24 1.18 1.22 1.21
Ratio of net investment income to
average net assets (%) ........ .64 .86 .48 .75 1.13 1.25 2.22 1.33 1.20 1.16
Portfolio turnover rate (%) ...... 35.8 45.2 46.3 39.9 29.2 50.4 70.1 49.4 48.3 54.8
Average commission rate paid (b) . $.0002 -- -- -- -- -- -- -- -- --
</TABLE>
(a) Based on monthly average share Based on monthly average shares outstanding
during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years ending on or after March 31, 1997.
19 -- SCUDDER INTERNATIONAL FUND
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder International Fund (the "Fund") is a diversified series of Scudder
International Fund, Inc. (the "Corporation"). The Corporation is organized as a
Maryland corporation and is registered under the Investment Company Act of 1940,
as amended, as an open-end, management investment company.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio securities which are traded on U.S. or foreign
stock exchanges are valued at the most recent sale price reported on the
exchange on which the security is traded most extensively. If no sale occurred,
the security is then valued at the calculated mean between the most recent bid
and asked quotations. If there are no such bid and asked quotations, the most
recent bid quotation is used. Securities quoted on the National Association of
Securities Dealers Automatic Quotation ("NASDAQ") System, for which there have
been sales, are valued at the most recent sale price reported on such system. If
there are no such sales, the value is the high or "inside" bid quotation.
Securities which are not quoted on the NASDAQ System but are traded in another
over-the-counter market are valued at the most recent sale price on such market.
If no sale occurred, the security is then valued at the calculated mean between
the most recent bid and asked quotations. If there are no such bid and asked
quotations, the most recent bid quotation shall be used.
Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost. All other securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Directors.
Options. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During the
period, the Fund purchased put options and wrote call options on currencies as a
hedge against potential adverse price movements in the value of portfolio
assets.
If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.
20 -- SCUDDER INTERNATIONAL FUND
<PAGE>
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and, that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
receives delivery of the underlying securities, the amount of which at the time
of purchase and each subsequent business day is required to be maintained at
such a level that the market value, depending on the maturity of the repurchase
agreement, is equal to at least 100.5% of the repurchase price.
Foreign Currency Translations. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis:
(i) market value of investment securities, other assets and other
liabilities at the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on
the respective dates of such transactions.
The Fund does not isolate that portion of gains and losses on investments which
is due to changes in foreign exchange rates from that which is due to changes in
market prices of the investments. Such fluctuations are included with the net
realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange
contract (forward contract) is a commitment to purchase or sell a foreign
currency at the settlement date at a negotiated rate. During the period, the
Fund utilized forward contracts as a hedge in connection with portfolio
purchases and sales of securities denominated in foreign currencies.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
21 -- SCUDDER INTERNATIONAL FUND
<PAGE>
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment companies
and to distribute all of its taxable income to its shareholders. The Fund paid
no federal income taxes and no federal income tax provision was required.
Distribution of Income and Gains. Distributions of net investment income are
made annually. During any particular year net realized gains from investment
transactions, in excess of available capital loss carryforwards, would be
taxable to the Fund if not distributed and, therefore, will be distributed to
shareholders annually. An additional distribution may be made to the extent
necessary to avoid the payment of a four percent federal excise tax. Earnings
and profits distributed to shareholders on redemption of Fund shares ("tax
equalization") may be utilized by the Fund, to the extent permissible, as part
of the Fund's dividends paid deduction on its federal income tax return.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. The differences
primarily relate to investments in forward contracts, passive foreign investment
companies, options on currencies, and foreign denominated investments. As a
result, net investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
The Fund uses the identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting purposes.
Other. Investment security transactions are accounted for on a trade date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis.
B. Purchases and Sales of Securities
For the year ended March 31, 1997, purchases and sales of investment securities
(excluding short-term investments) aggregated $874,321,294 and $1,039,474,034,
respectively.
C. Related Parties
On September 5, 1996, the Fund's Board of Directors approved a new Investment
Management Agreement (the "Management Agreement") with Scudder, Stevens & Clark,
Inc. (the "Adviser"). Under the Management Agreement the Adviser directs the
investments of the Fund in accordance with its investment objectives, policies,
and restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management, the Adviser provides certain
administrative services in accordance with the Management Agreement. The
management fee payable under the Management Agreement is equal to an annual rate
of approximately 0.90% of the first $500,000,000 of average daily net assets,
0.85% of the next $500,000,000 of such net assets, 0.80% of the next
22 -- SCUDDER INTERNATIONAL FUND
<PAGE>
$1,000,000,000 of such net assets, 0.75% of the next $1,000,000,000 of such net
assets, and 0.70% of such net assets in excess of $3,000,000,000, computed and
accrued daily and payable monthly.
Under the Investment Management Agreement between the Fund and the Adviser which
was in effect prior to September 5, 1996 (the "Agreement"), the Fund agreed to
pay to the Adviser a fee equal to an annual rate of 0.90% on the first
$500,000,000 of the Fund's average daily net assets, 0.85% on the next
$500,000,000, 0.80% on the next $1,000,000,000, and 0.75% of such net assets in
excess of $2,000,000,000, computed and accrued daily and payable monthly. The
agreements also provide that if the Fund's expenses, exclusive of taxes,
interest, and extraordinary expenses, exceed specified limits, such excess, up
to the amount of the management fee, will be paid by the Adviser. For the year
ended March 31, 1997, the fee pursuant to both agreements amounted to
$20,989,160 which was equivalent to an annual effective rate of 0.82% of the
Fund's average daily net assets.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. Included
in services to shareholders is $3,050,321 charged to the Fund by SSC for the
year ended March 31, 1997, of which $296,627 is unpaid at March 31, 1997.
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 year ended March 31, 1997,
the amount charged to the Fund by STC aggregated $930,582, of which $111,209 is
unpaid at March 31, 1997.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
March 31, 1997, the amount charged to the Fund by SFAC aggregated $795,122, of
which $65,991 is unpaid at March 31, 1997.
The Fund pays each Director not affiliated with the Adviser $4,000 annually plus
specified amounts for attended board and committee meetings. For the year ended
March 31, 1997, Directors' fees and expenses aggregated $61,815.
D. Lines of Credit
The Fund and several affiliated Funds (the "Participants") share in a $500
million revolving credit facility for temporary or emergency purposes, including
the meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated among each of the Participants. Interest is calculated based
on the market rates at the time of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the agreement. In addition, the
Fund also maintains an uncommitted line of credit.
23 -- SCUDDER INTERNATIONAL FUND
<PAGE>
Report of Independent Accountants
To the Board of Directors of Scudder International Fund, Inc. and to the
Shareholders of Scudder International Fund:
We have audited the accompanying statement of assets and liabilities of Scudder
International Fund, including the investment portfolio, as of March 31, 1997,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the ten years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder International Fund as of March 31, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the ten years
in the period then ended, in conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 16, 1997
24 -- SCUDDER INTERNATIONAL FUND
<PAGE>
Tax Information
The Fund paid distributions of $1.19 per share from net long-term capital gains
during its year ended March 31, 1997. Pursuant to Section 852 of the Internal
Revenue Code, the Fund designates $36,901,570 as capital gain dividends for its
fiscal year ended March 31, 1997.
The Fund paid foreign taxes of $5,218,633 and the Fund recognized $33,186,627 of
foreign source income during the year ended March 31, 1997. Pursuant to section
853 of the Internal Revenue Code, the Fund designates $0.097 per share of
foreign taxes paid and $0.618 of income earned from foreign sources in the year
ended March 31, 1997.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Scudder Fund account, please call a Scudder Investor Relations
Representative at 1-800-225-5163.
25 - SCUDDER INTERNATIONAL FUND
<PAGE>
This Page
intentionally
left blank.
26 - SCUDDER INTERNATIONAL FUND
<PAGE>
This Page
intentionally
left blank.
27 - SCUDDER INTERNATIONAL FUND
<PAGE>
Officers and Directors
Daniel Pierce*
Chairman of the Board and Director
Nicholas Bratt*
President and Director
Paul Bancroft III
Director; Venture Capitalist and Consultant
Thomas J. Devine
Director; Consultant
Keith R. Fox
Director; President, Exeter Capital Management Corporation
William H. Gleysteen, Jr.
Director; Consultant; Guest Scholar, Brookings Institute
Dudley H. Ladd*
Director
William H. Luers
Director; President, The Metropolitan Museum of Art
Dr. Wilson Nolen
Director; Consultant
Kathryn L. Quirk*
Director; Vice President and Assistant Secretary
Dr. Gordon Shillinglaw
Director; Professor Emeritus of Accounting, Columbia University Graduate School
of Business
Robert W. Lear
Honorary Director
Robert G. Stone, Jr.
Honorary Director; Chairman Emeritus and Director, Kirby Corporation
Elizabeth J. Allan*
Vice President
Joyce E. Cornell*
Vice President
Edmund B. Games, Jr.*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
David S. Lee*
Vice President and Assistant Treasurer
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Carol L. Franklin*
Vice President
Richard W. Desmond*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
28 - SCUDDER INTERNATIONAL FUND
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Limited Term
Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
Scudder Pennsylvania Tax Free Fund*
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund
Retirement Programs
- -------------------
IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan *+++ +++
(a variable annuity)
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder World Income Opportunities
Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed in order from
expected least risk to most risk. +A portion of the income from the tax-free
funds may be subject to federal, state, and local taxes. *Not available in all
states. +++ +++A no-load variable annuity contract provided by Charter National
Life Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark,
Inc., are traded on various stock exchanges.
29 - SCUDDER INTERNATIONAL FUND
<PAGE>
<TABLE>
<CAPTION>
Scudder Solutions
Convenient ways to invest, quickly and reliably:
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan AutoBuy
A convenient investment program in which you designate Lets you purchase Scudder fund shares
the purchase details and the bank account, and money is electronically, avoiding potential mailing delays;
electronically debited from that account monthly to designate a bank account and the transaction
regularly purchase fund shares and "dollar cost average" details, and money for each of your transactions is
-- buy more shares when the fund's price is higher and electronically debited from that account.
fewer when it's lower, which can reduce your average
purchase price over time.
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ---------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ---------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan AutoSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you designate.
DistributionsDirect
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ---------------------------------------------------------------------------------------------------------------------------------
30 - SCUDDER INTERNATIONAL FUND
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ---------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 6,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder Developed for investors who prefer the benefits of no-load
shareholders can take advantage of a Scudder Scudder funds but want ongoing professional assistance in
Brokerage account already reserved for them, with managing a portfolio. Personal Counsel(SM) is a highly
no minimum investment. For information about customized, fee-based asset management service for
Scudder Brokerage Services, call 1-800-700-0820. individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Service, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ---------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ---------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Funds Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Funds Centers. Check for a Funds Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
New From Scudder: Pathway Series
In a complex financial world, Scudder Pathway Series is a refreshingly simple concept. With one
investment, Pathway gives you instant access to broad diversification in U.S. markets and
across the globe. Select from four Portfolios -- Growth, Balanced, Conservative, or
International -- each with a distinct investment objective that can match your goals. Each
Portfolio, rather than investing in individual securities, invests in carefully selected
Scudder mutual funds.
The share price of each Pathway Series portfolio will fluctuate and the risk associated with
each portfolio is determined by the securities held in each underlying Scudder fund. Contact
Scudder Investor Services, Inc., Distributor, for a prospectus which contains more complete
information, including management fees and other expenses. Please read it carefully before you
invest or send money.
</TABLE>
31 - SCUDDER INTERNATIONAL FUND
<PAGE>
Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven Clark,
Scudder, Stevens & Clark was the first independent investment counsel firm in
the United States. Since its birth, Scudder's pioneering spirit and commitment
to professional long-term investment management have helped shape the investment
industry. In 1928, we introduced the nation's first no-load mutual fund. Today
we offer over 40 pure no load(TM) funds, including the first international
mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
345 Park Avenue
New York, New York 10154
1-800-854-8525
Institutional International Equity Portfolio (the "Portfolio")
is a series of Scudder Institutional Fund, Inc.
(the "Company"), a no-load, open-end, diversified management investment company.
The Portfolio seeks long-term growth of capital primarily through a
diversified portfolio of marketable foreign equity securities.
- --------------------------------------------------------------------------------
Statement of Additional Information
May 1, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus of Institutional International Equity
Portfolio dated May 1, 1997, as may be amended from time to time, a copy of
which may be obtained without charge by writing to Scudder Investor Services,
Inc., Two International Place, Boston, Massachusetts 02110-4103.
<PAGE>
TABLE OF CONTENTS
Page
THE PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES.............................1
General Investment Objective and Policies............................1
Risk Factors.........................................................2
Investment Restrictions.............................................11
PURCHASING SHARES............................................................13
REDEEMING SHARES.............................................................13
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS....................................13
PERFORMANCE INFORMATION......................................................14
Average Annual Total Return.........................................14
Cumulative Total Return.............................................14
Total Return........................................................15
Capital Change......................................................15
Comparison of Portfolio Performance.................................15
SHAREHOLDER BENEFITS.........................................................15
COMPANY ORGANIZATION.........................................................16
INVESTMENT ADVISER...........................................................17
Personal Investments by Employees of the Adviser....................18
DIRECTORS AND OFFICERS.......................................................18
REMUNERATION.................................................................20
Responsibilities of the Board--Board and Committee Meetings.........20
Compensation of Officers and Directors..............................20
DISTRIBUTOR..................................................................21
TAXES........................................................................21
PORTFOLIO TRANSACTIONS.......................................................25
Brokerage Commissions...............................................25
Portfolio Turnover..................................................26
NET ASSET VALUE..............................................................26
ADDITIONAL INFORMATION.......................................................27
Experts.............................................................27
Other Information...................................................27
FINANCIAL STATEMENTS.........................................................28
APPENDIX
i
<PAGE>
THE PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES (See "Investment
Objective and Policies" and "Additional Information About Policies and
Investments" in the Portfolio's Prospectus)
General Investment Objective and Policies
The investment objective of the Portfolio is to seek long-term growth of
capital primarily through a diversified portfolio of marketable foreign equity
securities. These securities are selected primarily to permit the Portfolio to
participate in non-United States companies and economies with prospects for
growth. The Portfolio invests in companies, wherever organized, which in the
judgment of the Portfolio's investment adviser, have their principal activities
and interests outside the United States. The Portfolio intends to diversify
investments among several countries and to have represented in the portfolio, in
substantial proportions, business activities in not less than five different
countries. To the extent consistent with the Portfolio's objective of long-term
growth of capital, as described above, it is the policy of the Portfolio to
provide shareholders with participation in the economies of a number of
countries other than the U.S. The Portfolio may invest in securities of
companies incorporated in the U.S. and having their principal activities and
interests outside of the U.S. The investment objective of the Portfolio is
nonfundamental and can be changed without the approval of the holders of a
majority of the Portfolio's outstanding shares, as defined in the Investment
Company Act of 1940 (the "1940 Act") and a rule thereunder. There is no
assurance that the Portfolio will achieve its investment objective. Except as
otherwise indicated, the Portfolio's policies are not fundamental and may be
changed without a vote of shareholders.
The Portfolio generally invests at least 90% of its total assets in equity
securities of established companies, listed on recognized exchanges, which the
Portfolio's investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"),
believes have favorable characteristics. The Adviser expects this condition to
continue, although the Portfolio may invest in other securities.
When the Adviser believes that it is appropriate to do so in order to
achieve the Portfolio's investment objective of long-term capital growth, the
Portfolio may invest up to 10% of its total assets in debt securities. Such debt
securities include debt securities of foreign governments, supranational
organizations and private issuers, including bonds denominated in the European
Currency Unit (ECU). In determining the location of the principal activities and
interests of a company, the Adviser takes into account such factors as the
location of the company's assets, personnel, sales and earnings. In selecting
securities for the Portfolio, the Adviser seeks to identify companies whose
securities prices do not adequately reflect their established positions in their
fields. In analyzing companies for investment, the Adviser ordinarily looks for
one or more of the following characteristics: above-average earnings growth per
share, high return on invested capital, healthy balance sheets and overall
financial strength, strong competitive advantages, strength of management and
general operating characteristics which will enable the companies to compete
successfully in the marketplace. Investment decisions are made without regard to
arbitrary criteria as to minimum asset size, debt-equity ratios or dividend
history of portfolio companies.
The Portfolio may invest in any type of security including, but not limited
to shares, preferred or common; bonds and other evidences of indebtedness; and
other securities of issuers wherever organized, and not excluding evidences of
indebtedness of governments and their political subdivisions. The Portfolio, in
view of its investment objective, intends under normal conditions to maintain a
portfolio consisting primarily of a diversified list of equity securities.
When the Adviser determines that exceptional conditions exist abroad, the
Portfolio may, for temporary defensive purposes, invest all or a portion of its
assets in Canadian or U.S. Government obligations or currencies, or securities
of companies incorporated in and having their principal activities in Canada or
the U.S.
Foreign securities such as those purchased by the Portfolio may be subject
to foreign government taxes which could reduce the yield on such securities,
although a shareholder of the Portfolio may, subject to certain limitations, be
entitled to claim a credit or deduction for U.S. federal income tax purposes for
his or her proportionate share of such foreign taxes paid by the Fund. (See
"TAXES.")
From time to time, the Portfolio may be a purchaser of restricted debt or
equity securities (i.e., securities which may require registration under the
Securities Act of 1933, as amended, or an exemption therefrom, in order to be
<PAGE>
sold in the ordinary course of business) in a private placement. The Portfolio
has undertaken not to purchase or acquire any such securities if, solely as a
result of such purchase or acquisition, more than 10% of the value of the
Portfolio's total assets would be invested in restricted securities or otherwise
illiquid (securities subject to legal restrictions on resales to institutions,
or contractual restrictions on resale) and more than 10% of its total assets
would be invested in securities that are not readily marketable.
The Portfolio reserves the right in the future, without prior shareholder
approval, to pursue its investment objective by investing all of its investable
assets in a separate registered investment company having the same investment
objective and substantially similar policies and restrictions as the Portfolio.
The new structure (commonly known as "master-feeder") could enable the Portfolio
to benefit, directly or indirectly, from certain economies of scale, based on
the premise that certain of the expenses of operating an investment portfolio
are relatively fixed and that a larger investment portfolio may eventually
achieve a lower ratio of operating expenses to average net assets.
Risk Factors
Foreign Securities. The Portfolio is intended to provide individual and
institutional investors with an opportunity to invest a portion of their assets
in securities of a diversified group of companies, wherever organized, which do
business primarily outside the U.S., and foreign governments. The Adviser
believes that diversification of assets on an international basis decreases the
degree to which events in any one country, including the U.S., will affect an
investor's entire investment holdings. In certain periods since World War II,
many leading foreign economies and foreign stock market indices have grown more
rapidly than the U.S. economy and leading U.S. stock market indices, although
there can be no assurance that this will be true in the future. Because of the
Portfolio's investment policy, the Portfolio is not intended to provide a
complete investment program for an investor.
Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. securities and which may favorably
or unfavorably affect the Portfolio's performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the U.S. and, at times, volatility of
price can be greater than in the U.S. Fixed commissions on some foreign
securities exchanges and bid to asked spreads in foreign bond markets are
generally higher than commissions or bid to asked spreads on U.S. markets,
although the Portfolio will endeavor to achieve the most favorable net results
on its portfolio transactions. There is generally less government supervision
and regulation of securities exchanges, brokers and listed companies than in the
U.S. It may be more difficult for the Portfolio's agents to keep currently
informed about corporate actions which may affect the prices of portfolio
securities. Communications between the U.S. and foreign countries may be less
reliable than within the U.S., thus increasing the risk of delayed settlements
of portfolio transactions or loss of certificates for portfolio securities.
Payment for securities without delivery may be required in certain foreign
markets. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. The management of the Portfolio seeks to mitigate
the risks associated with the foregoing considerations through continuous
professional management.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because the Portfolio may hold
foreign currencies and forward contracts, futures contracts and options on
foreign currencies and foreign currency futures contracts, the value of the
assets of the Portfolio as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations, and the Portfolio may incur costs in connection with conversions
between various currencies. Although the Portfolio values its assets daily in
terms of U.S. dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so from time to time,
and investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
2
<PAGE>
foreign currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer. The
Portfolio will conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into options or forward or futures
contracts to purchase or sell foreign currencies. The market value of the
Portfolio's debt securities, and correspondingly the Portfolio's share price,
will vary inversely with changes in prevailing interest rates.
Debt Securities. When the Adviser believes that it is appropriate to do so in
order to achieve the Portfolio's objective of long-term capital growth, the
Portfolio may invest up to 10% of its total assets in debt securities including
bonds of foreign governments, supranational organizations and private issuers,
including bonds denominated in the ECU. Portfolio debt investments will be
selected on the basis of, among other things, yield, credit quality, and the
fundamental outlooks for currency and interest rate trends in different parts of
the globe, taking into account the ability to hedge a degree of currency or
local bond price risk. The Portfolio may purchase "investment-grade" bonds,
which are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P
or, if unrated, judged to be of equivalent quality as determined by the Adviser.
Moody's considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics. The market value of the Portfolio's debt
securities may vary inversely with changes in prevailing interest rates.
High Yield/High Risk Bonds. The Portfolio may also purchase, to a limited
extent, debt securities which are rated below investment-grade, that is, rated
below Baa by Moody's or below BBB by S&P and unrated securities, which usually
entail greater risk (including the possibility of default or bankruptcy of the
issuers of such securities), generally involve greater volatility of price and
risk of principal and income, and may be less liquid, than securities in the
higher rating categories. The lower the ratings of such debt securities, the
greater their risks. The Portfolio will invest no more than 5% of its total
assets in securities rated BB or lower by Moody's or Ba by S&P, and may invest
in securities which are rated D by S&P. Securities rated D may be in default
with respect to payment of principal or interest. See the Appendix to this
Statement of Additional Information for a more complete description of the
ratings assigned by ratings organizations and their respective characteristics.
An economic downturn could disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would have a greater adverse impact on the value of such
obligations than on higher quality debt securities. During an economic downturn
or period of rising interest rates, highly leveraged issues may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations. Prices and yields of high yield
securities will fluctuate over time and, during periods of economic uncertainty,
volatility of high yield securities may adversely affect the Portfolio's net
asset value. In addition, investments in high yield zero coupon or pay-in-kind
bonds, rather than income-bearing high yield securities, may be more speculative
and may be subject to greater fluctuations in value due to changes in interest
rates.
The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market. A thin trading market may limit
the ability of the Portfolio to accurately value high yield securities in its
portfolio and to dispose of those securities. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.
These securities may also involve special registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the
Portfolio's investment objective by investment in such securities may be more
dependent on the Adviser's credit analysis than is the case for higher quality
bonds. Should the rating of a portfolio security be downgraded, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of such security.
Prices for below investment-grade securities may be affected by legislative
and regulatory developments. For example, new federal rules require savings and
loan institutions to gradually reduce their holdings of this type of security.
Also, Congress has from time to time considered legislation which would restrict
or eliminate the corporate tax deduction for interest payments in these
securities and regulate corporate restructurings. Such legislation may
3
<PAGE>
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"TAXES."
Strategic Transactions and Derivatives. The Portfolio may, but is not required
to, utilize various other investment strategies as described below to hedge
various market risks (such as interest rates, currency exchange rates, and broad
or specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities in the Portfolio's portfolio, or
to enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Portfolio, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Portfolio's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Portfolio to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Portfolio
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Portfolio, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Portfolio can realize on its
investments or cause the Portfolio to hold a security it might otherwise sell.
The use of currency transactions can result in the Portfolio incurring losses as
a result of a number of factors including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related portfolio position of
the Portfolio creates the possibility that losses on the hedging instrument may
be greater than gains in the value of the Portfolio's position. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
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options require segregation of Portfolio assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Portfolio's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Portfolio the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Portfolio against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The Portfolio is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Portfolio's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Portfolio will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. The Portfolio expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
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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 Portfolio will engage in OTC option transactions
only with U.S. government securities dealers recognized by the Federal Reserve
Bank of New York as "primary dealers" or broker/dealers, domestic or foreign
banks or other financial institutions which have received (or the guarantors of
the obligation of which have received) a short-term credit rating of A-1 from
S&P or P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, are determined to be of equivalent credit quality by the Adviser.
The staff of the SEC currently takes the position that OTC options purchased by
the Portfolio, and portfolio securities "covering" the amount of the Portfolio's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the
Portfolio's limitation on investing no more than 10% of its total assets in
illiquid securities.
If the Portfolio sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income. The sale of put options can
also provide income.
The Portfolio may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Portfolio must be "covered" (i.e., the
Portfolio must own the securities or futures contract subject to the call) or
must meet the asset segregation requirements described below as long as the call
is outstanding. Even though the Portfolio will receive the option premium to
help protect it against loss, a call sold by the Portfolio exposes the Portfolio
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Portfolio to hold a security or instrument which it might
otherwise have sold.
The Portfolio may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. The Portfolio will not sell put options if, as a result, more
than 50% of the Portfolio's assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that the
Portfolio may be required to buy the underlying security at a disadvantageous
price above the market price.
General Characteristics of Futures. The Portfolio may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Portfolio, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Portfolio to deposit
with a financial intermediary as security for its obligations an amount of cash
or other specified assets (initial margin) which initially is typically 1% to
10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Portfolio. If the Portfolio exercises an option on a futures contract it
will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures position just as it would for any position.
Futures contracts and options thereon are generally settled by
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entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur.
The Portfolio will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Portfolio's total assets (taken at current
value); however, in the case of an option that is in-the-money at the time of
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Portfolio also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Portfolio may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Portfolio may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the Adviser.
The Portfolio's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its securities or the receipt
of income therefrom. Position hedging is entering into a currency transaction
with respect to portfolio security positions denominated or generally quoted in
that currency.
The Portfolio will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Portfolio may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a commitment or option to sell a
currency whose changes in value are generally considered to be correlated to a
currency or currencies in which some or all of the Portfolio's portfolio
securities are or are expected to be denominated, in exchange for U.S. dollars.
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The amount of the commitment or option would not exceed the value of the
Portfolio's securities denominated in correlated currencies. For example, if the
Adviser considers that the Austrian schilling is correlated to the German
deutschemark (the "D-mark"), the Portfolio holds securities denominated in
schillings and the Adviser believes that the value of schillings will decline
against the U.S. dollar, the Adviser may enter into a commitment or option to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Portfolio if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived correlation between various
currencies may not be present or may not be present during the particular time
that the Portfolio is engaging in proxy hedging. If the Portfolio enters into a
currency hedging transaction, the Portfolio will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Portfolio if it is unable to deliver or receive currency or
funds in settlement of obligations and could also cause hedges it has entered
into to be rendered useless, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures are subject
to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Combined Transactions. The Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Portfolio may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and the Portfolio believe such obligations do not
constitute senior securities under the 1940 Act, and, accordingly, will not
treat them as being subject to its borrowing restrictions. The Portfolio will
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not enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from a NRSRO or is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Portfolio may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate 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 assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
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assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for qualification
as a regulated investment company. (See "TAXES.")
Repurchase Agreements. The Portfolio may enter into repurchase agreements with
any member bank of the Federal Reserve System and any broker-dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker-dealer has been determined by the Adviser to be at least
as high as that of other obligations the Portfolio may purchase or to be at
least equal to that of issuers of commercial paper rated within the two highest
grades assigned by Moody's or S&P.
A repurchase agreement provides a means for the Portfolio to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Portfolio) acquires a security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and price. Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to the Portfolio, or the purchase
and repurchase prices may be the same, with interest at a stated rate due to the
Portfolio together with the repurchase price upon repurchase. In either case,
the income to the Portfolio is unrelated to the interest rate on the Obligation
itself. Obligations will be held by the Custodian or in the Federal Reserve Book
Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan
from the Portfolio to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Portfolio's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Portfolio subject to a repurchase agreement as being
owned by the Portfolio or as being collateral for a loan by the Portfolio to the
seller. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, the Portfolio may encounter delay and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Portfolio has not perfected a security interest in the
Obligation, the Portfolio may be required to return the Obligation to the
seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, the Portfolio would be at risk of losing some or all of the
principal and income involved in the transaction. As with any unsecured debt
instrument purchased for the Portfolio, the Adviser seeks to minimize the risk
of loss through repurchase agreements by analyzing the creditworthiness of the
obligor, in this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the Obligation, in which case the Portfolio may incur a loss
if the proceeds to the Portfolio of the sale to a third party are less than the
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repurchase price. However, if the market value of the Obligation subject to
the repurchase agreement becomes less than the repurchase price (including
interest), the Portfolio will direct the seller of the Obligation to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement will equal or exceed the repurchase price. It is possible
that the Portfolio will be unsuccessful in seeking to enforce the seller's
contractual obligation to deliver additional securities.
Investment Restrictions
In connection with its investment objective and policies as set forth in
the Prospectus, the Company has adopted the following investment restrictions,
on behalf of the Portfolio, none of which may be changed without the approval of
the holders of a majority of the Portfolio's outstanding shares, as defined in
the 1940 Act.
As a matter of fundamental policy, the Portfolio may not:
(1) with respect to 75% of its total assets, taken at market value,
purchase more than 10% of the voting securities of any one issuer, or
invest more than 5% of the value of its total assets in the securities
of any one issuer, except obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and except securities of
other investment companies (except that if the Portfolio chooses to
participate in the master-feeder structure, as described in the
section titled "General Investment Objective and Policies," it may
purchase up to 100% of the voting securities of any one issuer and may
invest up to 100% of its investment securities in a single issuer
without restriction);
(2) borrow money, except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase
agreements; provided that the Portfolio maintains asset coverage of
300% for all borrowings;
(3) act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio;
(4) make loans to other persons, except (a) loans of portfolio securities,
and (b) to the extent the entry into repurchase agreements and the
purchase of debt securities in accordance with its investment
objectives and investment policies may be deemed to be loans;
(5) purchase or sell real estate (except that the Portfolio may invest in
(i) securities of companies which deal in real estate or mortgages,
and (ii) securities secured by real estate or interests therein, and
that the Portfolio reserves freedom of action to hold and to sell real
estate acquired as a result of the Portfolio's ownership of
securities); and
(6) purchase or sell physical commodities or contracts relating to
physical commodities.
The Portfolio will not as a matter of nonfundamental policy:
(a) purchase or retain securities of any open-end investment company,
or securities of closed-end investment companies except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchases, or except when
such purchase, though not made in the open market, is part of a
plan of merger, consolidation, reorganization or acquisition of
assets; in any event the Portfolio may not purchase more than 3%
of the outstanding voting securities of another investment
company, may not invest more than 5% of its assets in another
investment company, and may not invest more than 10% of its
assets in other investment companies (except that if the
Portfolio chooses to participate in the master-feeder structure,
as described in the section titled "General Investment Objective
and Policies," it may invest up to 100% of its investment
securities in an investment company without restriction);
(b) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
11
<PAGE>
(c) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer, director
or trustee of the Portfolio or a member, officer, director or
trustee of the investment adviser of the Portfolio if one or more
of such individuals owns beneficially more than one-half of one
percent (1/2%) of the outstanding shares or securities or both
(taken at market value) of such issuer and such individuals
owning more than one-half of one percent (1/2%) of such shares or
securities together own beneficially more than 5% of such shares
or securities or both;
(d) purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, it has the right to
obtain securities equivalent in kind and amount to the securities
sold and, if the right is conditional, the sale is made upon the
same conditions, except in connection with arbitrage transactions
and except that the Portfolio may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities;
(e) invest more than 10% of its total assets in securities which are
not readily marketable or otherwise illiquid, the disposition of
which is restricted under Federal securities laws, or in
repurchase agreements not terminable within 7 days, and the
Portfolio will not invest more than 10% of its total assets in
restricted securities;
(f) other than as may be necessary to participate in a master-feeder
arrangement, purchase securities of any issuer with a record of
less than three years continuous operations, including
predecessors, and in equity securities which are not readily
marketable except U.S. Government securities, and obligations
issued or guaranteed by any foreign government or its agencies or
instrumentalities, if such purchase would cause the investments
of the Portfolio in all such issuers to exceed 5% of the total
assets of the Portfolio taken at market value;
(g) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Portfolio
at any time do not exceed 20% of its net assets; or sell put
options on securities if, as a result, the aggregate value of the
obligations underlying such put options would exceed 50% of the
Portfolio's net assets;
(h) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate
initial margin with respect to all futures contracts entered into
on behalf of the Portfolio and the premiums paid for options on
futures contracts does not exceed 5% of the fair market value of
the Portfolio's total assets; provided, that in the case of an
option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limit;
(i) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which own
or invest in such interests);
(j) borrow money in excess of 5% of its total assets (taken at market
value) except for temporary or emergency purposes or borrow other
than from banks;
(k) purchase warrants if as a result warrants taken at the lower of
cost or market value would represent more than 5% of the value of
the Portfolio's total net assets or more than 2% of its net
assets in warrants that are not listed on the New York or
American Stock Exchanges or on an exchange with comparable
listing requirements (for this purpose, warrants attached to
securities will be deemed to have no value);
(l) invest more than 10% of its total assets in debt securities
(including convertible securities) or more than 5% of its total
assets in securities rated BB/Ba or below by Moody's or S&P or
the equivalent;
(m) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Portfolio's total assets at the
time the loan is made; all loans of portfolio securities will be
fully collateralized and marked to market daily. The Portfolio
has no current intention of making loans of portfolio securities
that would amount to greater than 5% of the Portfolio's total
assets; or
12
<PAGE>
(n) purchase or sell real estate limited partnership interests.
In addition to the foregoing restrictions, it is not the policy of the
Portfolio to concentrate its investments in any particular industry and the
Portfolio's management does not intend to make acquisitions in particular
industries which would increase the percentage of the market value of the
Portfolio's assets above 25% for any one industry. The Portfolio may not deviate
from such policy without a vote of a majority of the outstanding shares as
provided by the 1940 Act.
Whenever any investment restriction states a maximum percentage of the
Portfolio's assets, it is intended that if the percentage limitation is met at
the time the action is taken; subsequent percentage changes resulting from
fluctuating asset values will not be considered a violation of such
restrictions.
PURCHASING SHARES
(See "Transaction Information--Purchasing Shares" in the Portfolio's Prospectus)
There is a $1,000 minimum initial investment in the Portfolio, with a
minimum account size of $1,000. The minimum subsequent investment for the
Portfolio is $1,000. Investment minimums may be waived for Directors and
officers of the Company and certain other affiliates and entities. The Portfolio
and Scudder Investor Services, Inc. (the "Distributor") reserve the right to
reject any purchase order. All funds will be invested in full and fractional
shares.
Shares of the Portfolio may be purchased by writing or calling Scudder
Service Corporation, a subsidiary of the Adviser (the "Transfer Agent"). Due to
the desire of the Company to afford ease of redemption, certificates will not be
issued to indicate ownership in the Portfolio. Orders for shares of the
Portfolio will be executed at the net asset value per share next determined
after an order has become effective.
Checks drawn on a non-member bank or a foreign bank may take substantially
longer to be converted into federal funds and, accordingly, may delay the
execution of an order. Checks must be payable in U.S. dollars and will be
accepted subject to collection at full face value.
By investing in the Portfolio, a shareholder appoints the Transfer Agent to
establish an open account to which all shares purchased will be credited with
any dividends and capital gains distributions that are paid in additional
shares. See "Distribution and Performance Information--Dividends and Capital
Gains Distributions" in the Portfolio's Prospectus.
REDEEMING SHARES
(See "Transaction Information--Redeeming Shares" in the Portfolio's Prospectus)
Payment of redemption proceeds may be made in securities. The Company may
suspend the right of redemption with respect to the Portfolio during any period
when (i) trading on the New York Stock Exchange (the "Exchange") is restricted
or the Exchange is closed, other than customary weekend and holiday closings,
(ii) the SEC has by order permitted such suspension or (iii) an emergency, as
defined by rules of the SEC, exists making disposal of portfolio securities or
determination of the value of the net assets of the Portfolio not reasonably
practicable.
A shareholder's account remains open for up to one year following complete
redemption and all costs during the period will be borne by the Portfolio. This
permits an investor to resume investments.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Distribution and Performance Information--Dividends and
Capital Gains Distributions" in the Portfolio's Prospectus.)
The Portfolio intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The
Portfolio may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, the Portfolio may retain all or part of such gain for reinvestment
after paying the related federal income taxes for which the shareholders may
then be asked to claim a credit against their federal income tax liability. (See
"TAXES.")
13
<PAGE>
If the Portfolio does not distribute the amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, the Portfolio may be subject to that excise tax. (See "TAXES.") In certain
circumstances, the Portfolio may determine that it is in the interest of
shareholders to distribute less than the required amount.
Earnings and profits distributed to shareholders on redemptions of
Portfolio shares may be utilized by the Portfolio, to the extent permissible, as
part of the Portfolio's dividends paid deduction on its federal tax return.
The Portfolio intends to distribute its investment company taxable income
and any net realized capital gains in December to avoid federal excise tax,
although an additional distribution may be made, if necessary.
Both types of distributions will be made in shares of the Portfolio and
confirmations will be mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check will be sent. Distributions of
investment company taxable income and net realized capital gains are taxable
(See "TAXES"), whether made in shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Portfolio issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
(See "Distribution and Performance Information--Performance Information"
in the Portfolio's Prospectus.)
From time to time, quotations of the Portfolio's performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures may be calculated in the
following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of return
for periods of one year and the life of the Portfolio, where applicable, all
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Portfolio's shares, if any, and
assume that all dividends and capital gains distributions during the respective
periods were reinvested in Portfolio shares. Average annual total return is
calculated by finding the average annual compound rates of return of a
hypothetical investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000.
T = Average Annual Total Return.
n = number of years.
ERV = ending redeemable value: ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 investment
made at the beginning of the applicable period.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Portfolio's shares and assume
that all dividends and capital gains distributions during the period were
reinvested in Portfolio shares. Cumulative total return is calculated by finding
the cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
14
<PAGE>
C = (ERV/P) - 1
Where:
C = Cumulative Total Return.
P = a hypothetical initial investment of $1,000.
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
Cumulative total return for the period April 3, 1996 (commencement of
operations) to December 31, 1996 was 4.83%. If the Adviser had not maintained
Fund expenses and had imposed a full management fee, total return would have
been lower.
Total Return
Total Return is the rate of return on an investment for a specified period
of time calculated in the same manner as cumulative total return.
Capital Change
Capital change measures the return from invested capital including
reinvested capital gains distributed. Capital change does not include the
reinvestment of income dividends.
Quotations of the Portfolio's performance are based on historical earnings,
show the performance of a hypothetical investment, and are not intended to
indicate future performance of the Portfolio. An investor's shares when redeemed
may be worth more or less than their original cost. Performance of the Portfolio
will vary based on changes in market conditions and the level of the Portfolio's
expenses.
Comparison of Portfolio Performance
Because some or all of the Portfolio's investments are denominated in
foreign currencies, the strength or weakness of the U.S. dollar as against these
currencies may account for part of the Portfolio's investment performance.
Historical information on the value of the dollar versus foreign currencies may
be used from time to time in advertisements concerning the Portfolio. Such
historical information is not indicative of future fluctuations in the value of
the U.S. dollar against these currencies. In addition, marketing materials may
cite country and economic statistics and historical stock market performance for
any of the countries in which the Portfolio invests, including, but not limited
to, the following: population growth, gross domestic product, inflation rate,
average stock market price-earnings ratios and the total value of stock markets.
Sources for such statistics may include official publications of various foreign
governments and exchanges.
From time to time, in marketing and other portfolio literature, the
performance of the Portfolio may be compared to the performance of broad groups
of mutual funds with similar investment goals, as tracked by independent
organizations. Among these organizations, Lipper Analytical Services, Inc.
("Lipper") may be cited. When Lipper's tracking results are used, the Portfolio
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings. For instance, the Portfolio will be compared
with funds within Lipper's international equity fund category. Rankings may be
listed among one or more of the asset-size classes as determined by Lipper.
Since the assets in all funds are always changing, the Portfolio may be
ranked within one Lipper asset-size class at one time and in another Lipper
asset-size class at some other time. Footnotes in advertisements and other
marketing literature will include the time period and Lipper asset-size class,
as applicable, for the ranking in question.
SHAREHOLDER BENEFITS
(See "Shareholders Benefits" in the Portfolio's Prospectus)
Special Monthly Summary of Accounts. A special service is available to
banks, brokers, investment advisers, trust companies and others who have a
number of accounts in any Portfolio. In addition to the copy of the regular
15
<PAGE>
Statement of Account furnished to the registered holder after each transaction,
a monthly summary of accounts can be provided. The monthly summary will show for
each account the account number, the month-end share balance and the dividends
and distributions paid during the month. All costs of this service will be borne
by the Company. For information on the special monthly summary of accounts,
contact the Company.
COMPANY ORGANIZATION
(See "Company Organization" in the Portfolio's Prospectus)
The Company was formed on January 2, 1986 as a corporation under the laws
of the State of Maryland. The authorized capital stock of the Company consists
of 25,000,000,000 shares having a par value of $.001 per share, of which
5,000,000,000 shares each have been designated for the Government Portfolio, and
Cash Portfolio, 2,000,000,000 shares have been designated for the Tax-Free
Portfolio and 100,000,000 have been designated for the Institutional
International Equity Portfolio. The Company is authorized to issue full and
fractional shares in separate series. The Directors have created 28 series,
constituting the Government Portfolio, the Federal Portfolio, Cash Portfolio,
Tax-Free Portfolio, Institutional International Equity Portfolio, Institutional
Prime Portfolio, Institutional Municipal Income Portfolio, Institutional
Intermediate Cash Portfolio, Institutional Bond Index Portfolio, Institutional
Cash Plus Portfolio, Institutional Global Equity Portfolio, Institutional
Emerging Markets Equity Portfolio, Institutional Global Small Company Equity
Portfolio, Institutional Latin America Equity Portfolio, Institutional Japanese
Equity Portfolio, Institutional Pacific Basin Equity Portfolio, Institutional
Growth and Income Portfolio, Institutional Quality Growth Portfolio,
Institutional Value Equity Portfolio, Institutional Small Company Equity
Portfolio, Institutional Defensive Limited Volatility Bond Portfolio,
Institutional Intermediate Limited Volatility Bond Portfolio, Institutional
Active Value Bond Portfolio, Institutional Long Duration Bond Portfolio,
Institutional Mortgage Investment Portfolio, Institutional Global Bond
Portfolio, Institutional International Bond Portfolio, and Institutional
Emerging Markets Fixed Income Portfolio. The Directors have reserved authority
to create, in the future, other series representing shares of additional
portfolios.
On any matter submitted to a vote of shareholders, all shares then entitled
to vote will be voted by Portfolio unless otherwise required by the 1940 Act, in
which case all shares will be voted in the aggregate. For example, a change in a
Portfolio's fundamental investment policies would be voted upon only by
shareholders of the Portfolio involved. Additionally, approval of the Investment
Advisory Agreements is a matter to be determined separately by each Portfolio.
Approval by the shareholders of one Portfolio is effective as to that Portfolio
whether or not sufficient votes are received from the shareholders of the other
Portfolios to approve the proposal as to those Portfolios. As used in the
Prospectus and in this Statement of Additional Information, the term "majority,"
when referring to approvals to be obtained from shareholders of a Portfolio,
means the vote of the lesser of (i) 67% or more of the voting securities of the
Portfolio represented at a meeting if the holders of more than 50% of the
outstanding voting securities of the Portfolio are present in person or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Portfolio. The term "majority," when referring to the approvals to be
obtained from shareholders of the Company as a whole, means the vote of the
lesser of (i) 67% of the Company's shares represented at a meeting if the
holders of more than 50% of the outstanding shares are present in person or
represented by proxy, or (ii) more than 50% of the Company's outstanding shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held.
Each share of a Portfolio represents an equal proportional interest in that
Portfolio with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to that Portfolio
as are declared in the discretion of the Directors. In the event of the
liquidation or dissolution of the Company, shares of a Portfolio are entitled to
receive the assets attributable to that Portfolio that are available for
distribution, and a distribution of any general assets not attributable to a
particular Portfolio that are available for distribution in such manner and on
such basis as the Directors in their sole discretion may determine.
Shareholders are not entitled to any pre-emptive rights. All shares, when
issued, will be fully paid and non-assessable by the Company.
16
<PAGE>
INVESTMENT ADVISER
(See "Company Organization--Investment Adviser" in the Portfolio's Prospectus)
The Company retains Scudder, Stevens & Clark, Inc. (the "Adviser") as
investment adviser on behalf of the Portfolio pursuant to an Investment Advisory
Agreement (the "Agreement"). The Adviser is one of the most experienced
investment counsel firms in the U.S. It was established in 1919 as a partnership
and was restructured as a Delaware corporation in 1985. The principal source of
the Adviser's income is professional fees received from providing continuing
investment advice, and the firm derives no income from banking, brokerage, or
underwriting of securities. A subsidiary of the Adviser, Scudder Investor
Services, Inc. (the "Distributor"), acts as principal underwriter for shares of
registered open-end investment companies. The Adviser provides investment
counsel for many individuals and institutions, including insurance companies,
endowments, industrial corporations and financial and banking organizations. As
of December 31, 1996, the Adviser and its affiliates had in excess of $115
billion under their supervision.
The Adviser maintains a research department with more than 50
professionals, which conducts continuous studies of the factors that affect
various industries, companies and individual securities in the U.S. as well as
abroad. In this work the Adviser utilizes reports, statistics and other
investment information from a wide variety of sources, including brokers and
dealers who may execute portfolio transactions for the Portfolio and for other
clients of the Adviser. Investment decisions, however, are based primarily on
investigations and critical analyses by the Adviser's own research specialists
and portfolio managers.
The Adviser may give advice and take action with respect to any of its
other clients, which may differ from advice given or from the time or nature of
action taken with respect to the Portfolio. If these clients and the Portfolio
are simultaneously buying or selling a security with a limited market, the price
may be adversely affected. In addition, the Adviser may, on behalf of other
clients, furnish financial advice or be involved in tender offers or merger
proposals relating to companies in which the Portfolio invests. The best
interests of the Portfolio may or may not be consistent with the achievement of
the objectives of the other persons for whom the Adviser is providing advice or
for whom they are acting. Where a possible conflict is apparent, the Adviser
will follow whatever course of action is in its judgment in the best interests
of the Portfolio. The Adviser may consult independent third persons in reaching
its decision.
Under the Agreement, it is the responsibility of the Adviser, subject to
the supervision of the Board of Directors, to manage the Portfolio's investments
in conformity with the stated policies of the Portfolio by providing supervision
of its investments, including the acquisition, holding or disposal of securities
for the Portfolio, and by effecting purchase and sale orders for securities of
the Portfolio. Under the Agreement, the Adviser also furnishes the Portfolio
with certain bookkeeping, accounting and certain administrative services which
are not furnished by the Custodian or Scudder Fund Accounting Corporation, a
subsidiary of the Adviser, office space and equipment, and the services of the
officers and employees of the Company. The Adviser has authorized any of its
managing directors, officers and employees who have been elected as Directors or
officers of the Company to serve in the capacities to which they have been
elected.
The Portfolio will bear all expenses not specifically assumed by the
Adviser under the terms of the Agreement. Such expenses will include without
limitation: (a) organization expenses of the Portfolio; (b) clerical salaries;
(c) fees and expenses incurred by the Portfolio in connection with membership in
investment company organizations; (d) brokerage and other expenses of executing
portfolio transactions; (e) payment for portfolio pricing services to a pricing
agent, if any; (f) legal, auditing or accounting expenses; (g) trade association
dues; (h) taxes or governmental fees; (i) the fees and expenses of the transfer
agent of the Portfolio; (j) the cost of preparing share certificates or any
other expenses, including clerical expenses of issue, redemption or repurchase
of shares of the Portfolio; (k) the expenses and fees for registering and
qualifying securities for sale; (l) the fees and expenses of directors of the
Company who are not employees or affiliates of the Adviser or any of its
affiliates; (m) travel expenses of all officers, directors and employees; (n)
insurance premiums; (o) the cost of preparing and distributing reports and
notices to shareholders; (p) public and investor relations expenses; or (q) the
fees or disbursements of custodians of the Portfolio's assets, including
expenses incurred in the performance of any obligations enumerated by the
Articles of Incorporation or By-Laws insofar as they govern agreements with any
such custodian. No sales or promotional expenses are incurred by the Company,
but expenses incurred in complying with laws relating to the issue or sale of
the Portfolio's shares are not deemed sales or promotional expenses.
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<PAGE>
For these services the Portfolio pays the Adviser a fee equal to 0.90% of
the Portfolio's average daily net assets. Management fees are computed daily and
paid monthly. The Adviser has agreed to maintain the total annualized expenses
of the Portfolio at no more than 0.95% of the average daily net assets of the
Portfolio until July 31, 1997. For the period April 3, 1996 (commencement of
operations) to December 31, 1996, Scudder did not impose any of its fee
amounting to $104,861. In addition, Scudder reimbursed expenses amounting to
$80,840.
The Agreement will continue in effect with respect to the Portfolio if
specifically approved annually by a majority of the Directors of the Company,
including a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Agreement may be terminated without
penalty by either of the parties on 60 days' written notice and must terminate
in the event of its assignment. The Agreement may be amended or modified only if
approved by vote of the holders of the majority of the Portfolio's outstanding
shares as defined in the 1940 Act.
The Agreement provides that the Adviser is not liable for any act or
omission in the course of or in connection with rendering services under the
Agreement in the absence of willful misfeasance, bad faith or gross negligence
of its obligations or duties.
The Adviser places orders for the purchase and sale of securities for the
Portfolio. The Company will not deal with the Adviser in any transaction in
which the Adviser acts as principal.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Portfolio. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
DIRECTORS AND OFFICERS
The principal occupations of the Directors and executive officers of the
Company for the past five years are listed below.
<TABLE>
<CAPTION>
Position with
Position with Underwriter, Scudder
Name (Age) and Address Company Principal Occupation** Investor Services, Inc.
- ---------------------- ------- ---------------------- -----------------------
<S> <C> <C> <C>
Daniel Pierce (63)+*# President and Chairman of the Board and Vice President, Director
Director Managing Director of and Assistant Treasurer
Scudder, Stevens & Clark,
Inc.
David S. Lee (63)+*# Chairman of the Managing Director of President, Director and
Board and Director Scudder, Stevens & Clark, Assistant Treasurer
Inc.
Edgar R. Fiedler (68)# Director Senior Fellow and Economic --
50023 Brogden Counselor, The Conference
Chapel Hill, NC 27514 Board, Inc.
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<PAGE>
Position with
Position with Underwriter, Scudder
Name (Age) and Address Company Principal Occupation** Investor Services, Inc.
- ---------------------- ------- ---------------------- -----------------------
Peter B. Freeman (64) Director Corporate Director and --
100 Alumni Avenue Trustee
Providence, RI 02906
Robert W. Lear (79) Director Executive-in-Residence, --
429 Silvermine Road Visiting Professor, Columbia
New Canaan, CT 06840 University Graduate School
of Business
Stephen L. Akers+ Vice President Managing Director of --
Scudder, Stevens & Clark,
Inc.
K. Sue Cote (35)+ Vice President Principal of Scudder, --
Stevens & Clark, Inc.
Carol L. Franklin++ Vice President Managing Director of --
Scudder, Stevens & Clark,
Inc.
Jerard K. Hartman (64)++ Vice President Managing Director of --
Scudder, Stevens & Clark,
Inc.
Thomas W. Joseph (57)+ Vice President and Principal of Scudder, Vice President,
Assistant Secretary Stevens & Clark, Inc. Director, Treasurer and
Assistant Clerk
Kathryn L. Quirk (44)++ Vice President Managing Director of Senior Vice President,
Scudder, Stevens & Clark, Director and Clerk
Inc.
Thomas F. McDonough (50)+ Vice President and Principal of Scudder, Assistant Clerk
Secretary Stevens & Clark, Inc.
Pamela A. McGrath (43)+ Vice President Managing Director of --
and Treasurer Scudder, Stevens & Clark,
Inc.
</TABLE>
* Messrs. Lee and Pierce are considered by the Company to be persons
who are "interested persons" of the Adviser or of the Company (within
the meaning of the 1940 Act).
** All the Directors and officers have been associated with their
respective companies for more than five years, but not necessarily in
the same capacity.
# Messrs. Pierce, Fiedler and Lee are members of the Executive Committee.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
Directors of the Company not affiliated with the Adviser receive from
the Company an annual fee and a fee for each Board of Directors and Board
Committee meeting attended and are reimbursed for all out-of-pocket expenses
relating to attendance at such meetings. Directors who are affiliated with the
Adviser do not receive compensation from the Company, but the Company may
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<PAGE>
reimburse such Directors for all out-of-pocket expenses relating to attendance
at meetings.
As of April 1, 1997, the Directors and officers of the Company, as a group,
owned less than 1% of the outstanding shares of the Portfolio as of the
commencement of operations.
REMUNERATION
Responsibilities of the Board--Board and Committee Meetings
The Board of Directors is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with
Scudder, Stevens & Clark, Inc. (The "Advisor"). These "Independent Directors"
have primary responsibility for assuring that each Fund is managed in the best
interests of its shareholders.
The Board of Directors 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 Directors review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Funds' 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 each Fund's independent public accountants and
by independent legal counsel selected by the Independent Directors.
All of the Independent Directors serve on the Committee on Independent
Directors, which nominates Independent Directors and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Directors from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
The Independent Directors met five times during 1996, including Board and
Committee meetings and meetings to review each Fund's contractual arrangements
as described above. All of the Independent Directors attended at least 83.3% of
all such meetings.
Compensation of Officers and Directors
The Independent Directors receive compensation of $150 per Portfolio for
each Director's meeting attended and each Board Committee meeting attended and
an annual Director's fee payable quarterly of $500 for each Portfolio with
average daily net assets less than $100 million, and $1,500 for each Portfolio
with average daily net assets in excess of $100 million. No additional
compensation is paid to any Independent Director for travel time to meetings,
attendance at directors' educational seminars or conferences, service on
industry or association committees, participation as speakers at directors'
conferences, service on special trustee task forces or subcommittees or service
as lead or liaison trustee. Independent Directors do not receive any employee
benefits such as pension, retirement or health insurance.
The Independent Directors also serve in the same capacity for other funds
managed by the Adviser. These funds differ broadly in type an complexity and in
some cases have substantially different Directors fee schedules. The following
table shows the aggregate compensation received by each Independent Directors
during 1996 from the Trust and from all of Scudder funds as a group.
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<TABLE>
<CAPTION>
Name Scudder Institutional Fund* All Scudder Funds
---- --------------------------- -----------------
<S> <C> <C>
Edgar R. Fiedler, Director** $________ $108,083 (20 funds)
Peter B. Freeman, Director $________ $131,734 (33 funds)
Robert W. Lear, Director $________ $34,049 (11 funds)
</TABLE>
* Scudder Institutional Fund, Inc. consists of Institutional Government
Portfolio, Institutional Cash Portfolio, Institutional Tax-Free Portfolio
and Institutional International Equity Portfolio. Institutional
International Equity Portfolio commenced operations on April 3, 1996.
** Mr. Fiedler received $______ through a deferred compensation program. As of
December 31, 199 , Mr. Fiedler had a total of $______ accrued in a deferred
compensation program for serving on the Board of Directors of the Company.
Members of the Board of Directors who are employees of Scudder or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of Scudder, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
DISTRIBUTOR
(See "Company Organization--Distributor" in the Portfolio's Prospectus)
Pursuant to a contract with the Portfolio, Scudder Investor Services, Inc.
(the "Distributor"), a subsidiary of the Adviser, serves as the Company's
principal underwriter in connection with a continuous offering of shares of the
Portfolio. The Distributor receives no remuneration for its services as
principal underwriter and is not obligated to sell any specific amount of
Company shares. As principal underwriter, it accepts purchase orders for shares
of the Portfolio. In addition, the Underwriting Agreement obligates the
Distributor to pay certain expenses in connection with the offering of the
shares of the Portfolio. After the Prospectuses and periodic reports have been
prepared, set in type and mailed to shareholders, the Distributor will pay for
the printing and distribution of copies thereof used in connection with the
offering to prospective investors. The Distributor will also pay for
supplemental sales literature and advertising costs.
TAXES
(See "Distribution and Performance Information--Taxes" in the
Portfolio's Prospectus.)
The Prospectus describes generally the tax treatment of distributions by
the Portfolio. This section of the Statement includes additional information
concerning federal taxes.
The Portfolio has elected to be treated as a regulated investment company
under Subchapter M of the Code, or a predecessor statute. As a regulated
investment company, the Portfolio is required to distribute to its shareholders
at least 90 percent of its investment company taxable income (including net
short-term capital gain) and generally is not subject to federal income tax to
the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code.
The Portfolio is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Portfolio's ordinary income for the calendar
year, at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) realized during the one-year period
ending October 31 during such year, and all ordinary income and capital gains
for prior years that were not previously distributed.
Investment company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of the Portfolio.
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<PAGE>
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, the
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim a proportionate
share of federal income taxes paid by the Portfolio on such gains as a credit
against the shareholder's federal income tax liability, and will be entitled to
increase the adjusted tax basis of the shareholder's Portfolio shares by the
difference between the shareholder's pro rata share of such gains and the
shareholder's tax credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are not expected to comprise a
substantial part of the Portfolio's gross income. If any such dividends
constitute a portion of the Portfolio's gross income, a portion of the income
distributions of the Portfolio may be eligible for the deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares of the Portfolio with respect to which the dividends are
received are treated as debt-financed under federal income tax law and is
eliminated if either those shares or the shares of the Portfolio are deemed to
have been held by the Portfolio or the shareholders, as the case may be, for
less than 46 days.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the Portfolio have been held by
such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares may result in tax consequences (gain
or loss) to the shareholder and are also subject to these reporting
requirements.
An individual may make a deductible IRA contribution of up to $2,000 or, if
less, the amount of the individual's earned income for any taxable year only if
(i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her nonearning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Portfolio result in a reduction in the net asset value
of the Portfolio's shares. Should a distribution reduce the net asset value
below a shareholder's cost basis, such distribution would nevertheless be
taxable to the shareholder as ordinary income or capital gain as described
above, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax implications
of buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
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<PAGE>
The Portfolio intends to qualify for and may make the election permitted
under Section 853 of the Code so that shareholders may (subject to limitations)
be able to claim a credit or deduction on their federal income tax returns for,
and will be required to include in gross income (in addition to distributions
actually received), their pro rata portion of qualified taxes paid by the
Portfolio to foreign countries (which taxes relate primarily to investment
income). The Portfolio may make an election under Section 853 of the Code,
provided that more than 50% of the value of the total assets of the Portfolio at
the close of the taxable year consists of securities in foreign corporations.
The foreign tax credit available to shareholders is subject to certain
limitations imposed by the Code.
If the Portfolio does not make the election permitted under section 853 any
foreign taxes paid or accrued will represent an expense to the Portfolio which
will reduce its investment company taxable income. Absent this election,
shareholders will not be able to claim either a credit or a deduction for their
pro rata portion of such taxes paid by the Portfolio, nor will shareholders be
required to treat as part of the amounts distributed to them their pro rata
portion of such taxes paid.
Equity options (including covered call options written on portfolio stock)
and over-the-counter options on debt securities written or purchased by the
Portfolio will be subject to tax under Section 1234 of the Code. In general, no
loss will be recognized by the Portfolio upon payment of a premium in connection
with the purchase of a put or call option. The character of any gain or loss
recognized (i.e. long-term or short-term) will generally depend, in the case of
a lapse or sale of the option, on the Portfolio's holding period for the option,
and in the case of the exercise of a put option, on the Portfolio's holding
period for the underlying property. The purchase of a put option may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of any stock in the Portfolio's portfolio similar to the stocks
on which the index is based. If the Portfolio writes an option, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as short-term capital gain or loss. If a call option
is exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
Positions of the Portfolio which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes the Portfolio's risk of loss with respect to such stock
could be treated as a "straddle" which is governed by Section 1092 of the Code,
the operation of which may cause deferral of losses, adjustments in the holding
periods of stocks or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for
certain "qualified covered call options" on stock written by the Portfolio.
Many futures and forward contracts entered into by the Portfolio and listed
nonequity options written or purchased by the Portfolio (including options on
debt securities, options on futures contracts, options on securities indices and
options on currencies), will be governed by Section 1256 of the Code. Absent a
tax election to the contrary, gain or loss attributable to the lapse, exercise
or closing out of any such position generally will be treated as 60% long-term
and 40% short-term, and on the last trading day of the Portfolio's fiscal year,
all outstanding Section 1256 positions will be marked to market (i.e., treated
as if such positions were closed out at their closing price on such day), with
any resulting gain or loss recognized as 60% long-term and 40% short-term. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts, certain futures and options and
similar financial instruments entered into or acquired by the Portfolio will be
treated as ordinary income or loss.
Subchapter M of the Code requires the Portfolio to realize less than 30% of
its annual gross income from the sale or other disposition of stock, securities
and certain options, futures and forward contracts held for less than three
months. The Portfolio's options, futures and forward transactions may increase
the amount of gains realized by the Portfolio that are subject to this 30%
limitation. Accordingly, the amount of such transactions that the Portfolio may
undertake may be limited.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Portfolio accrues receivables or
liabilities denominated in a foreign currency and the time the Portfolio
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
options, futures and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
23
<PAGE>
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If the Portfolio invests in stock of certain foreign investment companies,
the Portfolio may be subject to U.S. federal income taxation on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the Portfolio's holding period for the stock. The
distribution or gain so allocated to any taxable year of the Portfolio, other
than the taxable year of the excess distribution or disposition, would be taxed
to the Portfolio at the highest ordinary income rate in effect for such year,
and the tax would be further increased by an interest charge to reflect the
value of the tax deferral deemed to have resulted from the ownership of the
foreign company's stock. Any amount of distribution or gain allocated to the
taxable year of the distribution or disposition would be included in the
Portfolio's investment company taxable income and, accordingly, would not be
taxable to the Portfolio to the extent distributed by the Portfolio as a
dividend to its shareholders.
Proposed regulations have been issued which may allow the Portfolio to make
an election to mark to market its shares of these foreign investment companies
in lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Portfolio would report as
ordinary income the amount by which the fair market value of the foreign
company's stock exceeds the Portfolio's adjusted basis in these shares. No mark
to market losses would be recognized. The effect of the election would be to
treat excess distributions and gain on dispositions as ordinary income which is
not subject to a fund level tax when distributed to shareholders as a dividend.
Alternatively, the Portfolio may elect to include as income and gain its share
of the ordinary earnings and net capital gain of certain foreign investment
companies in lieu of being taxed in the manner described above.
Investments by the Portfolio in original issue discount obligations will
result in income to the Portfolio equal to a portion of the excess of the face
value of the obligations over issue price (the "original issue discount") each
year that the obligations are held, even though the Portfolio receives no cash
interest payments. This income is included in determining the amount of income
which the Portfolio must distribute to maintain its status as a regulated
investment company and to avoid federal income and excise taxes. If the
Portfolio invests in certain high yield original issue discount obligations
issued by corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Portfolio by its corporate shareholders, to the extent
attributable to such portion of accrued original issue discount, may be eligible
for this deduction for dividends received by corporations if so designated by
the Portfolio in a written notice to shareholders.
The Portfolio will be required to report to the IRS all distributions of
investment company taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Portfolio shares, except in the case of
certain exempt shareholders. Under the backup withholding provisions of Section
3406 of the Code, distributions of investment company taxable income and capital
gains and proceeds from the redemption or exchange of the shares of a regulated
investment company may be subject to withholding of federal income tax at the
rate of 31% in the case of non-exempt shareholders who fail to furnish the
investment company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law.
Withholding may also be required if a Portfolio is notified by the IRS or a
broker that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
Shareholders of the Portfolio may be subject to state and local taxes on
distributions received from the Portfolio and on redemptions of the Portfolio's
shares.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. corporations, partnerships, trusts and estates. Each shareholder who is
not a U.S. person should consider the U.S. and foreign tax consequences of
ownership of shares of the Portfolio, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of 30% (or at a
lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
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<PAGE>
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
To the maximum extent feasible, the Adviser places orders for portfolio
transactions for the Portfolio through the Distributor which in turn places
orders on behalf of the Portfolio with issuers, underwriters or other brokers
and dealers. The Distributor receives no commissions, fees or other remuneration
from the Portfolio for this service. Allocation of brokerage is supervised by
the Adviser.
The primary objective of the Adviser in placing orders for the purchase and
sale of securities for the Portfolio is to obtain the most favorable net results
taking into account such factors as price, commission where applicable
(negotiable in the case of U.S. national securities exchange transactions but
generally fixed in the case of foreign exchange transactions) size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Adviser seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Portfolio to reported commissions paid by others. The
Adviser reviews on a routine basis commission rates, execution and settlement
services performed, making internal and external comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply market quotations to the Custodian for appraisal
purposes, or who supply research, market and statistical information to the
Portfolio. The term "research, market and statistical information" includes
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; and analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. The Adviser is not authorized when placing
portfolio transactions for the Portfolio to pay a brokerage commission (to the
extent applicable) in excess of that which another broker might have charged for
executing the same transaction solely on account of the receipt of research,
market or statistical information. The Adviser will not place orders with
brokers or dealers on the basis that the broker or dealer has or has not sold
shares of the Portfolio. Except for implementing the policy stated above, there
is no intention to place portfolio transactions with particular brokers or
dealers or groups thereof. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available otherwise.
Although certain research, market and statistical information from brokers
and dealers can be useful to the Portfolio and to the Adviser, it is the opinion
of the Adviser that such information will only supplement the Adviser's own
research effort since the information must still be analyzed, weighed, and
reviewed by the Adviser's staff. Such information may be useful to the Adviser
in providing services to clients other than the Portfolio, and not all such
information will be used by the Adviser in connection with the Portfolio.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Portfolio.
The Directors intend to review whether the recapture for the benefit of the
Portfolio of some portion of the brokerage commissions or similar fees paid by
the Portfolio on portfolio transactions is legally permissible and advisable.
In the fiscal year ended December 31, 1996, the Fund paid brokerage
commissions of $70,492. For the fiscal year ended December 31, 1996, $63,094
(90%) of the total brokerage commissions paid by the Fund resulted from orders
for transactions, placed consistent with the policy of seeking to obtain the
most favorable net results, with brokers and dealers who provided supplementary
research, market and statistical information to the Fund or the Adviser. The
balance of such brokerage was not allocated to particular broker or dealer with
regard to the above-mentioned or other special factors.
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Portfolio Turnover
The Portfolio's average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. A higher rate
involves greater brokerage transaction expenses to the Portfolio and may result
in the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for the Portfolio whenever
necessary, in management's opinion, to meet the Portfolio's objective. The
portfolio turnover rate for the period April 3, 1996 (commencement of
operations) to December 31, 1996 was 10.1%.
NET ASSET VALUE
The net asset value of shares of the Portfolio is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share is determined by dividing
the value of the total assets of the Portfolio, less all liabilities, by the
total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system is valued at its most
recent sale price. Lacking any sales, the security is valued at the high or
"inside" bid quotation. The value of an equity security not quoted on the NASDAQ
System, but traded in another over-the-counter market, is its most recent sale
price. Lacking any sales, the security is valued at the Calculated Mean. Lacking
a Calculated Mean, the security is valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Portfolio's pricing agent(s) which reflect broker/dealer
supplied valuations and electronic data processing techniques. Short-term
securities with remaining maturities of sixty days or less are valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Company's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Portfolio is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
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Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Portfolio will be included in the
Prospectus and the Financial Statement is included in this Statement of
Additional Information in reliance on the report of Price Waterhouse LLP,
independent accountants, and given upon their authority as experts in accounting
and auditing.
Other Information
The CUSIP number of the Portfolio is 811161-88-4.
The Portfolio has a fiscal year end of December 31.
The law firm of Sullivan and Cromwell is counsel to the Company and the law
firm of Dechert Price and Rhoads acts as special counsel to the Portfolio.
Price Waterhouse LLP are the independent accountants for the Portfolio.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110-4103, a subsidiary of the Adviser, computes net
asset value for the Portfolio. The Portfolio pays SFAC an annual fee equal to
0.065% of the first $150 million of average daily net assets, 0.040% of the next
$850 million, and 0.020% of such assets in excess of $1 billion, plus holding
and transaction charges for this service. For the period April 3, 1996
(commencement of operations) to December 31, 1996, the amount charged to the
Portfolio by SFAC aggregated $36,458, all of which was unpaid at December 31,
1996.
Scudder Service Corporation (the "Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer,
dividend-paying and shareholder service agent for the Portfolio and as such
performs the customary services of a transfer agent and dividend disbursing
agent. These services include, but are not limited to: (i) receiving for
acceptance in proper form orders for the purchase or redemption of Portfolio
shares and promptly effecting such orders; (ii) recording purchases of Portfolio
shares and, if requested, issuing stock certificates; (iii) reinvesting
dividends and distributions in additional shares or transmitting payments
therefor; (iv) receiving for acceptance in proper form transfer requests and
effecting such transfers; (v) responding to shareholder inquiries and
correspondence regarding shareholder account status; (vi) reporting abandoned
property to the various states; and (vii) recording and monitoring daily the
issuance in each state of shares of the Portfolio. The Service Corporation
applies a minimum annual charge of $220,000 for servicing all Portfolios of the
Company. An activity fee is charged on a monthly basis for the shareholder
accounts serviced. The difference between the activity fees charged and the
annual $220,000 minimum is allocated among all the Portfolios based on relative
net assets. For the period April 3, 1996 (commencement of operations) to
December 31, 1996, the amount charged to the Portfolio by SSC aggregated $17,723
of which $2,292 was unpaid at December 31, 1996.
The Portfolio's Prospectus and this Statement of Additional Information
omit certain information contained in the Registration Statement and its
amendments which the Portfolio has filed with the SEC under the Securities Act
of 1933 and reference is hereby made to the Registration Statement for further
information with respect to the Portfolio and the securities offered hereby. The
Registration Statement and its amendments are available for inspection by the
public at the SEC in Washington, D.C.
The Portfolio employs Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts 02109, as Custodian.
Costs of $28,742 incurred by the Portfolio in conjunction with its
organization are amortized over the five year period beginning April 3, 1996.
27
<PAGE>
No Portfolio of the Company shall be liable for the obligations of any
other Portfolio of the Company.
FINANCIAL STATEMENTS
The financial statements including the investment portfolios of the
Company, together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements are incorporated herein by
reference to the Annual Report to the Shareholders of the Company dated December
31, 1996 and are hereby deemed to be part of this Statement of Additional
Information.
28
<PAGE>
<PAGE>
APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate bonds.
Ratings of Corporate Bonds
S&P: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Bonds
which are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities. Bonds which are rated
A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds which are rated Ba are
<PAGE>
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
BARRETT INTERNATIONAL SHARES
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Board of Directors
<S> <C>
DAVID S. LEE^(1) Chairman of the Board; Managing Director, Scudder, Stevens
& Clark, Inc.
EDGAR R. FIEDLER^(1)^(2)^(3) Vice President and Economic Counsellor, The Conference Board;
formerly Assistant Secretary of the Treasury for Economic Policy
PETER B. FREEMAN^(2)^(3) Corporate Director and Trustee
ROBERT W. LEAR^(2)^(3) Executive-in-Residence and Visiting Professor, Columbia
University Graduate School of Business; Director or Trustee,
Various Organizations
DANIEL PIERCE^(1) President; Chairman of the Board, Scudder, Stevens & Clark, Inc.
^(1)Member of Executive Committee
^(2)Member of Nominating Committee
^(3)Member of Audit Committee
</TABLE>
- --------------------------------------------------------------------------------
Officers
DAVID S. LEE Chairman of the Board
DANIEL PIERCE President
STEPHEN L. AKERS Vice President
K. SUE COTE Vice President
CAROL L. FRANKLIN Vice President
JERARD K. HARTMAN Vice President
KATHRYN L. QUIRK Vice President
THOMAS W. JOSEPH Vice President and Assistant Secretary
THOMAS F. McDONOUGH Vice President and Secretary
PAMELA A. McGRATH Vice President and Treasurer
2
<PAGE>
Dear Shareholder:
We are pleased to provide you with the first annual report for the
Institutional International Equity Portfolio (the "Portfolio"). The Portfolio is
currently comprised of a single class of shares ("Barrett International
Shares"). The report covers the period from when the Portfolio commenced
operations on April 3, 1996, through December 31, 1996.
Since the Portfolio has been in operation, the Portfolio has provided a
positive total return of 4.93%, reflecting in part a generally positive market
environment for international equities. Going forward, the Portfolio will
continue to seek to provide long-term growth of capital by investing principally
in the equity securities of companies which do business primarily outside of the
United States. The management discussion which follows outlines key elements of
the current market environment and Portfolio strategy.
Thank you for your investment in the Portfolio. If you have any questions
about the Portfolio, please call us at (800) 854-8525.
/s/David S. Lee
David S. Lee
Chairman
3
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO/BARRETT INTERNATIONAL SHARES
PERFORMANCE UPDATE
DECEMBER 31, 1996
- --------------------------------------------
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------
Total Return
Period Growth ------------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- --------------------------------------
Life of
Fund* $10,493 4.93% --
- --------------------------------------
MSCI EAFE & CANADA INDEX
- --------------------------------------
Total Return
Period Growth ------------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- --------------------------------------
Life of
Fund* $10,076 0.76% --
- --------------------------------------
*The Portfolio commenced operations on
April 3, 1996. Index comparisons begin
April 30, 1996.
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
Year Amount
- ----------------------
4/96* $10,000
5/96 $ 9,951
6/96 $10,066
7/96 $ 9,671
8/96 $ 9,778
9/96 $ 9,934
10/96 $ 9,893
11/96 $10,272
12/96 $10,372
MSCI EAFE & CANADA INDEX
Year Amount
- ----------------------
4/96* $10,000
5/96 $ 9,829
6/96 $ 9,872
7/96 $ 9,583
8/96 $ 9,619
9/96 $ 9,880
10/96 $ 9,814
11/96 $10,218
12/96 $10,076
The Morgan Stanley Capital International (MSCI) Europe, Australia, the Far
East (EAFE) & Canada Index is an unmanaged capitalization-weighted measure of
stock markets in Europe, Australia, the Far East and Canada. Index returns
assume dividends reinvested net of withholding tax and, unlike Portfolio
returns, do not reflect any fees or expenses.
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
PERIOD ENDED DECEMBER 31
1996*
-------------------------
NET ASSET VALUE... $12.48
INCOME DIVIDENDS.. $ .11
FUND TOTAL
RETURN (%)........ 4.93
INDEX TOTAL
RETURN (%)........ .76
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
If the Manager had not maintained the Portfolio's expenses, total return for
the life of the Portfolio would have been lower.
4
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO/BARRETT INTERNATIONAL SHARES
PORTFOLIO SUMMARY
DECEMBER 31, 1996
- -------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
COUNTRY/REGION (Excludes Cash Equivalents of 10%)
- ---------------------------------------------------------------------------
Japan 21%
Emerging Markets 20%
Germany 15%
United Kingdom 11%
Switzerland 8%
France 8%
Sweden 5%
Netherlands 5%
Italy 3%
Other 4%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
SECTORS (Excludes Cash Equivalents of 10%)
- --------------------------------------------------------------------------
Manufacturing 24%
Financial 11%
Service Industries 8%
Consumer Discretionary 7%
Metals & Minerals 6%
Communications 6%
Technology 6%
Energy 6%
Utilities 6%
Other 20%
-----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- -----------------------------------------------------------------------
10 LARGEST EQUITY HOLDINGS (13% of Portfolio)
- -----------------------------------------------------------------------
1. HOESCHT AG
Chemical producer in Germany
2. HENNES & MAURITZ AB
Clothing and cosmetics retailer throughout Europe
3. MANNESMANN AG
Diversified construction and technology company in Germany
4. BASF AG
Leading international chemical producer in Germany
5. BAYER AG
Leading chemical producer in Germany
6. CARLTON COMMUNICATIONS PLC
Television post production products and services in the United Kingdom
7. NOVARTIS AG
Pharmaceutical company in Switzerland
8. HSBC HOLDINGS LTD.
Bank in Hong Kong
9. L.M. ERICSSON TELEPHONE CO.
Leading manufacturer of cellular telephone equipment in Sweden
10. COMPANIA TELEFONICA NACIONAL DE ESPANA SA
Telecommunication services in Spain
For more complete details about the Portfolio's Investment Portfolio,
see page 9.
5
<PAGE>
Dear Shareholder:
The following portfolio management discussion summarizes the performance of
the key markets in which portfolio holdings are invested, reviews the economic
and investment fundamentals underlying these markets, and summarizes the
portfolio's investment strategy with respect to these markets.
Performance Summary
The Institutional International Equity Portfolio provided a total return of
4.93% for the abbreviated fiscal year ended December 31, 1996, compared with
0.76% for the MSCI EAFE and Canada Index for the same time period. The Portfolio
commenced operations on April 3, 1996.
Although there were some important exceptions, most world markets turned in
performances that ranged from solid to strong. In Europe falling interest rates,
ongoing corporate restructuring, takeover activity, and greater management focus
on shareholder value propelled markets upwards. Investors seem to be
increasingly aware of the beneficial effects of structural changes on European
equity markets. Several bourses reached new peaks, including France, whose
market was characterized by takeover-related activity and renewed confidence in
French progress towards monetary union. Germany rose on the back of the strong
U.S. market, corporate restructuring, and a weaker Deutschemark. Deutsche
Telekom's initial public offering, the largest in Europe's history, also
provided additional focus. Nordic markets also benefited from falling interest
rates. In Spain, declining interest rates and optimism regarding currency
convergence drove the market significantly higher in the final quarter of the
year. The portfolio's tenth-largest holding as of year end, Compania Telefonica
Nacional de Espana SA, rose 24.5% in the last three months for a total gain of
65.4% this year. And the U.K. market turned in strong 1996 performance with a
gain of 27.4%, propelled by takeover activity and a buoyant consumer outlook.
Asian markets were mixed. Japan's market returned -15.5% for the year,
falling beneath the 19,000 level for the first time in more than a year while
the yen fell to a 45-month low against the dollar. Concerns about the feeble
economic recovery and the absence of domestic investors from the market
contributed to selling pressures. Korea's market fell 38.1% troubled by
corporate earnings, a widening trade gap, a depreciating currency, and a
collapse in the prices of semiconductors, which account for an important part of
national output. As concerns about the 1997 handover to China faded, improved
prospects for the local economy and property market caused the Hong Kong market
to rally 12.2% in the final quarter, contributing to a total return of 33.1% for
the year. Brazil continued its spectacular ascent, gaining another 7.3% in the
fourth quarter for a total gain of 53.2% this year, driven by an improving
macroeconomic backdrop, continued
6
<PAGE>
positive news on the privatization front, and the perception Brazilians are
likely to experience an extended period of low -- even single digit -- inflation
for the first time since the 1940s.
Portfolio Strategy
In Europe, we believe moderate growth and a benign inflation environment
will provide the basis for corporate profit growth in 1997. Industry
consolidation and corporate restructuring are being propelled by the forces of
global competition and the trend toward deregulation. Against this backdrop, we
continue to seek out companies with sound management strategies positioned to
benefit from these structural changes. The restructuring theme is most notable
in Germany at present, with strong performance from German-based holdings
Hoechst, BASF, and Daimler-Benz, all of which benefited from restructuring
efforts. But restructurings are also evident elsewhere in Europe. A prime
example is U.K.-based Pearson, which over the past three years has transformed
itself from a disparate group of businesses into a focused media company
featuring properties such as the Financial Times, the Economist, Penguin Books,
and Addison-Wesley. Pearson has taken steps to increase subscriptions to the
well-regarded Financial Times, including the use of electronic distribution
sites, and is using the paper's image to increase sales in the Penguin Books
division. Addison-Wesley, ranking in third place among U.S. educational
publishers, is also pursuing business expansion via electronic publishing
opportunities. With underworked intellectual property, Pearson is a potential
takeover target for a handful of European media empire builders.
Industry consolidation continues to be a successful theme in the portfolio.
Holding Carrefour rose substantially in the wake of a bid for 33% of Cora, the
eighth largest retailer in France. Consolidation of the retail sector in France
has been hastened by government restrictions on building new sites. Carrefour's
takeover bid for competitor Cora will enable the company to expand its
distribution network and become the predominant food retailer in France.
Consolidations are also reshaping the engineering sector in the United Kingdom,
as evidenced in portfolio holding General Electric Company. The company is a
recognized leader in the defense arena, and is considered the most likely
partner for U.S. defense companies seeking a foothold in Europe. GE also is
positioned to emerge as one of the few surviving players in global power
generation, and has a successful joint venture in power systems with Alcatel
Alsthom.
Japanese portfolio holdings constituted 21% of the portfolio as of
year-end, versus 31% at mid-year. Economic recovery remains elusive, marked by a
sluggish consumer environment, although the weakening yen should help reflate
the economy. Against this backdrop, we continue to seek out companies with
unique franchises and high-quality global blue chip stocks benefiting from a
weaker yen. One such unique franchise in the portfolio is supermarket operator
Jusco, which continued to outperform. The company has a very successful strategy
of establishing joint ventures with strong international
7
<PAGE>
firms such as Body Shop, Laura Ashley and Talbots, a factor underpinning strong
earnings growth. Jusco has also recently established joint ventures with
U.S.-based Sports Authority and Office Max to introduce the country's first
superstores, which are being introduced via lower-cost leasing of premises in
modestly priced shopping locations. Exposure to high-quality blue chip stocks
was rewarded by excellent performance from Canon, a Japanese leader in office
automation with impressive growth due to strong sales of copiers, steppers, and
printers. With 78% of sales overseas, the company is also a beneficiary of a
depreciating yen.
Our strategy in Asia has been to identify well-run, financially strong
companies in a good position to benefit from the opportunities created by
ongoing economic development in the Pacific Basin. Growth expectations are more
subdued than in prior years, due primarily to pricing problems in semiconductors
and consumer electronics, the falling yen's negative effect on Asian export
competitiveness, and weak demand in industrial countries. But we believe the
long-term growth story in Asia remains intact. We like players such as First
Pacific and HSBC in Hong Kong, which feature good managements and intra-regional
business strength. We are also invested in companies benefiting from strong
consumer spending and rising disposable incomes, including such standouts as
mall operator SM Prime in the Philippines and HM Sampoerna in Indonesia.
Looking Ahead
The core investment strategies for your portfolio remain essentially
unchanged. In Europe, we will continue to focus on structural change at the
industry and corporate level. In Japan, we have reduced exposure to domestic
growth and plan to focus on current or emerging globally oriented blue chip
companies. Expectations are limited for a sustained growth resurgence in Europe
or Japan, and as a result, we intend to avoid investments that we believe are
exposed to near-term cyclical economic risk.
Thank you for your interest in the Institutional International Equity
Portfolio.
/s/Carol L. Franklin /s/J. Gregory Garret
Lead Portfolio Manager Portfolio Manager
Carol L. Franklin J. Gregory Garrett
- --------------------------------------------------------------------------------
A Team Approach to Investing
Lead Portfolio Manager Carol L. Franklin has been responsible for setting the
Portfolio's investment strategy and overseeing security selection since the
Portfolio's inception. Ms. Franklin, who has 20 years of experience in finance
and investing joined Scudder in 1981. J. Gregory Garrett, Portfolio Manager,
joined Scudder in 1990, and the Portfolio's team in 1997. Mr. Garrett
specializes in international client service and international equity management
and has over ten years of investment experience.
- --------------------------------------------------------------------------------
8
<PAGE>
Institutional International Equity Portfolio/Barrett International Shares
Investment Portfolio
December 31, 1996
<TABLE>
<CAPTION>
Principal Market
Amount (b) Value ($)
---------- ---------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 9.9%
Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/96 at 6.7% to be repurchased at $1,760,655
on 1/2/97, collateralized by a $1,737,000 U.S. Treasury
Note, 6.375%, 3/31/01 (Cost $1,760,000) ................................... 1,760,000 1,760,000
-------------
CONVERTIBLE BONDS -- 0.2%
Japan
Softbank Corp., 0.5%, 3/29/02 (Cost $63,199) ....................... JPY 5,000,000 40,152
-------------
Shares
----------
PREFERRED STOCKS -- 1.8%
Germany
RWE AG (Producer and marketer of petroleum and chemical products) ......... 5,000 168,903
SAP AG (Computer software manufacturer) ................................... 1,100 153,636
-------------
Total Preferred Stocks (Cost $299,949) 322,539
-------------
COMMON STOCKS -- 88.1%
Argentina 0.9%
YPF S.A. "D" (ADR) (Petroleum company) .................................... 6,500 164,125
-------------
Brazil 4.3%
Centrais Eletricas Brasileiras S/A "B" (pfd.) (Electric utility) .......... 520,000 193,167
Companhia Energetica de Minas Gerais (pfd.) (Electric power utility) ...... 6,000,000 204,408
Petroleo Brasileiro S/A (pfd.) (Petroleum company) ........................ 1,300,000 207,054
Usinas Siderurgicas de Minas Gerais S/A (pfd.) (Non-coated
flat products and electrolytic galvanized products) .................... 150,000,000 153,017
-------------
757,646
-------------
Canada 1.1%
Canadian Pacific Ltd. (Ord.) (Transportation and natural resource
conglomerate) ........................................................... 7,523 198,015
-------------
</TABLE>
See notes to financial statements.
9
<PAGE>
Institutional International Equity Portfolio/Barrett International Shares
Investment Portfolio (continued)
December 31, 1996
<TABLE>
<CAPTION>
Market
Shares Value ($)
---------- ---------
<S> <C> <C>
France 6.8%
Carrefour (Hypermarket operator and food retailer) ........................ 300 195,257
Christian Dior (Leading fashion house) .................................... 1,000 161,365
Compagnie Financiere de Paribas (Finance and investment company) .......... 3,060 207,009
Lafarge SA (Leading producer of cement, concrete and aggregates) .......... 1,300 78,020
Pinault-Printemps, SA (Distributor of consumer goods) ..................... 500 198,381
Rhone-Poulenc SA "A" (Medical, agricultural and consumer chemicals) ....... 516 17,598
Schneider SA (Manufacturer of electronic components and
automated manufacturing systems) ....................................... 4,164 192,586
Total SA "B" (International oil and gas exploration, development
and production) ........................................................ 2,052 166,945
-------------
1,217,161
-------------
Germany 12.0%
Adidas AG (Manufacturer of sport shoes, clothing and equipment) ........... 1,200 103,680
BASF AG (Leading international chemical producer) ......................... 6,500 250,313
Bayer AG (Leading chemical producer) ...................................... 5,700 232,540
Bayerische Vereinsbank AG (Commercial bank) ............................... 3,500 143,697
Commerzbank AG (Worldwide multi-service bank) ............................. 6,300 160,022
Daimler-Benz AG (Automobile and truck manufacturer)* ...................... 2,500 172,151
Deutsche Telekom AG (Telecommunication services)* ......................... 1,698 35,794
Deutsche Telekom AG (ADR) (Telecommunication services)* ................... 2,268 46,211
Hoechst AG (Chemical producer) ............................................ 6,000 283,366
Mannesmann AG (Bearer) (Diversified construction and technology
company) ............................................................... 600 259,980
Schering AG (Pharmaceutical and chemical producer) ........................ 2,000 168,773
Siemens AG (Leading electrical engineering and electronics
company) ............................................................... 2,500 117,745
VEBA AG (Electric utility, distributor of oil and chemicals) .............. 2,800 161,887
-------------
2,136,159
-------------
Ghana 0.5%
Ashanti Goldfields Co. Ltd. (ADS) (Leading gold producer) ................. 7,000 86,625
-------------
Hong Kong 4.6%
First Pacific Co. Ltd. (International management and investment company) .. 100,000 129,937
</TABLE>
See notes to financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
---------- ---------
<S> <C> <C>
HSBC Holdings Ltd. (Bank) ................................................. 10,130 216,758
Hutchison Whampoa Ltd. (Container terminal and real estate
company) ............................................................... 22,000 172,797
Kerry Properties, Ltd. (Real estate company)* ............................. 54,000 148,012
Television Broadcasts Ltd. (Television broadcasting) ...................... 38,000 151,813
-------------
819,317
-------------
Indonesia 1.4%
Darya Varia Laboratoria (Foreign registered) (Producer of medicines
and pharmaceuticals) ................................................... 68,960 110,943
HM Sampoerna (Foreign registered) (Tobacco company) ....................... 26,000 138,696
-------------
249,639
-------------
Italy 2.5%
Ente Nazionale Idrocarburi SPA (Exploration and production of oil,
natural gas and chemicals) ............................................. 32,000 164,062
Luxottica Group SPA (ADR) (Manufacturer and marketer of
eyeglasses) ............................................................ 2,000 104,000
Telecom Italia Mobile SPA (Cellular telecommunication services) ........... 70,000 176,792
-------------
444,854
-------------
Japan 19.0%
Bridgestone Corp. (Leading automobile tire manufacturer) .................. 10,000 189,966
Canon Inc. (Leading producer of visual image and information
equipment) ............................................................. 8,000 176,841
DDI Corp. (Long distance telephone and cellular operator) ................. 18 119,057
East Japan Railway Co. (Railroad operator) ................................ 15 67,481
Fujitsu, Ltd. (Leading manufacturer of computers) ......................... 15,000 139,884
Hitachi, Ltd. (General electronics manufacturer) .......................... 12,000 111,907
Ishikawajima-Harima Heavy Industries Co. Ltd. (Comprehensive
heavy machinery manufacturer in aerospace and defense fields) .......... 21,000 93,386
Itochu Corp. (Leading general trading company) ............................ 19,000 102,046
Japan Associated Finance Co. (Venture capital company) .................... 2,000 158,017
Jusco Co. Ltd. (Major supermarket operator) ............................... 5,000 169,674
Kajima Corp. (Leading contractor engaged in large-scale civil
engineering projects) .................................................. 13,000 92,945
Kawasaki Steel Corp. (Major integrated steelmaker) ........................ 40,000 115,016
</TABLE>
See notes to financial statements.
11
<PAGE>
Institutional International Equity Portfolio/Barrett International Shares
Investment Portfolio (continued)
December 31, 1996
<TABLE>
<CAPTION>
Market
Shares Value ($)
---------- ---------
<S> <C> <C>
Keyence Corp. (Specialized manufacturer of sensors) ....................... 1,000 123,478
Kokuyo Corp. (Leading manufacturer of paper stationery) ................... 5,000 123,478
Komori Corp. (Leading manufacturer of offset printing machines) ........... 6,000 127,450
Kyocera Corp. (Leading ceramic package manufacturer) ...................... 2,000 124,687
Mabuchi Motor Co., Ltd. (Manufacturer of DC motors) ....................... 1,000 50,341
Matsushita Electric Industrial Co., Ltd. (Leading manufacturer of
consumer electronic products) .......................................... 9,000 146,879
Matsushita Electric Works, Inc. (Leading maker of building materials
and lighting equipment) ................................................ 5,000 43,045
Mitsubishi Heavy Industries, Ltd. (Diversified heavy machinery
manufacturer and leading shipbuilder) .................................. 16,000 127,105
Pioneer Electronics Corp. (Leading manufacturer of audio
equipment) ............................................................. 7,000 133,581
Ricoh Co., Ltd. (Leading maker of copiers and information
equipment) ............................................................. 13,000 149,296
SMC Corp. (Leading maker of pneumatic equipment) .......................... 2,000 134,531
Secom Co., Ltd. (Electronic security system operator) ..................... 2,000 121,060
Sumitomo Electric Industries, Ltd. (Leading manufacturer of
electric wires and cables) ............................................. 11,000 153,873
Sumitomo Metal Industries, Ltd. (Leading integrated crude steel
producer) .............................................................. 45,000 110,742
Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and copper
mining company) ........................................................ 14,000 94,413
THK Co., Ltd. (Manufacturer of linear motion systems for industrial
machinery) ............................................................. 6,000 82,376
-------------
3,382,555
-------------
Korea 0.7%
Pohang Iron & Steel Co., Ltd. (ADR) (Leading steel producer) .............. 5,800 117,450
-------------
Malaysia 1.5%
Malayan Banking Berhad (Leading banking and financial services
group) ................................................................. 12,000 133,043
Renong Berhad (Holding company involved in engineering,
construction, financial services, telecommunication and
information technology) ................................................ 72,000 127,721
-------------
260,764
-------------
</TABLE>
See notes to financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
---------- ---------
<S> <C> <C>
Netherlands 4.2%
AEGON Insurance Group NV (Insurance company) .............................. 3,000 191,190
Elsevier NV (International publisher of scientific, professional,
business and consumer information books) ............................... 9,000 152,119
Getronics NV (Provider of computer installation and maintenance
services) .............................................................. 5,000 135,737
Heineken Holdings N.V. "A" (Brewery) ...................................... 700 109,400
Wolters Kluwer CVA (Publisher) ............................................ 1,200 159,412
-------------
747,858
-------------
New Zealand 0.9%
Telecom Corp. of New Zealand (Telecommunication services) ................. 33,000 168,438
-------------
Philippines 3.0%
C & P Homes, Inc. (Home construction company) ............................. 247,500 127,044
Manila Electric Co. "B" (Electric utility) ................................ 19,500 159,411
Metropolitan Bank and Trust Company (Commercial bank and trust
company) ............................................................... 4,625 114,306
SM Prime Holdings Corp. (Leader in commercial center
operations) ............................................................ 552,000 142,722
-------------
543,483
-------------
Portugal 1.0%
Portugal Telecom SA (Telecommunication services) .......................... 6,500 185,295
-------------
Spain 2.1%
Acerinox, S.A. (Stainless steel producer) ................................. 1,200 173,403
Compania Telefonica Nacional de Espana SA (ADR)
(Telecommunication services) ........................................... 3,000 207,750
-------------
381,153
-------------
Sweden 4.3%
AGA AB "B" (Free) (Producer and distributor of industrial and
medical gases) ......................................................... 8,600 128,632
Astra AB "A" (Free) (Pharmaceutical company) .............................. 1,600 79,068
Hennes & Mauritz AB "B" (Free) (Clothing and cosmetics retailer
throughout Europe) ..................................................... 2,000 276,855
L.M. Ericsson Telephone Co. "B" (ADR) (Leading manufacturer of
cellular telephone equipment) .......................................... 7,000 211,313
</TABLE>
See notes to financial statements.
13
<PAGE>
Institutional International Equity Portfolio/Barrett International Shares
Investment Portfolio (continued)
December 31, 1996
<TABLE>
<CAPTION>
Market
Shares Value ($)
---------- ---------
<S> <C> <C>
S.K.F. AB "B" (Free) (Manufacturer of roller bearings) .................... 3,000 71,047
-------------
766,915
-------------
Switzerland 7.2%
ABB AG (Bearer) (Manufacturer of electrical equipment) .................... 120 149,160
Adecco SA (Bearer) (Personnel and temporary employment company) ........... 600 150,504
CS Holdings (Registered) (Provider of bank services, management
services and life insurance) ........................................... 1,500 153,975
Clariant AG (Registered) (Manufacturer of color chemicals) ................ 328 140,309
Elektrowatt AG (Bearer) (Holding company: owner of electric
plants and interests in hydro and nuclear power plants) ................ 375 149,216
Holderbank Financiere Glaris AG (Bearer) (Cement producer) ................ 200 142,740
Novartis AG (Registered) (Pharmaceutical company) ......................... 190 217,447
SGS Holdings SA (Bearer) (Trade inspection company) ....................... 70 171,930
-------------
1,275,281
-------------
Thailand 0.0%
Thai Farmers Bank FRN Warrants (expire 9/15/02)* .......................... 750 709
-------------
United Kingdom 10.1%
BOC Group PLC (Producer of industrial gases) .............................. 11,000 164,592
British Petroleum PLC (Major integrated world oil company) ................ 16,287 195,183
Carlton Communications PLC (Television post production products
and services) .......................................................... 25,500 223,344
General Electric Co., PLC (Manufacturer of power, communications
and defense equipment and other various electrical components) ......... 25,000 163,924
Pearson PLC (Diversified media and entertainment holding
company) ............................................................... 14,000 178,562
PowerGen PLC (Electric utility) ........................................... 16,478 161,363
RTZ Corp. PLC (Mining and finance company) ................................ 10,000 160,586
Reuters Holdings PLC (International news agency) .......................... 12,000 154,183
WPP Group PLC (Advertising agency) ........................................ 46,000 199,243
</TABLE>
See notes to financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
---------- ---------
<S> <C> <C>
Zeneca Group PLC (Holding company: manufacturing and marketing
of pharmaceutical and agrochemical products and specialty
chemicals) ............................................................. 7,000 197,137
-------------
1,798,117
-------------
Total Common Stocks (Cost $14,829,632) ....................................... 15,701,559
-------------
- ----------------------------------------------------------------------------------------------------------------
Total Investments -- 100.0% (cost $16,952,780) (a) ........................... $ 17,824,250
=============
</TABLE>
* Non-income producing security.
(a) Cost for federal income tax purposes was $16,954,977. At December 31, 1996,
net unrealized appreciation for all securities based on tax cost was
$869,273. This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of
$1,730,239 and unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $860,966.
(b) Principal amount stated in U.S. dollars unless otherwise noted.
Currency Abbreviations
----------------------
JPY Japanese Yen
Sector breakdown of the Portfolio's equity securities is noted on page 5.
15
<PAGE>
Institutional International Equity Portfolio/Barrett International Shares
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<S> <C> <C>
Assets
Investments, at market (identified cost $16,952,780) (note 2) ................ $ 17,824,250
Receivable for Portfolio shares sold ......................................... 44,593
Dividend and interest receivable ............................................. 10,166
Foreign tax recoverable ...................................................... 11,100
Deferred organizational expenses (note 2) .................................... 24,587
Due from manager (note 5) .................................................... 80,840
-------------
Total assets ........................................................... 17,995,536
Liabilities
Accrued expenses (note 5) .................................................... $ 97,627
Other payables ............................................................... 401
----------
Total liabilities ...................................................... 98,028
-------------
Net assets, at market value .................................................. $ 17,897,508
=============
Net Assets
Net assets consist of:
Distributions in excess of net investment income .......................... $ (853)
Net unrealized appreciation on investments ................................ 871,470
Accumulated net realized loss ............................................. (162,805)
Paid-in capital ........................................................... 17,189,696
-------------
Net assets, at market value .................................................. $ 17,897,508
=============
Net asset value, offering and redemption price per share
($17,897,508 / 1,433,768 outstanding shares of
Capital Stock, $.001 par value, 100,000,000
shares authorized) ........................................................ $12.48
======
</TABLE>
See notes to financial statements.
16
<PAGE>
Institutional International Equity Portfolio/Barrett International Shares
Statement of Operations
For the period April 3, 1996* to December 31, 1996
<TABLE>
<S> <C> <C>
Investment Income
Dividend (net of foreign taxes withheld of $18,811) .......................... $ 147,755
Interest ..................................................................... 106,448
-----------
254,203
Expenses:
Management fee (note 5) ...................................................... $ 104,861
Custodian and accounting fees (note 5) ....................................... 84,453
Shareholder services (note 5) ................................................ 18,182
Directors' fees and expenses (note 5) ........................................ 5,328
Registration fees ............................................................ 32,409
Auditing ..................................................................... 27,557
Reports to shareholders ...................................................... 12,351
Amortization of organization expenses (note 2) ............................... 4,155
Legal ........................................................................ 3,211
Miscellaneous fees ........................................................... 3,640
----------
Total expenses before reductions ............................................. 296,147
Expense reductions (note 5) .................................................. (185,701)
Expenses, net ............................................................. ---------- 110,446
-----------
Net investment income ........................................................ 143,757
-----------
Net realized and unrealized gain (loss) on investments
Net realized loss from:
Investments ............................................................... (162,805)
Foreign currency related transactions ..................................... (11,452) (174,257)
----------
Net unrealized appreciation from investments ................................. 871,470
-----------
Net gain on investments ...................................................... 697,213
-----------
Net increase in net assets resulting from operations ......................... $ 840,970
===========
</TABLE>
* Commencement of operations
See notes to financial statements.
17
<PAGE>
Institutional International Equity Portfolio/Barrett International Shares
Statements of Changes in Net Assets
For the period
April 3, 1996
(commencement of
operations) to
December 31, 1996
-----------------
Increase (Decrease) in Net Assets
Operations:
Net investment income ......................................... $ 143,757
Net realized loss on investments .............................. (174,257)
Net unrealized appreciation on investments during the period .. 871,470
-----------
Net increase in net assets resulting from operations .......... 840,970
-----------
Distributions to shareholders from net investment income ...... (156,525)
-----------
Capital Stock Transactions:
Proceeds from sale of shares .................................. 17,436,410
Reinvestment of distributions ................................. 88,761
Cost of shares redeemed ....................................... (313,308)
-----------
Net increase in assets from Portfolio share transactions ...... 17,211,863
-----------
Increase in net assets ........................................ 17,896,308
-----------
Net Assets:
Beginning of period ........................................... 1,200
-----------
End of period (including distributions in excess of net
investment income of $853) ................................. $17,897,508
===========
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ..................... 100
-----------
Shares sold ................................................... 1,451,638
Shares issued to shareholders in reinvestment of
distributions .............................................. 7,199
Shares redeemed ............................................... (25,169)
-----------
Net increase in Portfolio shares .............................. 1,433,668
-----------
Shares outstanding at end of period ........................... 1,433,768
===========
See notes to financial statements.
18
<PAGE>
International International Equity Portfolio/Barrett International Shares
Financial Highlights
The following table includes selected data for a share outstanding throughout
the period (a) and other performance information derived from the financial
statements.
For the period
April 3, 1996
(commencement of
operations) to
December 31, 1996
-----------------
Net asset value, beginning of period .......................... $ 12.00
-------
Income from Investment Operations:
Net investment income ......................................... .11
Net realized and unrealized gain (loss) on investments ........ .48
-------
Total from investment operations .............................. .59
-------
Less distributions from income ................................ (.11)
-------
Net asset value, end of period ................................ $ 12.48
=======
Total return (%) (b) .......................................... 4.93**
Ratios and Supplementary Data
Net assets, end of period ($ millions) ........................ 18
Ratio of operating expenses, to average daily net assets (%)... .95*
Ratio of operating expenses before expense reductions,
to average daily net assets (%).............................. 2.55*
Ratio of net investment income, to average daily net assets (%) 1.24*
Portfolio turnover rate (%).................................... 10.1*
Average commission rate paid (c)............................... $ .0004
(a) Based on monthly average shares outstanding during the period.
(b) Total returns would have been lower had certain expenses not been reduced.
(c) Average commission rate paid per share of common and preferred stock
securities.
* Annualized
** Not annualized
19
<PAGE>
Institutional International Equity Portfolio/Barrett International Shares
Notes to Financial Statements
1. Organization
Institutional International Equity Portfolio (the "Portfolio") is a
portfolio of Scudder Institutional Fund, Inc. (the "Company") which is an
open-end, diversified management investment company. Currently the Portfolio is
comprised of a single class of shares ("Barrett International Shares").
2. Significant Accounting Policies
The Portfolio's financial statements are prepared in accordance with
generally accepted accounting principles which require the use of management
estimates. Significant accounting policies followed by the Portfolio are:
(a) Security Valuation-Portfolio securities which are traded on U.S. or
foreign stock exchanges are valued at the most recent sale price reported on the
exchange on which the security is traded most extensively. If no sale occurred,
the security is then valued at the calculated mean between the most recent bid
and asked quotations. If there are no such bid and asked quotations, the most
recent bid quotation is used. Securities quoted on the National Association of
Securities Dealers Automatic Quotation ("NASDAQ") System, for which there have
been sales, are valued at the most recent sale price reported on such system. If
there are no such sales, the value is the high or "inside" bid quotation.
Securities which are not quoted on the NASDAQ System but are traded in another
over-the-counter market are valued at the most recent sale price on such market.
If no sale occurred, the security is then valued at the calculated mean between
the most recent bid and asked quotations. If there are no such bid and asked
quotations, the most recent bid quotation shall be used. Portfolio debt
securities with remaining maturities greater than sixty days are valued by
pricing agents approved by the officers of the Portfolio, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost. All other securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Directors.
(b) Foreign Currency Transactions -- The books and records of the Portfolio
are maintained in U.S. dollars. Foreign currency transactions are translated
into U.S. dollars on the following basis:
(i) market value of investment securities, other assets and other
liabilities at the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions.
The Portfolio does not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
(c) Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract (forward contract) is a commitment to purchase or sell a
foreign currency at the settlement date at a negotiated rate. During the period,
the Portfolio utilized forward contracts as a hedge in connection with portfolio
purchases and sales of securities denominated in foreign currencies.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss)
20
<PAGE>
is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, the Portfolio gives up the
opportunity to profit from favorable exchange rate movements during the term of
the contract.
(d) Federal Income Taxes -- The Portfolio intends to qualify as a regulated
investment company under subchapter M of the Internal Revenue Code and to
distribute all taxable income, including any realized net capital gains, to
shareholders. Therefore, no Federal income tax provision is required.
As of December 31, 1996, the Portfolio had a net tax basis capital loss
carryforward of approximately $147,000, which may be applied against any
realized net capital gains of each succeeding year until fully utilized or until
December 31, 2004, the expiration date. In addition, from November 1, 1996
through December 31, 1996, the Portfolio incurred approximately $14,000 of net
realized capital losses and $1,000 of net realized currency losses. As permitted
by tax regulations, the Portfolio intends to elect to defer these losses and
treat them as having arisen in the year ended December 31, 1997.
(e) Distribution of Income and Gains -- Distributions of net investment
income are made annually. During any particular year, net realized gains from
investment transactions, in excess of available capital loss carryforwards,
would be taxable to the Portfolio if not distributed and, therefore, will be
distributed to shareholders annually. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences primarily relate to foreign currency denominated securities. As a
result, net investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Portfolio may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Portfolio.
(f) Organization Costs -- Costs incurred by the Portfolio in connection
with its organization have been deferred and are being amortized on a
straight-line basis over a five-year period.
(g) Other -- Investment transactions are recorded on a trade date basis.
Interest income is recorded on the accrual basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend dates.
3. Repurchase Agreements
It is the Portfolio's policy to obtain possession, through its custodian,
of the securities underlying each repurchase agreement to which it is a party,
either through physical delivery or book entry transfer in the Federal Reserve
System or Participants Trust Portfolio. Payment by the Portfolio in respect of a
repurchase agreement is authorized only when proper delivery of the underlying
securities is made to the Portfolio custodian. The Portfolio's investment
manager values such underlying securities each business day using quotations
obtained from a reputable, independent source. If the Portfolio's investment
manager determines that the value of such underlying securities (including
accrued interest thereon) does not at least equal the value of each repurchase
agreement (including accrued interest thereon) to which such securities are
subject, it will ask for additional securities to be delivered to the
Portfolio's custodian. In connection with each repurchase agreement transaction,
if the seller defaults and the value of the collateral declines or if the seller
enters an insolvency proceeding, realization of the collateral by the Portfolio
may be delayed or limited.
21
<PAGE>
Institutional International Equity Portfolio/Barrett International Shares
Notes to Financial Statements (continued)
4. Purchases and Sales of Securities
For the period April 3, 1996 (commencement of operations) to December 31,
1996, purchases and sales of securities (excluding short-term investments)
aggregated $16,433,501 and $1,077,915, respectively.
5. Management Fee and Other Transactions with Affiliates
The Portfolio retains Scudder, Stevens & Clark, Inc. ("Scudder") as
investment manager for the Portfolio, pursuant to an investment advisory
agreement between Scudder and the Company on behalf of the Portfolio, for a
management fee payable each month, based upon the average daily value of the
Portfolio's net assets, at an annual rate of 0.90%. Scudder has agreed not to
impose all or a portion of its management fee until April 30, 1997, and during
such period to maintain the annualized expenses of the Portfolio at not more
than 0.95% of average daily net assets. For the period April 3, 1996
(commencement of operations) to December 31, 1996, Scudder did not impose any of
its fee amounting to $104,861. In addition, Scudder reimbursed expenses
amounting to $80,840.
Scudder Service Corporation ("SSC"), a subsidiary of Scudder, is the
Portfolio's shareholder service, transfer and dividend disbursing agent. For the
period April 3, 1996 (commencement of operations) to December 31, 1996, the
amount charged by SSC aggregated $17,723 of which $ 2,292 is unpaid at December
31, 1996.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of Scudder, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records for the Portfolio. For the period
April 3, 1996 (commencement of operations) to December 31, 1996, the amount
charged to the Portfolio by SFAC aggregated $36,458, all of which is unpaid at
December 31, 1996.
The Portfolio has a compensation arrangement under which payment of
Directors' fees may be deferred. Interest is accrued (based on the rate of
return earned on the 90 day Treasury Bill as determined at the beginning of each
calendar quarter) on the deferred balances and is included in "Directors' fees
and expenses." For the period April 3, 1996 (commencement of operations) to
December 31, 1996, directors' fees and expenses amounted to $3,452. The
accumulated balance of deferred directors' fees and interest thereon relating to
the Portfolio aggregated $1,876, which is included in accrued expenses of the
Portfolio.
6. Investing in Emerging Markets
Investing in emerging markets may involve special risks and considerations not
typically associated with investing in the United States. These risks include
revaluation of currencies, high rates of inflation, repatriation restrictions on
income and capital, and future adverse political and economic developments.
Moreover, securities issued in these markets may be less liquid, subject to
government ownership controls, delayed settlements, and their prices more
volatile than those of comparable securities in the United States.
22
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
SCUDDER INSTITUTIONAL FUND, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Institutional International
Equity Portfolio, a portfolio of Scudder Institutional Fund, Inc. (hereafter
referred to as the "Portfolio") at December 31, 1996, and the results of its
operations, the changes in its net assets and the financial highlights for the
period April 3, 1996 (commencement of operations) through December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Portfolio's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at December
31, 1996 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
- --------------------------------------------------------------------------------
Federal Tax Status of 1996 Dividends (Unaudited)
The total amount of dividends declared in 1996 for Scudder Institutional
International Equity Portfolio is taxable as ordinary dividend income for
Federal income tax purposes. None of this amount qualifies for the dividends
received deduction available to corporations.
The Fund paid foreign taxes of $18,811 and recognized $103,592 of foreign
source income during the period ended December 31, 1996. Pursuant to section 853
of the Internal Revenue Code, the fund designates $0.013 per share of foreign
taxes and $0.073 per share of income from foreign sources as having been paid in
the period ended December 31, 1996.
- --------------------------------------------------------------------------------
23
<PAGE>
BARRETT INTERNATIONAL SHARES
345 Park Avenue, New York, New York 10154
(800) 854-8525
Investment Manager
Scudder, Stevens & Clark, Inc.
345 Park Avenue
New York, New York 10154
Distributor
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Fund Accounting Agent
Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Transfer Agent and
Dividend Disbursing Agent
Scudder Service Corporation
P.O. Box 9242
Boston, Massachusetts 02205
Legal Counsel
Sullivan & Cromwell
New York, New York
- --------------------------------------------------------------------------------
This report is for the information of the shareholders. Its use in connection
with any offering of the Company's shares is authorized only in case of a
concurrent or prior delivery of the Company's current prospectus.
BARRETT INTERNATIONAL
SHARES
---------------------
ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
Institutional International Equity Portfolio
- --------------------------------------------------------------------------------
Mid-Year Report
June 30, 1996
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Board of Directors
<S> <C>
DAVID S. LEE(1) Chairman of the Board; Managing Director, Scudder, Stevens
& Clark, Inc.
EDGAR R. FIEDLER(1) (2) (3) Vice President and Economic Counsellor, The Conference Board;
formerly Assistant Secretary of the Treasury for Economic Policy
PETER B. FREEMAN(2) (3) Corporate Director and Trustee
ROBERT W. LEAR(2) (3) Executive-in-Residence and Visiting Professor, Columbia
University Graduate School of Business; Director or Trustee,
Various Organizations
DANIEL PIERCE(1) President; Chairman of the Board, Scudder, Stevens & Clark, Inc.
(1)Member of Executive Committee
(2)Member of Nominating Committee
(3)Member of Audit Committee
- ---------------------------------------------------------------------------------------------------------
Officers
DAVID S. LEE Chairman of the Board
DANIEL PIERCE President
K. SUE COTE Vice President
JERARD K. HARTMAN Vice President
KATHRYN L. QUIRK Vice President
THOMAS W. JOSEPH Vice President and Assistant Secretary
THOMAS F. McDONOUGH Vice President and Assistant Secretary
PAMELA A. McGRATH Vice President and Treasurer
IRENE McC. PELLICONI Secretary
</TABLE>
2
<PAGE>
Dear Shareholder:
We are pleased to provide you with the first mid-year report for the
Institutional International Equity Portfolio. The report covers the abbreviated
period from when the Portfolio commenced operations on April 3, 1996 through
June 30, 1996. Going forward, you can expect to receive an annual report each
year as of the Portfolio's December 31 fiscal year end, as well as a mid-year
report.
Over the period of less than three months since the Portfolio has been in
operation, the Portfolio has provided a positive total return of 1.83%,
reflecting in part a generally positive if unspectacular market environment for
international equities. Going forward, the Portfolio will continue to seek to
provide long-term growth of capital by investing principally in the equity
securities of companies which do business primarily outside of the United
States. The management discussion which follows outlines key elements of the
current market environment and Portfolio strategy.
Thank you for your investment in the Institutional International Equity
Portfolio. If you have any questions about the Portfolio, please call us at
(800) 854-8525.
/s/David S. Lee
David S. Lee
Chairman
3
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO SUMMARY (Unaudited) as of June 30, 1996
- -------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
COUNTRY (Excludes Cash Equivalents of 12%)
- ---------------------------------------------------------------------------
Japan 31%
Emerging Markets 20%
Germany 11%
United Kingdom 8%
France 7%
Switzerland 7%
Sweden 4%
Netherlands 4%
Italy 3%
Other 5%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
CURRENCY (Excludes Cash Equivalents of 12%)
- --------------------------------------------------------------------------
Japanese Yen 31%
Deutsche Marks 11%
British Pounds 8%
French Francs 7%
Swiss Francs 7%
Philippine Pesos 4%
U.S. Dollars 4%
Hong Kong Dollars 4%
Dutch Guilders 4%
Other 20%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
SECTORS (Excludes Cash Equivalents of 12%)
- --------------------------------------------------------------------------
Manufacturing 25%
Service Industries 11%
Financial 9%
Metals & Minerals 9%
Consumer Discretionary 7%
Technology 6%
Communications 5%
Energy 5%
Utilities 5%
Other 18%
-----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- -----------------------------------------------------------------------
10 LARGEST EQUITY HOLDINGS (12% of Portfolio)
- -----------------------------------------------------------------------
1. JAPAN ASSOCIATED FINANCE CO.
Venture capital company in Japan
2. SANDOZ LTD. AG.
Swiss pharmaceutical company
3. SCHNEIDER SA
Manufacturer of electronic components and automated
manufacturing systems in France
4. MANNESMANN AG
Diversified construction and technology company in Germany
5. CARLTON COMMUNICATIONS PLC
Television post production products and services in the United Kingdom
6. HOESCHT AG
Chemical producer in Germany
7. BAYER AG
Leading chemical producer in Germany
8. BRIDGESTONE CORP.
Leading automobile tire manufacturer in Japan
9. HENNES & MAURITZ AB
Clothing and cosmetics retailer throughout Europe
10. COMPAGNIE FINANCIERE DE PARIBAS
Finance and investment company in France
For more complete details about the Fund's Investment Portfolio,
see page 7.
4
<PAGE>
Dear Shareholder:
The Institutional International Equity Portfolio provided a total return of
1.83% for the period between the Portfolio's beginning of operations on April 3,
1996 and June 30, 1996. For the full three months between April 1 through June
30, the unmanaged MSCI EAFE plus Canada Index returned 1.63%.
In Europe, sluggish growth and high unemployment have provided the backdrop
for the region's stock markets. Economic activity has been dampened as
governments struggle to restrain spending in preparation for European Monetary
Union. In Japan, the overriding factor has been a reversal of the yen, which had
reached a historic high of 79.75 yen to the dollar in April of 1995. Such
currency strength put major Japanese corporations at a disadvantage in export
markets and placed a severe strain on the economy. The government has since
implemented a concerted policy of monetary and fiscal easing, resulting in a
weaker yen and the first signs of recovery.
Looking ahead, while stocks in the U.K. are receiving a boost from
continued bid activity in the corporate sector, the economic cycle is at a more
advanced stage and there is less impetus from interest rate declines than on the
Continent. Across the Channel, corporations are beginning to restructure on a
scale similar to their U.K. counterparts. Managements, particularly in Germany,
are focusing more on shareholder value and are also improving disclosure to the
investment community. Europe will continue to feature privatizations,
consolidations, and restructurings, providing the underpinnings for favorable
long-term equity performance.
In Japan, exports should be sustained not only by a depreciating currency
but also by improved competitiveness as Japanese corporations restructure and
shift production overseas.
5
<PAGE>
Encouraged by the turn in the yen and signs of economic recovery, we have
assumed a 31% position in Japan. Finally, the emerging markets appear to have
put 1995's doldrums behind them, and holdings in the small but expanding venues
of Latin America, Asia, and Eastern Europe constitute 20% of the Portfolio's
assets.
/s/Carol L. Franklin /s/Nicholas Bratt
Lead Portfolio Manager Portfolio Manager
Carol L. Franklin Nicholas Bratt
/s/Irene T. Cheng /s/Francisco S. Rodrigo III
Portfolio Manager Portfolio Manager
Irene T. Cheng Francisco S. Rodrigo III
/s/Joan R. Gregory
Portfolio Manager
Joan R. Gregory
6
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
INVESTMENT PORTFOLIO (UNAUDITED)
JUNE 30, 1996
<CAPTION>
PRINCIPAL MARKET
AMOUNT($)(b) VALUE($)
------------ -------
<S> <C> <C>
REPURCHASE AGREEMENTS - 4.5%
Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 6/28/96 at 5.45% to be
repurchased at $758,344 on 7/1/96,
collateralized by a $708,000 U.S. Treasury
Note, 9.25%, 8/15/98, (Cost $758,000) ............. 758,000 758,000
-----------
COMMERCIAL PAPER - 7.2%
CIT Group Holdings Inc., 5.38%, 7/17/96 ............. 610,000 608,454
General Electric Capital Corp., 5.29%, 8/20/96 ...... 600,000 600,000
-----------
TOTAL COMMERCIAL PAPER (Cost $1,208,454) .............. 1,208,454
-----------
CONVERTIBLE BONDS - 0.4%
JAPAN
Softbank Corp., 0.5%, 3/29/02 (Cost $63,199)......... JPY 5,000,000 58,977
-----------
Shares
------
PREFERRED STOCKS - 1.9%
GERMANY
RWE AG (Producer and marketer of petroleum
and chemical products) ........................... 5,000 153,856
SAP AG (Computer software manufacturer) ............. 1,100 163,239
-----------
TOTAL PREFERRED STOCKS (Cost $299,949) ............ 317,095
-----------
COMMON STOCKS - 86.0%
ARGENTINA 0.9%
YPF S.A. "D" (ADR) (Petroleum company) .............. 6,500 146,250
-----------
BRAZIL 2.9%
Companhia Energetica de Minas Gerais (pfd.)
(Electric power utility) .......................... 6,000,000 159,538
Petroleo Brasileiro S/A (pfd.)*
(Petroleum company) ............................... 1,300,000 159,886
</TABLE>
See notes to financial statements.
7
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
INVESTMENT PORTFOLIO (CONTINUED)
JUNE 30, 1996
<CAPTION>
MARKET
SHARES VALUE($)
------ --------
<S> <C> <C>
Usinas Siderurgicas de Minas Gerais S/A (pfd.)
(Non-coated flat products and electrolytic
galvanized products) ............................. 150,000,000 158,343
-----------
477,767
-----------
CANADA 1.0%
Canadian Pacific Ltd. (Ord.) (Transportation and
natural resource conglomerate) ................... 7,500 164,256
-----------
FRANCE 6.1%
Carrefour (Hypermarket operator and food retailer) .. 300 168,188
Christian Dior (Leading fashion house) .............. 1,000 130,242
Compagnie Financiere de Paribas (Finance and
investment company) .............................. 3,060 180,831
Pinault-Printemps, SA (Distributor of consumer goods) 500 175,050
Schneider SA* (Manufacturer of electronic
components and automated manufacturing systems) .. 4,100 215,192
Total SA "B" (International oil and gas exploration,
development and production) ...................... 2,000 148,438
-----------
1,017,941
-----------
GERMANY 7.9%
BASF AG (Manufacturer of diversified chemicals
for industrial use) .............................. 500 143,007
Bayer AG (Leading chemical producer) ................ 5,700 201,443
Daimler-Benz AG* (Automobile and truck manufacturer) 250 133,919
Hoechst AG (Chemical producer) ...................... 6,000 203,564
Mannesmann AG (Bearer) (Diversified construction
and technology company) .......................... 600 207,509
Schering AG (Pharmaceutical and chemical producer) .. 2,000 145,572
Siemens AG (Leading electrical engineering and
electronics company) ............................. 2,500 133,638
VEBA AG (Electric utility, distributor of oil
and chemicals) ................................... 2,800 148,883
-----------
1,317,535
-----------
GHANA 0.8%
Ashanti Goldfields Co., Ltd. (ADS)
(Leading gold producer) .......................... 7,000 138,250
-----------
HONG KONG 3.5%
First Pacific Co., Ltd. (International management
and investment company) .......................... 100,000 154,378
</TABLE>
See notes to financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE($)
------ --------
<S> <C> <C>
HSBC Holdings Ltd. (Bank) ............................ 10,000 151,148
Hutchinson Whampoa, Ltd. (Container terminal
and real estate company) .......................... 22,000 138,410
Television Broadcasts, Ltd.
(Television broadcasting) ......................... 38,000 142,609
-----------
586,545
-----------
INDONESIA 1.7%
Darya Varia Laboratoria (Producer of
medicines and pharmaceuticals) .................... 68,960 141,475
HM Sampoerna (Foreign registered) (Tobacco company) .. 13,000 148,013
-----------
289,488
-----------
ITALY 2.8%
Ente Nazionale Idrocarburi SpA (Exploration and
production of oil, natural gas and chemicals) ..... 32,000 159,684
Luxottica Group SpA (ADR) (Manufacturer and
marketer of eyeglasses) ........................... 2,000 146,750
Telecom Italia Mobile SpA (Ord.) (Cellular
telecommunication services) ....................... 70,000 156,492
-----------
462,926
-----------
JAPAN 27.0%
Bridgestone Corp. (Leading automobile
tire manufacturer) ................................ 10,000 191,103
Canon Inc. (Leading producer of visual image
and information equipment) ........................ 8,000 166,781
DDI Corp. (Long distance telephone and
cellular operator) ................................ 18 157,345
East Japan Railway Co. (Railroad operator) ........... 15 78,864
Fujitsu Ltd. (Leading manufacturer of computers) ..... 15,000 137,155
Hitachi Ltd. (General electronics manufacturer) ...... 12,000 111,919
Hitachi Metals, Ltd. (Major producer of high-
quality specialty steels) ......................... 11,000 126,732
Ishikawajima-Harima Heavy Industries Co.,
Ltd. (Comprehensive heavy machinery manufacturer
in aerospace and defense fields) .................. 21,000 102,729
Itochu Corp. (Leading general trading company) ....... 19,000 133,077
Japan Associated Finance Co. (Venture capital company) 2,000 234,079
Jusco Co., Ltd. (Major supermarket operator) ......... 5,000 164,129
Kajima Corp. (Leading contractor engaged in
large-scale civil engineering projects) ........... 13,000 134,321
</TABLE>
See notes to financial statements.
9
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
INVESTMENT PORTFOLIO (CONTINUED)
JUNE 30, 1996
<CAPTION>
MARKET
SHARES VALUE($)
------ --------
<S> <C> <C>
Kawasaki Steel Corp. (Major integrated steel maker) .. 40,000 144,470
Keyence Corp. (Specialized manufacturer of sensors) .. 1,000 136,241
Kokuyo (Leading manufacturer of paper stationery) .... 5,000 138,527
Komori Corp. (Leading manufacturer of offset
printing machines) ................................ 6,000 153,614
Kyocera Corp. (Leading ceramic package manufacturer) . 2,000 141,727
Mabuchi Motor Co., Ltd. (Manufacturer of DC motors) .. 1,000 63,823
Matsushita Electric Industrial Co., Ltd. (Leading
manufacturer of consumer electronic products) ..... 9,000 167,878
Matsushita Electric Works, Inc.. (Leading maker of
building materials and lighting equipment) ........ 5,000 54,405
Mitsubishi Heavy Industries, Ltd. (Diversified heavy
machinery manufacturer and leading shipbuilder) .. 16,000 139,423
NSK Ltd. (Leading manufacturer of bearings and other
machinery parts) .................................. 19,000 144,022
Nisshin Steel Co., Ltd. (Blast furnace steel maker) .. 32,000 124,354
Pioneer Electronics Corp. (Leading manufacturer
of audio equipment) ............................... 7,000 167,055
Ricoh Co., Ltd. (Leading maker of copiers and
information equipment) ............................ 13,000 137,887
SMC Corp. (Leading maker of pneumatic equipment) ..... 2,000 155,077
Secom Co., Ltd. (Electronic security system operator) 2,000 132,401
Sekisui Chemical Co., Ltd. (Leading chemical producer,
PVC resin processor) .............................. 11,000 134,778
Sumitomo Corp. (Leading general trading company) ..... 7,000 62,342
Sumitomo Electric Industries, Ltd. (Leading
manufacturer of electric wires and cables ......... 11,000 157,912
Sumitomo Metal Industries, Ltd. (Leading integrated
crude steel producer) ............................. 45,000 138,253
Sumitomo Metal Mining Co., Ltd. (Leading gold,
nickel and copper mining company) ................. 14,000 121,483
THK Co., Ltd. (Manufacturer of linear motion
systems for industrial machinery) ................. 6,000 145,385
-----------
4,499,291
-----------
KOREA 0.8%
Pohang Iron & Steel Co., Ltd. (ADR)
(Leading steel producer) .......................... 5,800 141,375
-----------
</TABLE>
See notes to financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE($)
------ -------
<S> <C> <C>
MALAYSIA 1.4%
Malayan Banking Bhd. (Leading banking and
financial services group) ............................. 12,000 115,454
Renong Bhd (Holding company involved in
engineering, construction, financial services,
telecommunication and information technology) ......... 72,000 114,877
-----------
230,331
-----------
NETHERLANDS 3.3%
AEGON Insurance Group NV (Insurance company) ............. 3,000 138,258
Elsevier NV (International publisher of scientific,
professional, business, and consumer information books) 9,000 136,675
Heineken Holdings N.V. "A" (Brewery) ..................... 700 141,519
Wolters Kluwer CVA (Publisher) ........................... 1,200 136,429
-----------
552,881
-----------
NEW ZEALAND 0.8%
Telecom Corp. of New Zealand
(Telecommunication services) .......................... 33,000 138,949
-----------
PHILIPPINES 3.9%
C & P Homes, Inc. (Home construction company) ............ 165,000 143,273
Manila Electric Co. "B" (Electric utility) ............... 15,000 157,443
Metropolitan Bank and Trust Company
(Commercial bank and trust company) ................... 3,700 103,798
Philippine National Bank* (Bank) ......................... 6,400 106,870
SM Prime Holdings Corp.* (Leader in commercial
center operations) .................................... 552,000 143,267
-----------
654,651
-----------
PORTUGAL 1.0%
Portugal Telecom SA (Telecommunication services) ......... 6,500 169,997
-----------
SPAIN 2.7%
Acerinox, S.A. (Stainless steel producer) ................ 1,200 125,151
Compania Telefonica Nacional de Espana SA (ADR)
(Telecommunication services) .......................... 3,000 165,375
Iberdrola SA (Electric utility) .......................... 15,000 154,096
-----------
444,622
-----------
</TABLE>
See notes to financial statements.
11
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
INVESTMENT PORTFOLIO (CONTINUED)
JUNE 30, 1996
<CAPTION>
MARKET
SHARES VALUE($)
------ -------
<S> <C> <C>
SWEDEN 3.8%
AGA AB Free"B" (Producer and distributor of
industrial and medical gases) .................... 8,600 148,097
Astra AB "A" (Free) (Pharmaceutical company) ........ 1,600 70,816
Hennes & Mauritz AB "B" (Free) (Clothing and
cosmetics retailer throughout Europe) ............ 2,000 185,801
L.M. Ericsson Telephone Co. "B" (ADR) (Leading
manufacturer of cellular telephone equipment) .... 7,000 150,500
S.K.F. AB "B" (Free)(Manufacturer of roller bearings) 3,000 71,375
-----------
626,589
-----------
SWITZERLAND 5.9%
Adia SA (Personnel and temporary employment company) 600 150,702
Brown, Boveri & Cie. AG (Bearer)
(Manufacturer of electrical equipment) ........... 120 148,590
Elektrowatt AG (Bearer) (Holding company: owner
of electric plants and interests in hydro and
nuclear power plants) ............................ 375 138,883
Holderbank Financiere Glaris AG (Bearer)
(Cement producer) ................................ 200 159,981
SGS Holdings SA (Bearer) (Trade inspection company) . 70 167,700
Sandoz Ltd. AG (Registered) (Pharmaceutical company) 190 217,486
-----------
983,342
-----------
THAILAND 0.8%
Bangkok Bank Ltd. (Foreign registered)
(Leading commercial bank) ........................ 5,000 67,756
Thai Farmers Bank (Foreign registered)
(Commercial bank) ................................ 6,000 65,708
-----------
133,464
-----------
UNITED KINGDOM 7.0%
BOC Group PLC (Producer of industrial gases) ........ 7,300 104,696
British Petroleum PLC (Major integrated
world oil company) ............................... 16,000 140,391
Carlton Communications PLC (Television post
production products and services) ................ 25,500 205,136
PowerGen PLC (Electric utility) ..................... 16,000 116,537
RTZ Corp., PLC (Mining and finance company) ......... 10,000 148,001
Reuters Holdings PLC (International news agency) .... 12,000 145,174
Thorn EMI PLC (Amusement and recreational services) . 5,200 144,876
</TABLE>
See notes to financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE($)
------ -------
<S> <C> <C>
Zeneca Group PLC (Holding company: manufacturing and
marketing of pharmaceutical and agrochemical
products and specialty chemicals)................. 7,000 154,803
-----------
1,159,614
-----------
TOTAL COMMON STOCKS (Cost $14,136,225).................. 14,336,064
-----------
===============================================================================
TOTAL INVESTMENTS - 100.0% (cost $16,465,827) (a)....... $16,678,590
===========
- ----------
<FN>
* Non-income producing security.
(a) Cost for federal income tax purposes was $16,465,827. At June 30, 1996, net
unrealized appreciation for all securities based on tax cost was $212,763.
This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of
$538,508 and unrealized depreciation for all securities in which there was
an excess of tax cost over market value of $325,745.
(b) Principal amount stated in U.S. dollars unless otherwise noted.
Currency Abbreviations
----------------------
JPY Japanese Yen
</FN>
</TABLE>
Sector breakdown of the Portfolio's equity securities is noted on page 4.
13
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1996
<CAPTION>
<S> <C> <C>
ASSETS
Investments, at market (identified cost $16,465,827) (note 2) ...... $16,678,590
Cash ............................................................... 793
Foreign currency holdings, at market (identified cost $461) (note 2) 463
Receivable for investments sold .................................... 3,816
Dividend and interest receivable ................................... 33,693
Foreign tax recoverable ............................................ 8,111
Deferred organizational expenses (note 2) .......................... 26,295
Due from adviser (note 5) .......................................... 79,477
-----------
Total assets ................................................... 16,831,238
LIABILITIES
Payable for investments purchased .................................. $677,240
Management fee payable (note 5) .................................... 28,621
Accrued expenses (note 5) .......................................... 44,456
--------
Total liabilities .............................................. 750,317
-----------
Net assets, at market value ........................................ $16,080,921
===========
NET ASSETS
Net assets consist of:
Undistributed net investment income ............................. $ 96,930
Net unrealized appreciation on:
Investments ................................................. 212,763
Foreign currency related transactions ....................... (963)
Accumulated net realized loss ................................... (19,819)
Capital Stock ($.001 par value) ................................. 1,316
Additional paid-in capital ...................................... 15,790,694
-----------
Net assets, at market value ........................................ $16,080,921
===========
NET ASSET VALUE, offering and redemption price per share
($16,080,921[divided by]1,315,555 outstanding shares of Capital
Stock, $.001 par value, 100,000,000 shares authorized)........... $ 12.22
===========
</TABLE>
See notes to financial statements.
14
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD APRIL 3, 1996* TO JUNE 30, 1996
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividend (net of foreign taxes withheld of $7,672) ... $ 69,663
Interest ............................................. 57,478
--------
127,141
EXPENSES:
Management fee (note 5) .............................. $ 28,621
Shareholder services (note 5) ........................ 5,917
Custodian and accounting fees (note 5) ............... 32,181
Directors' fees and expenses (note 5) ................ 4,025
Reports to shareholders .............................. 4,617
Auditing ............................................. 25,000
Legal ................................................ 4,325
Amortization of organization expense (note 2) ........ 1,205
Registration fees .................................... 19,389
Miscellaneous fees ................................... 2,323
-------
Total expenses before reductions ..................... 127,603
Expense reductions (note 5) .......................... (97,392)
-------
Expenses, net ........................................ 30,211
--------
NET INVESTMENT INCOME ................................ 96,930
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss from:
Investments ...................................... (13,058)
Foreign currency related transactions ............ (6,761) (19,819)
-------
Net unrealized gain (loss) from:
Investments ...................................... 212,763
Foreign currency related transactions ............ (963) 211,800
------- --------
Net gain on investments .............................. 191,981
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . $288,911
========
<FN>
* Commencement of operations
</FN>
</TABLE>
See notes to financial statements.
15
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<CAPTION>
FOR THE PERIOD
APRIL 3, 1996
(COMMENCEMENT OF
OPERATIONS) TO
JUNE 30, 1996
----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income ...................................... $ 96,930
Net realized loss on investments ........................... (19,819)
Net unrealized appreciation on investments during the period 211,800
------------
Net increase in net assets resulting from operations ....... 288,911
CAPITAL STOCK TRANSACTIONS:
Proceeds from sale of shares ............................... 15,790,810
------------
Total increase in net assets ............................... 16,079,721
------------
NET ASSETS:
Beginning of period ........................................ 1,200
------------
End of period .............................................. $ 16,080,921
============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period .................. 100
Shares sold ................................................ 1,315,455
------------
Shares outstanding at end of period ........................ 1,315,555
============
</TABLE>
See notes to financial statements.
16
<PAGE>
INTERNATIONAL INTERNATIONAL EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
FOR THE PERIOD
APRIL 3, 1996
(COMMENCEMENT
OF OPERATIONS)
TO JUNE 30,
1996
--------------
<S> <C>
Net asset value, beginning of period ........................... $12.00
------
Income from Investment Operations:
Net investment income (a) ...................................... .07
Net realized and unrealized gain (loss) on investments ......... .15
------
Total from investment operations ............................... .22
------
Net asset value, end of period ................................. $12.22
======
TOTAL RETURN (%) (d) ........................................... 1.83(b)
RATIOS AND SUPPLEMENTARY DATA
Net assets, end of period ($ millions) ......................... 16
Ratio of operating expenses, to average daily net assets (%) (a) .95(c)
Ratio of net investment income, to average daily net assets (%) 3.05(c)
Portfolio turnover rate (%) .................................... 1.90(c)
Average commission rate paid ................................... $.0004
<FN>
(a) Reflects a per share amount of expense reductions ......... $ .07
Operating expense ratio before expense reductions (%) ..... 4.01(c)
(b) Not annualized
(c) Annualized
(d) Total returns are higher due to maintenance of the Fund's expenses.
</FN>
</TABLE>
17
<PAGE>
INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
Institutional International Equity Portfolio (the "Portfolio") is a
portfolio of Scudder Institutional Fund, Inc. (the "Company") which is an
open-end, diversified management investment company. Currently the Portfolio is
comprised of a single class of shares ("Barrett International Shares").
2. SIGNIFICANT ACCOUNTING POLICIES
The Portfolio's financial statements are prepared in accordance with
generally accepted accounting principles which require the use of management
estimates. Significant accounting policies followed by the Portfolio are:
(a) Security Valuation--Portfolio securities which are traded on U.S. or
foreign stock exchanges are valued at the most recent sale price reported on the
exchange on which the security is traded most extensively. If no sale occurred,
the security is then valued at the calculated mean between the most recent bid
and asked quotations. If there are no such bid and asked quotations, the most
recent bid quotation is used. Securities quoted on the National Association of
Securities Dealers Automatic Quotation ("NASDAQ") System, for which there have
been sales, are valued at the most recent sale price reported on such system. If
there are no such sales, the value is the high or "inside" bid quotation.
Securities which are not quoted on the NASDAQ System but are traded in another
over-the-counter market are valued at the most recent sale price on such market.
If no sale occurred, the security is then valued at the calculated mean between
the most recent bid and asked quotations. If there are no such bid and asked
quotations, the most recent bid quotation shall be used.
Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Portfolio, which
quotations reflect broker/dealer-supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or less
are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Directors.
(b) Foreign Currency Transactions--The books and records of the
Portfolio are maintained in U.S. dollars. Foreign currency transactions are
translated into U.S. dollars on the following basis:
(i) market value of investment securities, other assets and other liabilities
at the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest income
and certain expenses at the rates of exchange prevailing on the respective
dates of such transactions.
The Portfolio does not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
(c) Federal Income Taxes--The Fund intends to qualify as a regulated
investment company under subchapter M of the Internal Revenue Code and to
distribute all taxable income, including any realized net capital gains, to
shareholders. Therefore, no Federal income tax provision is required.
(d) Distribution of Income and Gains--Distributions of net investment
income are made annually. During any particular year net realized gains from
investment transactions, in excess of available capital loss carryforwards,
would be taxable to the Portfolio if not distributed and, therefore, will be
distributed to shareholders annually. An additional
18
<PAGE>
distribution may be made to the extent necessary to avoid the payment of a four
percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. As a result, net
investment income (loss) and net realized gain (loss) on investment transactions
for a reporting period may differ significantly from distributions during such
period. Accordingly, the Portfolio may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of the
Portfolio.
(e) Organization Costs--Costs incurred by the Portfolio in connection
with its organization have been deferred and are being amortized on a
straight-line basis over a five-year period.
(f) Other--Investment transactions are recorded on a trade date basis.
Interest income is recorded on the accrual basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend dates.
3. REPURCHASE AGREEMENTS
It is the Portfolio's policy to obtain possession, through its
custodian, of the securities underlying each repurchase agreement to which it is
a party, either through physical delivery or book entry transfer in the Federal
Reserve System or Participants Trust Company. Payment by the Company in respect
of a repurchase agreement is authorized only when proper delivery of the
underlying securities is made to the Company's custodian. The Company's
investment manager values such underlying securities each business day using
quotations obtained from a reputable, independent source. If the Company's
investment manager determines that the value of such underlying securities
(including accrued interest thereon) does not at least equal the value of each
repurchase agreement (including accrued interest thereon) to which such
securities are subject, it will ask for additional securities to be delivered to
the Company's custodian. In connection with each repurchase agreement
transaction, if the seller defaults and the value of the collateral declines or
if the seller enters an insolvency proceeding, realization of the collateral by
the Company may be delayed or limited.
4 PURCHASES AND SALES OF SECURITIES
For the period April 3, 1996 (commencement of operations) to June 30,
1996, purchases and sales of securities (excluding short-term investments)
aggregated $14,571,508 and $59,192, respectively.
5. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Company retains Scudder, Stevens & Clark, Inc. ("Scudder") as
investment manager for the Portfolio, pursuant to an investment advisory
agreement between Scudder and the Company on behalf of the Portfolio, for a
management fee payable each month, based upon the average daily value of the
Portfolio's net assets, at an annual rate of 0.90%. Scudder has agreed not to
impose all or a portion of its management fee until April 30, 1997, and during
such period to maintain the annualized expenses of the Portfolio at not more
than 0.95% of average daily net assets. For the period April 3, 1996
(commencement of operations) to June 30, 1996, Scudder did not impose any of its
fee amounting to $28,621. In addition, Scudder reimbursed expenses amounting to
$50,856.
Under certain state regulations, if the total expenses of the Portfolio,
exclusive of taxes, interest, and extraordinary expenses exceed certain
limitations, the Company's investment adviser is required to reimburse the
Portfolio for such excess up to the amount of the management fee. For the period
April 3, 1996 (commencement of operations) to June 30, 1996, no such
reimbursement was required.
Scudder Service Corporation ("SSC"), a subsidiary of Scudder, is the
Portfolio's shareholder service, transfer and dividend disbursing agent. For the
period April 3, 1996 (commencement of operations) to June 30, 1996, SSC did not
impose any of its fee amounting to $5,500.
19
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INSTITUTIONAL INTERNATIONAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of Scudder,
is responsible for determining the daily net asset value per share and
maintaining the portfolio and general accounting records for the Portfolio. For
the period April 3, 1996 (commencement of operations) to June 30, 1996, SFAC did
not impose any of its fees amounting to $12,415.
The Company has a compensation arrangement under which payment of
Directors' fees may be deferred. Interest is accrued (based on the rate of
return earned on the 90 day Treasury Bill as determined at the beginning of each
calendar quarter) on the deferred balances and is included in "Directors' fees
and expenses." For the period April 3, 1996 (commencement of operations) to June
30, 1996, directors' fees and expenses amounted to $4,025. The accumulated
balance of deferred directors' fees and interest thereon relating to the
Portfolio aggregated $729, which is included in accrued expenses of the
Portfolio.
20
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23
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Institutional International Equity Portfolio
345 Park Avenue, New York, New York 10154
(800) 854-8525
Investment Manager
Scudder, Stevens & Clark, Inc.
345 Park Avenue New York,
New York 10154
Distributor
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Fund Accounting Agent
Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Transfer Agent and
Dividend Disbursing Agent
Scudder Service Corporation
P.O. Box 9242
Boston, Massachusetts 02205
Legal Counsel
Sullivan & Cromwell
New York, New York
---------------------------------------------
This report is for the information of the shareholders. Its use in connection
with any offering of the Company's shares is authorized only in case of a
concurrent or prior delivery of the Company's current prospectus.
Institutional International
Equity Portfolio
BARRETT INTERNATIONAL SHARES
- --------------------------------------------------------------------------------
Mid-Year Report
June 30, 1996
<PAGE>
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PART C
OTHER INFORMATION
Item 15. Indemnification
- -------- ---------------
A policy of insurance covering Scudder, Stevens & Clark, Inc.,
its affiliates including Scudder Investor Services, Inc., and all
of the registered investment companies advised by Scudder,
Stevens & Clark, Inc. insures the Registrant's directors and
officers and others against liability arising by reason of an
alleged breach of duty caused by any negligent act, error or
accidental omission in the scope of their duties.
Article Tenth of the Registrant's Articles of Incorporation state
as follows:
TENTH: Liability and Indemnification
To the fullest extent permitted by the Maryland General
Corporation Law and the Investment Company Act of 1940, no
director or officer of the Corporation shall be liable to the
Corporation or to its stockholders for damages. The limitation on
liability applies to events occurring at the time a person serves
as a director or officer of the Corporation, whether or not such
person is a director or officer at the time of any proceeding in
which liability is asserted. No amendment to these Articles of
Amendment and Restatement or repeal of any of its provisions
shall limit or eliminate the benefits provided to directors and
officers under this provision with respect to any act or omission
which occurred prior to such amendment or repeal.
The Corporation, including its successors and assigns, shall
indemnify its directors and officers and make advance payment of
related expenses to the fullest extent permitted, and in
accordance with the procedures required by Maryland law,
including Section 2-418 of the Maryland General Corporation law,
as may be amended from time to time, and the Investment Company
Act of 1940. They By-Laws may provide that the Corporation shall
indemnify its employees and/or agents in any manner and within
such limits as permitted by applicable law. Such indemnification
shall be in addition to any other right or claim to which any
director, officer, employee or agent may otherwise be entitled.
The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee
or agent of the Corporation or is or was serving at the request
of the Corporation as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise or employee
benefit plan against any liability asserted against and incurred
by such person in any such capacity or arising out of such
person's position, whether or not the Corporation would have had
the power to indemnify against such liability.
The rights provided to any person by this Article shall be
enforceable against the Corporation by such person who shall be
presumed to have relied upon such rights in serving or continuing
to serve in the capacities indicated herein. No amendment of
these Articles of Amendment and Restatement shall impair the
rights of any person arising at any time with respect to events
occurring prior to such amendment.
Nothing in these Articles of Amendment and Restatement shall
be deemed to (i) require a waiver of compliance with any
provision of the Securities Act of 1933, as amended, or the
Investment Company Act of 1940, as amended, or of any valid rule,
regulation or order of the Securities and Exchange Commission
under those Acts or (ii) protect any director or officer
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of the Corporation against any liability to the Corporation or
its stockholder to which he would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the
performance of his or her duties or by reason of his or her
reckless disregard of his or her obligations and duties
hereunder.
Article V of Registrant's Amended and Restated By-Laws states as
follows:
INDEMNIFICATION AND INSURANCE
-----------------------------
Section 1. Indemnification of Directors and Officers. Any person
who was or is a party or is threatened to be made a party in any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
reason of the fact that such person is a current or former
Director or officer of the Corporation, or is or was serving
while a Director or officer of the Corporation at the request of
the Corporation as a Director, officer, partner, trustee,
employee, agent or fiduciary or another corporation, partnership,
joint venture, trust, enterprise or employee benefit plan, shall
be indemnified by the Corporation against judgments, penalties,
finds, excise taxes, settlements and reasonable expenses
(including attorneys' fees) actually incurred by such person in
connection with such action, suit or proceeding to the fullest
extent permissible under the Maryland General Corporation Law,
the Securities Act of 1933 and the 1940 Act, as such statutes are
now or hereafter in force, except that such indemnity shall not
protect any such person against any liability to the Corporation
or any stockholder thereof to which such person would otherwise
be subject to reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office ("disabling conduct".
Section 2. Advances. Any current or former Director or officer of
the Corporation claiming indemnification within the scope of this
Article V shall be entitled to advances from the Corporation for
payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the
fullest extent permissible under the Maryland General Corporation
Law, the Securities Act of 1933 and the 1940 Act, as such
statutes are now or hereafter in force; provided however, that
the person seeking indemnification shall provide to the
Corporation a written affirmation of his good faith belief that
the standard of conduct necessary for indemnification by the
Corporation has been met and a written undertaking by or on
behalf of the Director to repay any such advance if it is
ultimately determined that he is not entitled to indemnification,
and provided further that at least one of the following
additional conditions is met: (1) the person seeking
indemnification shall provide a security in form and amount
acceptable to the Corporation for his undertaking; (2) the
Corporation is insured against losses arising by reason of the
advance; or (3) a majority of a quorum of Directors of the
Corporation who are neither "interested persons" as defined in
Section 2(a)(19) of the 1940 Act, as amended, nor parties to the
proceeding ("disinterested non-party Directors") or independent
legal counsel, in a written opinion, shall determine, based on a
review of facts readily available to the Corporation at the time
the advance is proposed to be made, that there is reason to
believe that the person seeking indemnification will ultimately
be found to be entitled to indemnification.
Section 3. Procedure. At the request of any current of former
Director or officer, or any employee or agent whom the
Corporation proposes to indemnify, the Board of Directors shall
determine, or cause to be determined, in a manner consistent with
the Maryland General Corporation Law, the Securities Act of 1933
and the 1940 Act, as such statutes are now or hereafter in force,
whether the standards required by this Article V have been met;
provided, however, that indemnification shall be made only
following: (1) a final decision on the merits by a court or other
body before whom the proceeding was brought that the person to be
indemnified was
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not liable by reason of disabling conduct; or (2) in the absence
of such a decision, a reasonable determination, based upon a
review of the facts, that the person to be indemnified was not
liable by reason of disabling conduct, by (a) the vote of the
majority of a quorum of disinterested non-party Directors or (b)
an independent legal counsel in a written opinion.
Section 4. Indemnification of Employees and Agents. Employees and
agents who are not officers or Directors of the Corporation may
be indemnified, and reasonable expenses may be advanced to such
employees or agents, in accordance with the procedures set forth
in this Article V to the extent permissible under the Maryland
General Corporation Law, the Securities Act of 1933 and 1940 Act,
as such statutes are now or hereafter in force, and to such
further extent, consistent with the foregoing, as may be provided
by action of the Board of Directors or by contract.
Section 5. Other Rights. The indemnification provided by this
Article V shall not be deemed exclusive of any other right, in
respect of indemnification or otherwise, to which those seeking
such indemnification may be entitled under any insurance or other
agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action by a Director or officer of the
Corporation in his official capacity and as to action by such
person in another capacity while holding such office or position,
and shall continue as to a person who has ceased to be a Director
or officer and shall inure to the benefit of the heirs, executors
and administrators of such a person.
Section 6. Constituent, Resulting or Surviving Corporations. For
the purposes of this Article V, references to the "Corporation"
shall include all constituent corporations absorbed in a
consolidation or merger as well as the resulting or surviving
corporation so that any person who is or was a Director, officer,
employee or agent of a constituent corporation or is or was
serving at the request of a constituent corporation as a
Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise shall stand
in the same position under this Article V with respect to the
resulting or surviving corporation as he would if he had served
the resulting or surviving corporation in the same capacity.
Item 16. Exhibits
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1. (a) Articles of Amendment and Restatement of the Registrant as of January 24,
1991. (Incorporated by reference to Exhibit 1(a) to Post-Effective
Amendment No. 56 to the Registration Statement.)
(b) Articles Supplementary dated September 17, 1992. (Incorporated by reference
to Exhibit 1(b) to Post-Effective Amendment No. 56 to the Registration
Statement.)
(c) Articles Supplementary dated December 1, 1992. (Incorporated by reference
to Exhibit 1(c) to Post-Effective Amendment No. 56 to the Registration
Statement.)
(d) Articles Supplementary dated August 3, 1994. (Incorporated by reference to
Exhibit 1(d) to Post-Effective Amendment No. 56 to the Registration
Statement.)
(e) Articles Supplementary dated February 20, 1996. (Incorporated by reference
to Exhibit 1(e) to Post-Effective Amendment No. 56 to the Registration
Statement.)
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(f) Articles Supplementary dated September 5, 1996. (Incorporated by reference
to Exhibit 1(f) to Post-Effective Amendment No. 56 to the Registration
Statement.)
(g) Articles Supplementary dated December 12, 1996. (Incorporated by reference
to Post -Effective Amendment No. 56 to the Registration Statement.)
(h) Articles Supplementary dated March 3, 1997. (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
2. (a) Amended and Restated By-Laws of the Registrant dated March 4, 1991.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(b) Amended and Restated By-Laws of the Registrant dated September 20, 1991.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(c) Amended and Restated By-Laws of the Registrant dated December 12, 1991.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(d) Amended and Restated By-Laws of the Registrant dated September 4, 1996.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
3. Not Applicable.
4. Agreement and Plan of Reorganization is filed herein;
5. Not Applicable.
6. (a) Investment Management Agreement between the Registrant, on behalf of
Scudder International Fund, and Scudder, Stevens & Clark, Inc. dated
December 14, 1990. (Incorporated by reference to Post-Effective Amendment
No. 56 to the Registration Statement.)
(b) Investment Management Agreement between the Registrant, on behalf of
Scudder Latin America Fund, and Scudder, Stevens & Clark, Inc. dated
December 7, 1992. (Incorporated by reference to Post-Effective Amendment
No. 56 to the Registration Statement.)
(c) Investment Management Agreement between the Registrant, on behalf of
Scudder Pacific Opportunities Fund, and Scudder, Stevens & Clark, Inc.
dated December 7, 1992. (Incorporated by reference to Post-Effective
Amendment No. 56 to the Registration Statement.)
(d) Investment Management Agreement between the Registrant, on behalf of
Scudder Greater Europe Growth Fund, and Scudder, Stevens & Clark, Inc.
dated October 10, 1994. (Incorporated by reference to Post-Effective
Amendment No. 56 to the Registration Statement.)
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(e) Investment Management between the Registrant on behalf of Scudder
International Fund, and Scudder, Stevens & Clark, Inc. dated September 8,
1994. (Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(f) Investment Management Agreement between the Registrant, on behalf of
Scudder Emerging Markets Growth Fund and Scudder, Stevens & Clark, Inc.
dated May 8, 1996. (Incorporated by reference to Post-Effective Amendment
No. 56 to the Registration Statement.)
(g) Investment Management Agreement between the Registrant, on behalf of
Scudder International Growth and Income Fund, and Scudder, Stevens & Clark,
Inc. dated June 10, 1997. (Incorporated by reference to Post-Effective
Amendment No. 56 to the Registration Statement.)
(h) Investment Management Agreement between the Registrant, on behalf of
Scudder International Fund, and Scudder, Stevens & Clark, Inc. dated
September 5, 1996. (Incorporated by reference to Post-Effective Amendment
No. 56 to the Registration Statement.)
7. (a) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., formerly Scudder Fund Distributors, Inc., dated July 15,
1985. (Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(b) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc. dated September 17, 1992. (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
8. Not Applicable.
9. (a)(1) Custodian Contract between the Registrant and Brown Brothers Harriman & Co.
dated April 14, 1986. (Incorporated by reference to Post-Effective
Amendment No. 56 to the Registration Statement.)
(a)(2) Custodian Contract between the Registrant, on behalf of Scudder Latin
America Fund, and Brown Brothers Harriman & Co. dated November 25, 1992.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(a)(3) Custodian Contract between the Registrant, on behalf of Scudder Pacific
Opportunities Fund, and Brown Brothers Harriman & Co. dated November 25,
1992. (Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(a)(4) Custodian Contract between the Registrant, on behalf of Scudder Greater
Europe Growth Fund, and Brown Brothers Harriman & Co. dated October 10,
1994. (Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(a)(5) Fee schedule for Exhibit 9(a)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
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(a)(6) Revised fee schedule for Exhibit 9(a)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(a)(7) Custodian Contract between the Registrant and Brown Brothers Harriman & Co.
dated March 7, 1995. (Incorporated by reference to Post-Effective
Amendment No. 56 to the Registration Statement.)
(a)(8) Fee schedule for Exhibit 9(a)(7). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(b)(1) Master Subcustodian Agreement between Brown Brothers Harriman & Co. and
Morgan Guaranty Trust Company of New York, Tokyo office, dated November 8,
1976. (Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(b)(2) Fee schedule for Exhibit 9(b)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(c)(1) Master Subcustodian Agreement between Brown Brothers Harriman & Co. and
Morgan Guaranty Trust Company of New York, Brussels office, dated November
15, 1976. (Incorporated by reference to Post-Effective Amendment No. 56 to
the Registration Statement.)
(c)(2) Fee schedule for Exhibit 9(c)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(d)(1) Subcustodian Agreement between Brown Brothers Harriman & Co. and The Bank
of New York, London office, dated January 30, 1979. (Incorporated by
reference to Post-Effective Amendment No. 56 to the Registration Statement.)
(d)(2) Fee schedule for Exhibit 9(d)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(e)(1) Master Subcustodian Agreement between Brown Brothers Harriman & Co. and The
Chase Manhattan Bank, N.A., Singapore office, dated June 9, 1980.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(e)(2) Fee schedule for Exhibit 9(e)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(f)(1) Master Subcustodian Agreement between Brown Brothers Harriman & Co. and The
Chase Manhattan Bank, N.A., Hong Kong office, dated June 4, 1979.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(f)(2) Fee schedule for Exhibit 9(f)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(g)(1) Master Subcustodian Agreement between Brown Brothers Harriman & Co. and
Citibank, N.A. New York office, dated July 16, 1981. (Incorporated by
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reference to Post-Effective Amendment No. 56 to the Registration Statement.)
(g)(2) Fee schedule for Exhibit 9(g)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
10. Not Applicable
11. Opinion and Consent of Dechert Price & Rhoads. (Filed with Registrant's
notice pursuant to Rule 24f-2.)
12. Opinion and, and consent to their use, of
counsel or, in lieu of an opinion, a copy
of the revenue ruling from the Internal
Revenue Service, supporting the tax
matters and consequences to shareholders
discussed in the prospectus. To be filed
by pre-effective amendment.
13. (a)(1) Transfer Agency and Service Agreement between the Registrant and Scudder
Service Corporation dated October 2, 1989. (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(a)(2) Fee schedule for Exhibit 13(a)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(a)(3) Service Agreement between Copeland Associates, Inc. and Scudder Service
Corporation dated June 8, 1995.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(b) Letter Agreement between the Registrant and Cazenove, Inc. dated January
23, 1978, with respect to the pricing of securities. (Incorporated by
reference to Post-Effective Amendment No. 56 to the Registration Statement.)
(c)(1) COMPASS Service Agreement between the Registrant and Scudder Trust Company
dated January 1, 1990. (Incorporated by reference to Post-Effective
Amendment No. 56 to the Registration Statement.)
(c)(2) Fee schedule for Exhibit (13)(c)(1). (Incorporated by reference to
Post-Effective Amendment No. 56 to the Registration Statement.)
(c)(3) COMPASS and TRAK 2000 Service Agreement between the Registrant and
Scudder Trust Company dated October 1, 1995.
(Incorporated by reference to Exhibit 9(c)(3) to Post-Effective Amendment
No. 56 to the Registration Statement.)
(d)(1) Shareholder Services Agreement between the Registrant and Charles Schwab &
Co., Inc. dated June 1, 1990. (Incorporated by reference to Post-Effective
Amendment No. 56 to the Registration Statement.)
(d)(2) Administrative Services Agreement between the Registrant and McGladrey &
Pullen, Inc. dated September 30, 1995.
(Incorporated by reference to Exhibit 9(d)(2) to Post-Effective Amendment
No. 56 to the Registration Statement.)
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(e)(1) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Greater Europe Growth Fund, and Scudder Fund Accounting Corporation
dated October 10, 1994.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
(e)(2) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder International Fund, and Scudder Fund Accounting Corporation dated
April 12, 1995. (Incorporated by reference to Post-Effective Amendment No.
56 to the Registration Statement.)
(e)(3) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Latin America Fund dated May 17, 1995.
(Incorporated by reference to Exhibit 9(e)(3) to Post-Effective Amendment
No. 56 to the Registration Statement.)
(e)(4) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Pacific Opportunities Fund dated May 5, 1995.
(Incorporated by reference to Exhibit 9(e)(4) to Post-Effective Amendment
No. 56 to the Registration Statement.)
(e)(5) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Emerging Markets Growth Fund dated May 8, 1996.
(Incorporated by reference to Exhibit 9(e)(5) to Post-Effective Amendment
No. 56 to the Registration Statement.)
(e)(6) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder International Growth and Income Fund dated June 3, 1997.
(Incorporated by reference to Post-Effective Amendment No. 56 to the
Registration Statement.)
14. (a) Consent of Coopers & Lybrand L.L.P. filed herewith.
(b) Consent of Price Waterhouse L. L.P. filed herewith.
15. Not Applicable
16. Not Applicable
17. Not Applicable
</TABLE>
Item 17. Undertakings
(1) The undersigned registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this registration statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(C) of the Securities Act [17 CFR 230.145c],
the reoffering prospectus will contain the information called for
by the applicable registration form for reofferings by persons
who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that
is filed under paragraph (1) above will be filed as a part of an
amendment to the registration statement and will not be used
until the amendment is effective, and that, in determining any
liability under the 1933 Act, each
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post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of
the securities at that time shall be deemed to be the initial
bona fide offering of them.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston and the Commonwealth of
Massachusetts on the 25th day of August, 1997.
Scudder International Fund, Inc.
By: /s/ Thomas F. McDonough
---------------------------
Thomas F. McDonough, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-14 has been signed below by the following
persons in the capacities and on the dates indicated. By so signing, each of the
undersigned in his capacity as a trustee or officer, or both, as the case may
be, of the Registrant, does hereby appoint David Lee, Thomas F. McDonough and
Sheldon A. Jones and each of them, severally, or if more than one acts, a
majority of them, his true and lawful attorney and agent to execute in his name,
place and stead (in such capacity) any and all amendments to the Registration
Statement and any post-effective amendments thereto and all instruments
necessary or desirable in connection therewith, to attest the seal of the
Registrant thereon and to file the same with the Securities and Exchange
Commission. Each of said attorneys and agents shall have the power to act with
or without the other and have full power and authority to do and perform in the
name and on behalf of each of the undersigned, in any and all capacities, every
act whatsoever necessary or advisable to be done in the premises as fully and to
all intents and purposes as each of the undersigned might or could do in person,
hereby ratifying and approving the act of said attorneys and agents and each of
them.
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<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
/s/Daniel Pierce Chairman of the Board and
Daniel Pierce Director August 21, 1997
/s/Paul Bancroft III Director
Paul Bancroft III August 25, 1997
/s/Nicholas Bratt Director
Nicholas Bratt August 25, 1997
/s/Thomas J. Devine Director
Thomas J. Devine August 21, 1997
/s/Keith R. Fox Director
Keith R. Fox August 25, 1997
/s/William H. Gleysteen, Jr. Director
William H. Gleysteen, Jr. August 21, 1997
/s/David S. Lee Director
David S. Lee August 25, 1997
-60-
<PAGE>
/s/William H. Luers Director
William H. Luers August 21, 1997
/s/ Wilson Nolen Director
Wilson Nolen August 25, 1997
- ----------------- Director
Kathryn L. Quirk August __, 1997
/s/ Dr. Gordon Shillinglaw Director
Dr. Gordon Shillinglaw August 21, 1997
/s/ Pamela A. McGrath (Principal Financial and
Pamela A. McGrath Accounting Officer) Treasurer August 25, 1997
</TABLE>
-61-
Coopers
&Lybrand
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
To the Board of Directors of Scudder International Fund, Inc.:
We consent to the incorporation by reference in the Registration
Statement of Scudder International Fund, Inc. on Form N-14 of
our report dated May 16, 1997 on our audit of the financial
statements and financial highlights of Scudder International
Fund, which report is included in the Annual Report to
Shareholders for the year ended March 31, 1997 which is
incorporated by reference in the Registration Statement.
/s/COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
August 25, 1997
Price Waterhouse
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Proxy
Statement/Prospectus and the Statement of Additional Information constituting
parts of this Registration Statement on Form N-14 of our report dated February
19, 1997, relating to the financial statements and financial highlights
appearing in the December 31, 1996 Annual Report to Shareholders of Scudder
Institutional Fund, Inc.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
August 25, 1997
