Filed electronically with the Securities and Exchange
Commission on June 18, 1999.
File No. 2-13627
File No. 811-42
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
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Post-Effective Amendment No. 79
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 40
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Scudder Portfolio Trust
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(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-1000
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John Millette
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
X immediately upon filing pursuant to paragraph (b)
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on __________ pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(i)
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on __________ pursuant to paragraph (a)(i)
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75 days after filing pursuant to paragraph (a)(ii)
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on __________ pursuant to paragraph (a)(ii) of Rule 485.
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If appropriate, check the following:
-------- this post-effective amendment designates a new effective
date for a previously filed post- effective amendment
<PAGE>
Part A (the Prospectus for Scudder Balanced Fund, Scudder High
Yield Bond Fund, and Scudder Corporate Bond Fund)
Part A of this Post-Effective Amendment No. 79 to the
Registration Statement is incorporated by reference in its
entirety to the Scudder Portfolio Trust's Post-Effective
Amendment No. 78 on Form N-1A filed on April 30, 1999.
<PAGE>
SCUDDER BALANCED FUND
A series of Scudder Portfolio Trust
A No-Load Diversified Mutual Fund Series which
Seeks a Balance of Growth and Income, from a
Diversified Portfolio of Equity and Fixed-income Securities.
The Fund also Seeks Long-term Preservation of Capital,
through a Quality-Oriented Investment Approach that is Designed to Reduce Risk.
and
SCUDDER INCOME FUND
A series of Scudder Portfolio Trust
A No-Load Diversified Mutual Fund Series which
Seeks to Provide High Income while Managing its Portfolio in a
Way that is Consistent with the Prudent Investment of Shareholders'
Capital. It Does this by Using a Flexible Investment Program that Emphasizes
High-Grade Bonds.
and
SCUDDER CORPORATE BOND FUND
A series of Scudder Portfolio Trust
A No-Load Diversified Mutual Fund Series which Seeks to Provide High Income.
It does this by investing mainly in corporate bonds.
and
SCUDDER HIGH YIELD BOND FUND
A series of Scudder Portfolio Trust
A No-Load Diversified Mutual Fund Series which
Seeks to provide a High Income and, secondarily, capital appreciation.
It does this by investing mainly in lower rated, high
yielding corporate bonds, often called junk bonds.
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STATEMENT OF ADDITIONAL INFORMATION
June 15, 1999
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This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the prospectuses of Scudder Balanced
Fund, Scudder Income Fund, Scudder Corporate Bond Fund and Scudder High Yield
Bond Fund, each dated May 1, 1999, as amended from time to time, copies of which
may be obtained without charge by writing to Scudder Investor Services, Inc.,
Two International Place, Boston, Massachusetts 02110-4103.
Each Annual Report to Shareholders for Scudder Balanced Fund dated
December 31, 1998, Scudder Income Fund dated January 31, 1999, Scudder Corporate
Bond Fund dated January 31, 1999 and Scudder High Yield Bond Fund dated January
31, 1999, is incorporated by reference and is hereby deemed to be part of this
Statement of Additional Information.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
THE FUNDS'INVESTMENT OBJECTIVES AND POLICIES..........................................................................1
General Investment Objectives and Policies of Scudder Balanced Fund..........................................1
Investments..................................................................................................1
Equity Investments...........................................................................................2
Fixed-Income Investments.....................................................................................2
General Investment Objective and Policies of Scudder Income Fund.............................................3
General Investment Objective and Policies of Scudder Corporate Bond Fund.....................................4
Investments..................................................................................................4
Investment process...........................................................................................5
General Investment Objective and Policies of Scudder High Yield Bond Fund....................................5
Investments..................................................................................................6
Investment process...........................................................................................7
Master/feeder structure......................................................................................7
Investments and Investment Techniques........................................................................7
Investment Restrictions.....................................................................................29
PURCHASES............................................................................................................30
Additional Information About Opening An Account.............................................................30
Minimum balances............................................................................................31
Additional Information About Making Subsequent Investments..................................................31
Additional Information About Making Subsequent Investments by QuickBuy......................................31
Checks......................................................................................................32
Share Price.................................................................................................32
Share Certificates..........................................................................................33
Other Information...........................................................................................33
EXCHANGES AND REDEMPTIONS............................................................................................33
Special Redemption and Exchange Information for High Yield Bond Fund........................................33
Exchanges...................................................................................................34
Redemption by Telephone.....................................................................................35
Redemption By QuickSell.....................................................................................35
Redemption by Mail or Fax...................................................................................36
Redemption-In-Kind..........................................................................................36
Other Information...........................................................................................36
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................37
The No-Load Concept.........................................................................................37
Internet access.............................................................................................38
Dividend and Capital Gain Distribution Options..............................................................39
Scudder Investors Centers...................................................................................39
Reports to Shareholders.....................................................................................39
Transaction Summaries.......................................................................................39
THE SCUDDER FAMILY OF FUNDS..........................................................................................39
SPECIAL PLAN ACCOUNTS................................................................................................44
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations
and Self-Employed Individuals...............................................................................45
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals........45
Scudder IRA: Individual Retirement Account.................................................................45
Scudder Roth IRA: Individual Retirement Account............................................................46
Scudder 403(b) Plan.........................................................................................47
Automatic Withdrawal Plan...................................................................................47
Group or Salary Deduction Plan..............................................................................47
Automatic Investment Plan...................................................................................47
Uniform Transfers/Gifts to Minors Act.......................................................................48
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TABLE OF CONTENTS (continued)
Page
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................48
PERFORMANCE INFORMATION..............................................................................................48
Average Annual Total Return.................................................................................48
Cumulative Total Return.....................................................................................49
Total Return................................................................................................50
SEC Yield...................................................................................................50
Comparison of Fund Performance..............................................................................51
ORGANIZATION OF THE FUNDS............................................................................................54
INVESTMENT ADVISER...................................................................................................55
Personal Investments by Employees of the Adviser............................................................59
TRUSTEES AND OFFICERS................................................................................................59
REMUNERATION.........................................................................................................62
Responsibilities of the Board -- Board and Committee Meetings...............................................62
Compensation of Officers and Trustees.......................................................................62
DISTRIBUTOR..........................................................................................................63
TAXES................................................................................................................64
PORTFOLIO TRANSACTIONS...............................................................................................68
Brokerage Commissions.......................................................................................68
Portfolio Turnover..........................................................................................69
NET ASSET VALUE......................................................................................................69
ADDITIONAL INFORMATION...............................................................................................70
Experts.....................................................................................................70
Shareholder Indemnification.................................................................................70
Other Information...........................................................................................70
Scudder Fund Accounting Corpration..............................................................................71
Scudder Service Corporation.....................................................................................71
Scudder Trust Company...........................................................................................72
FINANCIAL STATEMENTS.................................................................................................72
Scudder Balanced Fund.......................................................................................72
Scudder Income Fund.........................................................................................73
Scudder Corporate Bond Fund.................................................................................73
Scudder High Yield Bond Fund................................................................................73
APPENDIX
Ratings of Municipal and Corporate Bonds
Standard & Poor's Corporation Earnings and Dividend Rankings for Common Stocks
</TABLE>
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THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See Fund descriptions in each Fund's prospectus.)
Scudder Balanced Fund, Scudder Income Fund, Scudder Corporate Bond Fund
and Scudder High Yield Bond Fund (each a "Fund," collectively, the "Funds"), are
no-load, diversified series of Scudder Portfolio Trust (the "Trust"), an
open-end management investment company which continuously offers and redeems its
shares. It is a company of the type commonly known as a mutual fund.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which a Fund may engage (such as
hedging, etc.) or a financial instrument which a Fund may purchase (such as
options, forward foreign currency contracts, etc.) are meant to describe the
spectrum of investments that Scudder Kemper Investments, Inc. (the "Adviser"),
in its discretion, might, but is not required to, use in managing each Fund's
portfolio assets. The Adviser may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of a Fund but, to the extent employed, could from time to time have a
material impact on the Fund's performance.
General Investment Objectives and Policies of Scudder Balanced Fund
Scudder Balanced Fund ("Balanced Fund") seeks a balance of growth and
income from a diversified portfolio of equity and fixed-income securities. The
Fund also seeks long-term preservation of capital through a quality-oriented
investment approach designed to reduce risk.
The Fund is intended to provide -- through a single investment --
access to a wide variety of seasoned stock and investment-grade bond
investments. Common stocks and other equity investments provide long-term growth
potential to help offset the effects of inflation on an investor's purchasing
power. Bonds and other fixed-income investments provide current income and may,
over time, help reduce fluctuations in the Fund's share price. While the Fund
maintains a balanced investment program, its price can fluctuate daily with
changes in stock market levels, interest rates and other factors. There can be
no assurance that the Fund's objectives will be met.
Except as otherwise indicated, the Fund's investment objectives and
policies are not fundamental and may be changed by a vote of the Trustees
without a shareholder vote.
Investments
In seeking its objectives of a balance of growth and income as well as
long-term preservation of capital, the Fund invests in a diversified portfolio
of equity and fixed-income securities. The Fund invests, under normal
circumstances, 50% to 75% of its net assets in common stocks and other equity
investments. The Fund's remaining assets are allocated to investment-grade bonds
and other fixed-income securities, including cash reserves. For liquidity and
temporary defensive purposes, the Fund may invest without limit in cash and in
other money market and short-term instruments. It is impossible to predict for
how long such alternate strategies may be utilized.
The Fund will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Fund's
investment adviser, Scudder Kemper Investments, Inc. (the "Adviser"), weighs the
relative values of different asset classes and expectations for future returns.
In doing so, the Adviser analyzes, on a global basis, the level and direction of
interest rates, capital flows, inflation expectations, anticipated growth of
corporate profits, monetary and fiscal policies around the world, and other
related factors.
The Fund does not take extreme investment positions as part of an
effort to "time the market." Shifts between stocks and fixed-income investments
are expected to occur in generally small increments within the guidelines
adopted in the Fund's prospectus and this Statement of Additional Information.
The Fund is designed as a conservative long-term investment program.
<PAGE>
While the Fund emphasizes U.S. equity and debt securities, it may
invest a portion of its assets in foreign securities, including depositary
receipts. The Fund's foreign holdings will meet the criteria applicable to its
domestic investments. The international component of the Fund's investment
program is intended to increase diversification, thus reducing risk, while
providing the opportunity for higher returns.
In addition, the Fund may invest in securities on a when-issued or
forward delivery basis and may utilize various other strategic transactions.
Please refer to Investments and Investment Techniques - "Strategic Transactions
and Derivatives" for more information.
Equity Investments
The Fund normally invests at least 50%, but no more than 75%, of its
net assets in equity securities. The Fund's equity investments generally consist
of common stocks, preferred stocks, warrants and securities convertible into
common stocks, of companies that, in the Adviser's judgment, are of
above-average financial quality and offer the prospect for above-average growth
in earnings and capital. The Fund invests primarily in securities issued by
medium-to-large size domestic companies with annual revenues or market
capitalizations of at least $1 billion and, in the opinion of the Adviser, offer
above-average potential for price appreciation. The Fund seeks to invest in
companies that have relatively consistent and above-average rates of growth;
companies that are in a strong financial position with high credit standings and
profitability; firms with important business franchises, leading products, or
dominant marketing and distribution systems; companies guided by experienced and
motivated managements; and, companies selling at attractive market valuations.
At least 65% of the value of the Fund's common stocks will be of
issuers which qualify, at the time of purchase, for one of the three highest
equity earnings and dividends ranking categories (A+, A or A-) of Standard &
Poor's Corporation ("S&P"), or if not ranked by S&P, are judged to be of
comparable quality by the Adviser. S&P assigns earnings and dividends rankings
to corporations based on a number of factors, including stability and growth of
earnings and dividends. Rankings by S&P are not an appraisal of a company's
creditworthiness, as is true for S&P's debt security ratings, nor are these
rankings intended as a forecast of future stock market performance. In addition
to using S&P's rankings of earnings and dividends of commons stocks, the Adviser
conducts its own analysis of a company's history, current financial position,
and earnings prospects.
Fixed-Income Investments
To enhance income and stability, the Fund normally invests 25% to 50%
of its net assets in investment-grade fixed-income securities. However, at least
25% of the Fund's net assets will always be invested in fixed-income senior
securities. To the extent that the Fund invests in convertible senior securities
only that portion of the value of such securities attributable to their
fixed-income characteristics will be used in calculating the 25% requirement.
The Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, and convertible preferred securities of varying maturities. Longer-term
bonds generally are more volatile than bonds with shorter maturities. It may
also purchase U.S. Government securities and obligations of federal agencies
that are not backed by the full faith and credit of the U.S. Government, such as
obligations of the Federal Home Loan Banks, Farm Credit Banks, and the Federal
Home Loan Mortgage Corporation. The Fund may also invest in obligations of
international agencies, foreign debt securities (both U.S. dollar and non-U.S.
dollar denominated), mortgage-backed and other asset-backed securities,
municipal obligations, debt securities issued by real estate investment trusts
("REITs"), zero coupon securities, indexed securities, illiquid securities and
reverse repurchase agreements, and engage in dollar-roll transactions. The value
of fixed-income investments will fluctuate with changes in interest rates and
bond market conditions, tending to rise as interest rates decline and decline as
interest rates rise.
For liquidity and defensive purposes, the Fund may invest up to 100% of
its assets in money market securities such as commercial paper, banker's
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks and in other short-term investments. The Fund may also enter into
repurchase agreements with respect to U.S. Government securities.
The Fund's fixed-income component is of high quality. At least 75% of
the value of the Fund's debt securities will be high grade, that is, rated
within the three highest quality ratings of Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa and A) or S&P (AAA, AA and A), or, if unrated, judged to be
of equivalent quality as determined by the
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<PAGE>
Adviser at the time of purchase. Securities must also meet credit standards
applied by the Adviser. Moreover, the Fund does not purchase debt securities
rated below Baa by Moody's or BBB by S&P. These debt securities generally offer
less current yield than securities of lower quality, but lower-quality
securities generally have less liquidity, greater credit and market risk, and
consequently more price volatility. Should the rating of a portfolio security be
downgraded after being purchased by the Fund, the Adviser will determine whether
it is in the best interest of the Fund to retain or dispose of the security.
(See "APPENDIX.")
General Investment Objective and Policies of Scudder Income Fund
The investment objective of Scudder Income Fund ("Income Fund") is to
seek to provide high income while managing its portfolio in a way that is
consistent with the prudent investment of shareholders' capital. It does this by
using a flexible investment program that emphasizes high-grade bonds.
The majority of the Fund's assets are usually invested in intermediate-
and long-term fixed-income securities. Long-term bonds have remaining maturities
of longer than eight years and usually pay a higher rate of income than
short-term fixed-income securities and common stocks. The Fund, however, has the
flexibility to invest in securities within any maturity range. The Fund invests
primarily in a broad range of high-grade income-producing securities such as
corporate bonds and government securities. The Fund may invest, from time to
time, in convertible bonds, preferred securities, convertible preferred
securities, fixed and adjustable rate bonds, debentures (convertible and
non-convertible), stripped coupons and bonds, zero coupon securities, commercial
paper and other money market instruments, asset-backed bonds and certificates,
mortgage and mortgage-backed securities, mortgage bonds and pass-through
certificates, debt securities issued by real estate investment trusts ("REITs"),
trust preferred securities, corporate notes (including convertible notes),
equipment trust certificates, the bond portion of units with stock, or warrants
to buy stock attached. The Fund may also invest, from time to time, in municipal
obligations and illiquid securities such as certain private placements.
Proportions among the types of securities held by the Fund will vary from time
to time depending on the judgment of the Fund's Adviser as to the prospects of
income related to the outlook for the economy and the securities markets, the
quality of investments available, the level of interest rates, and other
factors. However, it is a policy of the Fund to allocate its investments among
industries and companies. The securities in which the Fund may invest are
further described below and in the Fund's prospectus.
Under normal market conditions, the Fund will invest at least 65% of
its assets in securities rated within the three highest quality rating
categories of Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or if unrated, in
bonds judged by the Adviser to be of comparable quality at the time of purchase.
The Fund may invest up to 20% of its assets in debt securities rated lower than
Baa or BBB or, if unrated, of equivalent quality as determined by the Adviser,
but will not purchase bonds rated below B by Moody's or S&P or their equivalent.
Securities rated below investment-grade (those rated lower than Baa or
BBB) are commonly referred to as "junk bonds." These securities can entail
greater price volatility and involve a higher degree of speculation with respect
to the payment of principal and interest than higher quality fixed-income
securities. The market prices of such lower rated debt securities may decline
significantly in periods of general economic difficulty. In addition, the
trading market for these securities is generally less liquid than for higher
rated securities, and the Fund may have difficulty disposing of these securities
at the time it wishes to do so. The lack of a liquid secondary market for
certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing its portfolio and calculating
its net asset value.
The Fund may also invest in U.S. Government securities which include:
o securities issued and backed by the full faith and credit of the U.S.
Government, such as U.S. Treasury bills, notes and bonds;
o securities, including mortgage-backed securities, issued by an agency
or instrumentality of the U.S. Government, including those backed by
the full faith and credit of the U.S. Government and those issued by
agencies and instrumentalities which, while neither direct obligations
of, nor guaranteed by the U.S. Government, are backed by the credit of
the issuer itself and may be supported as well by the issuer's right to
borrow from the U.S. Treasury; and
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o securities of the U.S. Government, its agencies or instrumentalities on
a when-issued or forward delivery basis.
The Fund may invest in foreign securities and certificates of deposit
issued by foreign and domestic branches of U.S. banks. It may also invest in
when-issued or forward delivery securities, indexed securities, repurchase
agreements, reverse repurchase agreements, illiquid securities, and may engage
in dollar-roll transactions and strategic transactions.
As a defensive measure the Fund could invest up to 100% of its assets
in money market securities.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes. The Fund cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Fund's shares will increase or decrease with
changes in the market prices of the Fund's investments and there is no assurance
that the Fund's objective will be achieved.
Except as otherwise indicated, the Fund's investment objective and
policies are not fundamental and may be changed by the Trustees without a
shareholder vote.
General Investment Objective and Policies of Scudder Corporate Bond Fund
Scudder Corporate Bond Fund ("Corporate Bond Fund") seeks to provide
high income. It does this by investing mainly in corporate bonds.
The Fund invests in a broad range of investment-grade, income producing
securities and, to a lesser extent, below investment grade bonds. The Fund is
designed as a long-term investment for shareholders who can bear some credit,
interest rate, and other bond market risks in exchange for the potential for
high current income.
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 the 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 invests, under normal market conditions, at least 65% of its
total assets in investment grade debt securities. Investment-grade securities
are those that are rated Aaa, Aa, A, or Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A, or BBB by Standard & Poor's Corporation ("S&P"), or
if unrated, are of equivalent quality as determined by the Fund's investment
adviser, Scudder Kemper Investments, Inc. (the "Adviser"). In addition, the Fund
may invest up to 35% of its net assets in securities in high yield, below
investment-grade securities. Below investment-grade securities are rated below
"Baa" by Moody's or below "BBB" by S&P. Below investment-grade securities are
considered predominantly speculative with respect to their capacity to pay
interest and repay principal. They generally involve a greater risk of default
and, at times, can have more price volatility than higher rated securities.
The Fund invests primarily in intermediate corporate bonds, but can
also hold short-term and long-term issues. The dollar-weighted average maturity
of the Fund's portfolio is expected to range from five to ten years. Longer-term
bonds generally are more volatile than bonds with shorter maturities. While the
Fund emphasizes corporate bonds and notes, it can also invest in U.S. Treasury
and Agency securities, convertible and preferred securities, debt securities
issued by real estate investment trusts ("REITs"), dollar rolls, warrants, trust
preferred securities, mortgage-backed and other asset-backed securities, zero
coupon securities, municipal obligations, dollar-denominated debt of
international agencies or investment grade foreign institutions, American
Depositary Receipts and other depositary receipts, and money market instruments
such as commercial paper, bankers acceptances, and certificates of deposit
issued by domestic and foreign branches of U.S. banks.
The Fund may invest up to 20% of total assets in foreign debt
securities denominated in currencies other than the U.S. dollar. While it is
anticipated that the majority of the Fund's foreign investments will be
denominated in the U.S. dollar, the Fund may invest, within the aforementioned
limit, in foreign bonds denominated in local currencies, including those issued
in emerging markets. The Fund considers "emerging markets" to include any
country that is defined as an emerging or developing economy by any one of the
International Bank for Reconstruction and
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Development (i.e., the World Bank), the International Finance Corporation or the
United Nations or its authorities. The Fund may also invest in when-issued
securities, indexed securities, repurchase agreements, illiquid securities, and
may engage in strategic transactions.
The value of fixed-income investments will fluctuate with changes in
interest rates and bond market conditions, tending to rise as interest rates
decline and decline as interest rates rise.
For temporary defensive purposes, the Fund may invest all or a
substantial portion of its assets in money market and short-term instruments
when the Adviser deems such a position advisable in light of economic or market
conditions. It is impossible to predict accurately how long such a defensive
strategy may be utilized.
Investment process
The Fund is designed to provide investors with a high level of monthly
income. In pursuit of this objective, the Adviser seeks to construct a
diversified portfolio of primarily investment-grade corporate bonds, and to a
lesser extent, below investment-grade corporate bonds. The Adviser carefully
monitors business and economic conditions in the U.S. and abroad and conducts
its own research to identify attractive industry sectors and companies. In
addition, the Adviser utilizes the ratings and analysis provided by the major
rating agencies such as Moody's and S&P.
The Fund will focus its investments in securities issued by
investment-grade companies that are established in their industries, have stable
cash flows and strong balance sheets. The Adviser will also invest, to a lesser
extent, in corporate securities that are rated below investment-grade. Investing
in high yielding, lower quality bonds involves various types of risks, including
the risk of default; that is, the chance that issuers of bonds held in the
portfolio will not make timely payment of either interest or principal. In
comparison to investing in higher quality issues, high yield bond investors may
be rewarded for the additional risks of high yield bonds through higher interest
payments. The Adviser seeks to manage the risks of investing in below
investment-grade company securities by using a research intensive process to
identify companies that have, among other qualities, improving business
prospects, positive credit trends, and growing cash flows.
The Adviser will invest in securities of a variety of maturities
including short-term (bonds with maturities of less than five years),
intermediate-term (bonds with maturities between five and ten years), and
long-term (bonds with maturities greater than ten years). The Fund will invest
primarily in intermediate bonds and the Fund's portfolio is expected to have a
dollar weighted average maturity of five to ten years, which is considered
intermediate maturity. The Fund's investment approach creates an overall
investment-grade portfolio with an intermediate maturity that is designed to
provide investors with a high level of monthly income.
General Investment Objective and Policies of Scudder High Yield Bond Fund
Scudder High Yield Bond Fund ("High Yield Bond Fund") seeks to provide
a high income and, secondarily, capital appreciation. It does this by investing
mainly in lower rated, high yielding corporate bonds, often called junk bonds.
While the Fund's primary investment objective is high current income,
it also pursues capital appreciation. Capital appreciation can occur, for
example, from an improvement in the financial condition or credit rating of
issuers whose securities are held by the Fund, or from a general drop in the
level of interest rates, or a combination of both factors.
The Fund can invest without limit in lower-quality domestic debt
securities, sometimes referred to as "high yield" or "junk" bonds. These are
non-investment grade debt securities, which are considered speculative
investments by the major credit rating agencies. High yield bonds involve a
greater risk of default and price volatility than U.S. Government bonds and
other high quality fixed-income securities.
The Fund is designed as a long-term investment for investors able to
bear credit, interest rate and other risks in exchange for the potential for
high current income and capital appreciation. To encourage a long-term
investment horizon, the Fund maintains a 1% redemption and exchange fee for
shares held less than one year. This fee, described
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more fully under "Exchanges and Redemptions -- Special Redemption and Exchange
Information," is payable to the Fund for the benefit of remaining shareholders.
Except as otherwise indicated, the Fund's investment objectives and
policies are not fundamental and may be changed without a vote of shareholders.
Investments
In pursuit of its investment objectives, the Fund, under normal market
conditions, invests at least 65% of its total assets in high yield, below
investment-grade domestic debt securities. The Fund defines "domestic debt
securities" as securities of companies domiciled in the U.S. or organized under
the laws of the U.S. or for which the U.S. trading market is a primary market.
Below investment-grade securities are rated below "Baa" by Moody's Investors
Service, Inc. ("Moody's") or below "BBB" by Standard and Poor's Corporation
("S&P"), or, if unrated, are of equivalent quality as determined by the Fund's
investment adviser, Scudder Kemper Investments, Inc. (the "Adviser"). The Fund's
Adviser intends to focus investments on those securities qualifying for a Ba or
B rating from Moody's or a BB or B rating from S&P, but has the flexibility to
acquire securities qualifying for any rating category, as well as defaulted
securities and non-rated securities. Below investment-grade securities are
considered predominantly speculative with respect to their capacity to pay
interest and repay principal in accordance with their terms and generally
involve a greater risk of default and more volatility in price than securities
in higher rating categories. Please refer to the attached "Appendix" for further
information.
In addition to domestic debt securities, the Fund may invest in a
variety of other securities consistent with its investment objectives. In
addition, other investments may include convertible and preferred securities,
U.S. Treasury and Agency bonds, Brady bonds, mortgage-backed and asset-backed
securities, common stocks and warrants, debt securities issued by real estate
investment trusts ("REITs"), trust preferred securities, bank loans, loan
participations, dollar rolls, indexed securities and illiquid securities and
reverse repurchase agreements.
The Fund may invest up to 25% of its total assets in foreign
securities. While it is anticipated that the majority of the Fund's foreign
investments will be denominated in U.S. dollars, the Fund may invest, within the
aforementioned limit, in foreign bonds denominated in local currencies,
including those issued in emerging markets. The Fund considers "emerging
markets" to include any country that is defined as an emerging or developing
economy by any one of the International Bank for Reconstruction and Development
(i.e., the World Bank), the International Finance Corporation or the United
Nations or its authorities.
The Fund invests primarily in medium- and long-term fixed-income
securities. However, there is no limitation as to the weighted average maturity
of the Fund's portfolio and no restriction on the maturity of any individual
security held in the portfolio. The Adviser will adjust the average portfolio
maturity in light of actual or projected changes in economic and market
conditions. Prices of longer-term bonds generally are more volatile than prices
of bonds with shorter maturities.
Although the Fund is designed to provide monthly income to
shareholders, it can invest in non-income producing debt securities. Such
securities include zero coupon or other original issue discount bonds, which may
pay interest only at maturity, or pay-in-kind bonds, which pay interest in the
form of additional securities.
The Fund may invest in when-issued or forward-delivery securities, and
may engage in strategic transactions and utilize derivatives.
To provide for redemptions, or in anticipation of investment in
longer-term debt securities, the Fund may hold a portion of its portfolio
investments in cash or cash equivalents including repurchase agreements and
other types of money market instruments. In addition, to provide for redemptions
or distributions, the Fund may borrow from banks in an amount not exceeding the
value of one-third of the Fund's total assets. The Fund does not expect to
borrow for investment purposes.
For temporary defensive purposes, the Fund may invest up to 100% of its
assets in cash or money market instruments or invest all or a substantial
portion of its assets in high quality domestic debt securities. It is impossible
to accurately predict for how long such alternate strategies may be utilized.
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Investment process
The Fund involves above-average bond fund risk. Investing in high
yielding, lower-quality bonds involves various types of risks including the risk
of default; that is, the chance that issuers of bonds held in the portfolio will
not make timely payment of either interest or principal. Risk of default can
increase with changes in the financial condition of a company or with changes in
the overall economy, such as a recession. In comparison to investing in higher
quality issues, high yield bond investors may be rewarded for the additional
risk of high yield bonds through higher interest payments and the opportunity
for capital appreciation.
The Adviser attempts to manage the risks of high yield investing, as
well as to enhance investment return, through careful monitoring of business and
economic conditions in the U.S. and abroad, and through conducting its own
credit research along with utilizing the ratings and analysis provided by major
rating agencies such as Moody's and S&P. The Adviser monitors, on a regular
basis, the creditworthiness and business prospects of companies represented in
the portfolio.
Further, the Adviser attempts to manage risk through portfolio
diversification. The Fund will typically invest in a variety of issuers and
industries. Using a research-intensive security selection process, the Adviser
will focus primarily on the following types of high yield opportunities:
o Young, growing companies with attractive business opportunities and
positive credit trends
o Companies with stable to growing cash flows that have the ability to
improve the strength of their balance sheets
o Established companies that may have experienced financial setbacks, but
are displaying evidence of improving business trends
o Securities judged to be undervalued
The Adviser will rely on fundamental corporate credit analysis,
incorporating proprietary credit screening tools.
Master/feeder structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for each Fund while investing in a master fund in a
master/feeder structure fund as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Investments and Investment Techniques
High Yield, High Risk Securities. Income Fund, Corporate Bond Fund and High
Yield Bond Fund may invest in below investment-grade securities (rated below Baa
by Moody's and below BBB by S&P) or unrated securities of equivalent quality,
which may carry a high degree of risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk of principal and income, and may be less liquid,
than securities in the higher rating categories and are considered speculative.
The lower the ratings of such debt securities, the greater their risks. 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.
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Economic downturns may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have an adverse impact on the value of such
obligations. During an economic downturn or period of rising interest rates,
highly leveraged issues may experience financial stress which could 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 a Fund's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of a
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the 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 a 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 after being purchased by a
Fund, 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, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"TAXES."
High Yield Bond Fund -- Debt Securities. High Yield Bond Fund may invest in
securities rated lower than Baa/BBB and in unrated securities of equivalent
quality in the Adviser's judgment. The Fund may invest in debt securities which
are rated as low as C by Moody's or D by S&P. Such securities may be in default
with respect to payment of principal or interest. The Fund may also 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. Bonds rated Baa or BBB may have speculative elements
as well as investment-grade characteristics. For more information about debt
security ratings please refer to the attached "Appendix."
The Adviser expects that a portion of the Fund's investments will be
purchased at a discount to par value. To the extent developments in emerging
markets result in improving credit fundamentals and rating upgrades for
countries in emerging markets, the Adviser believes that there is the potential
for capital appreciation as the improving fundamentals become reflected in the
price of the debt instruments. The Adviser also believes that a country's
sovereign credit rating (with respect to foreign currency denominated issues)
acts as a "ceiling" on the rating of all debt issuers from that country. Thus,
the ratings of private sector companies cannot be higher than that of their home
countries. The Adviser believes, however, that many companies in emerging market
countries, if rated on a stand alone basis without regard to the rating of the
home country, possess fundamentals that could justify a higher credit rating,
particularly if they are major exporters and receive the bulk of their revenues
in U.S. dollars or other hard currencies. The Adviser seeks to identify such
opportunities and benefit from this type of market inefficiency.
Corporate Bond Fund -- Debt Securities. Corporate Bond 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 to be of equivalent quality as
determined by the Adviser. The Fund may invest in securities rated lower than
Baa/BBB and in unrated securities of equivalent quality in the Adviser's
judgment. The Fund may invest in debt securities which are rated as low as C by
Moody's or D by S&P. Such securities may be in default with respect to payment
of principal or interest. Bonds rated
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Baa or BBB may have speculative elements as well as investment-grade
characteristics. For more information about debt security ratings please refer
to the attached "Appendix."
Trust Preferred Securities. Income Fund, Corporate Bond Fund and High Yield Bond
Fund may invest in Trust Preferred Securities, which are hybrid instruments
issued by a special purpose trust (the "Special Trust"), the entire equity
interest of which is owned by a single issuer. The proceeds of the issuance to a
Fund of Trust Preferred Securities are typically used to purchase a junior
subordinated debenture, and distributions from the Special Trust are funded by
the payments of principal and interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by
the Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as a Fund,
would be required to accrue daily for Federal income tax purposes, their share
of the stated interest and the de minimis OID on the debentures (regardless of
whether the Fund receives any cash distributions from the Special Trust), and
the value of Trust Preferred Securities would likely be negatively affected.
Interest payments on the underlying junior subordinated debentures typically may
only be deferred if dividends are suspended on both common and preferred stock
of the issuer. The underlying junior subordinated debentures generally rank
slightly higher in terms of payment priority than both common and preferred
securities of the issuer, but rank below other subordinated debentures and debt
securities. Trust Preferred Securities may be subject to mandatory prepayment
under certain circumstances. The market values of Trust Preferred Securities may
be more volatile than those of conventional debt securities. Trust Preferred
Securities may be issued in reliance on Rule 144A under the Securities Act of
1933, as amended, and, unless and until registered, are restricted securities;
there can be no assurance as to the liquidity of Trust Preferred Securities and
the ability of holders of Trust Preferred Securities, such as the Fund, to sell
their holdings.
Zero Coupon Securities. Each Fund may invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually issued with shorter maturities (15 years or less) and with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Funds, most likely
will be deemed the beneficial holder of the underlying U.S. government
securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Funds will be able to have their beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
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When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself. (See "TAXES.")
Real Estate Investment Trusts. The Funds may invest in REITs. REITs are
sometimes informally characterized as equity REITs, mortgage REITs and hybrid
REITs. Investment in REITs may subject a Fund to risks associated with the
direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of a
Fund's investment in REITs. For instance, during periods of declining interest
rates, certain mortgage REITs may hold mortgages that the mortgagors elect to
prepay, which prepayment may diminish the yield on securities issued by those
REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986 as amended (the "Code"), and to maintain exemption from the registration
requirements of the Investment Company Act of 1940 (the "1940 Act"). By
investing in REITs indirectly through a Fund, a shareholder will bear not only
his or her proportionate share of the expenses of the Fund, but also,
indirectly, similar expenses of the REITs. In addition, REITs depend generally
on their ability to generate cash flow to make distributions to shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities. Each Fund may
also invest in mortgage-backed securities, which are interests in pools of
mortgage loans, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks, and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related, and private organizations as further described below. The
Funds may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Funds to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by a
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities.
When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of mortgage-related securities and increasing their
volatility, affecting the price volatility of the Fund's shares.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing, or foreclosure, net of
fees or costs which may be incurred. Because principal may be prepaid at any
time, mortgage-backed securities may involve significantly greater price and
yield volatility than traditional debt securities. Some mortgage-related
securities such as securities issued by the Government National Mortgage
Association ("GNMA") are described as "modified pass-through." These securities
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment dates regardless of
whether or not the mortgagor actually makes the payment.
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The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of each Fund's shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets each Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Funds may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Adviser determines that the
securities meet each Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The
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Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. The Funds will not purchase mortgage-backed securities or any
other assets which, in the opinion of the Adviser, are illiquid if, as a result,
more than 10% of the value of each Fund's total assets will be illiquid. As new
types of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with each Fund's investment objectives, policies, and
quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgaged-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with each Fund's investment objectives and policies, a
Fund may invest in these and other types of asset-backed securities that may be
developed in the future. In general, the collateral supporting these securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments with interest rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile Receivables(SM) ("CARS(SM)").
CARS(SM) represent undivided fractional interests in a trust (Trust) whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS(SM) are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARS(SM) may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage to
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
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Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Funds will not pay any additional or separate fees for
credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated or failure of the credit support could adversely affect the return
on an investment in such a security.
Each Fund may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The amount of residual cash flow resulting from a particular issue of
asset-backed securities will depend on, among other things, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the Securities Act of 1933 may be subject to certain
restrictions on transferability and would be subject to each Fund's restriction
on restricted or illiquid securities. In addition, there may be no liquid market
for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Funds to dispose of any then existing holdings of such
securities.
Indexed Securities. Each Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which
the Funds may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
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When-Issued Securities. Each Fund may purchase securities on a "when-issued" or
"forward delivery" basis for payment and delivery at a later date. The price of
such securities, which is generally expressed in yield terms, is generally fixed
at the time the commitment to purchase is made, but delivery and payment for the
when-issued or forward delivery securities takes place at a later date. During
the period between purchase and settlement, no payment is made by the Funds to
the issuer and no interest on the when-issued or forward delivery securities
accrues to the Funds. To the extent that assets of the Funds are held in cash
pending the settlement of a purchase of securities, the Funds will earn no
income; however, it is the Funds' intention to be fully invested to the extent
practicable and subject to the policies stated above. While when-issued or
forward delivery securities may be sold prior to the settlement date, the Funds
intend to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the Funds
make the commitment to purchase a security on a when-issued or forward delivery
basis, they will record the transaction and reflect the value of the security in
determining their net asset values. At the time of settlement, the market value
of the when-issued or forward delivery securities may be more or less than the
purchase price. The Funds do not believe that their net asset values or income
will be adversely affected by their purchase of securities on a when-issued or
forward delivery basis.
Municipal Obligations. Balanced Fund, Income Fund and Corporate Bond Fund may
invest in municipal obligations. Municipal obligations are issued by or on
behalf of states, territories, and possessions of the U.S., and their political
subdivisions, agencies, and instrumentalities, and the District of Columbia to
obtain funds for various public purposes. The interest on these obligations is
generally exempt from federal income tax in the hands of most investors. The two
principal classifications of municipal obligations are "notes" and "bonds." The
return on municipal obligations is ordinarily lower than that of taxable
obligations. The Funds may acquire municipal obligations when, due to
disparities in the debt securities markets, the anticipated total return on such
obligations is higher than that on taxable obligations. The Funds have no
current intention of purchasing tax-exempt municipal obligations that would
amount to greater than 5% of each Fund's total assets.
Repurchase Agreements. Each Fund may enter into repurchase agreements with
member banks 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 a Fund may purchase or to be at least equal
to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's or S&P.
A repurchase agreement provides a means for the Funds to earn income on
funds for periods as short as overnight. It is an arrangement under which the
Funds acquire a security ("Obligation") and the seller (i.e. the bank or the
broker-dealer) agrees, at the time of sale, to repurchase the Obligation at a
specified time and price. Obligations subject to a repurchase agreement are held
in a segregated account and the value of such obligations is 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 Funds, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to the Funds together with the repurchase price upon repurchase. In either
case, the income to the Funds is unrelated to the interest rate on the
Obligation itself. Obligations will be held by each Fund's custodian or in the
Federal Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Funds to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to each Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Funds subject to a repurchase agreement as being
owned by the Funds or as being collateral for a loan by the Funds 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 Funds may encounter delay and incur costs
before being able to sell the security. Delays may cause loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Funds have not perfected a security interest in the
Obligation, the Funds 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 Funds would be at the risk of losing some or all of the principal
and income involved in the transaction. As with any unsecured debt instrument
purchased for the Funds, 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 Funds may incur a loss if the
proceeds to the Funds of their sale of the securities underlying the
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repurchase agreement to a third party are less than the repurchase price. To
protect against such potential loss, if the market value (including interest) of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Funds will direct the seller of the
Obligation to deliver additional securities so that the value (including
interest) of all securities subject to the repurchase agreement will equal or
exceed the repurchase price. It is possible that the Funds will be unsuccessful
in seeking to impose on the seller a contractual obligation to deliver
additional securities.
Repurchase Commitments. Balanced Fund and Income Fund may enter into repurchase
commitments with any party deemed creditworthy by the Adviser, including foreign
banks and broker/dealers, if the transaction is entered into for investment
purposes and the counterparty's creditworthiness is at least equal to that of
issuers of securities which the Funds may purchase. Such transactions may not
provide the Funds with collateral marked-to-market during the term of the
commitment.
Dollar Roll Transactions. Each Fund may enter into "dollar roll" transactions,
which consist of the sale by the Funds to a bank or broker/dealers (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. The Funds receive a fee from the counterparty
as consideration for entering into the commitment to purchase. Dollar rolls may
be renewed over a period of several months with a different purchase and
repurchase price fixed and a cash settlement made at each renewal without
physical delivery of securities. Moreover, the transaction may be preceded by a
firm commitment agreement pursuant to which the Funds agree to buy a security on
a future date.
The Funds will not use such transactions for leveraging purposes and,
accordingly, will segregate cash or liquid assets in an amount sufficient to
meet their purchase obligations under the transactions. Each Fund will also
maintain asset coverage of at least 300% for all outstanding firm commitments,
dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the 1940 Act as borrowings of
the Funds because they involve the sale of a security coupled with an agreement
to repurchase. Like all borrowings, a dollar roll involves costs to the Funds.
For example, while the Funds receive a fee as consideration for agreeing to
repurchase the security, the Funds forgo the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Funds, thereby effectively
charging the Funds interest on their borrowing. Further, although the Funds can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of each Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Funds' right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Funds are able to purchase them.
Similarly, the Funds may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Funds, the security that the Funds
are required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Funds' use of the cash
that they receive from a dollar roll will provide a return that exceeds
borrowing costs.
The Trustees of the Trust, on behalf of the Funds, have adopted
guidelines to ensure that those securities received are substantially identical
to those sold. To reduce the risk of default, the Funds will engage in such
transactions only with counterparties selected pursuant to such guidelines.
Brady Bonds. High Yield Bond Fund may invest in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico,
Nigeria, the Philippines, Poland and Uruguay.
Brady Bonds have been issued only recently, and for that reason do not
have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the dollar)
and are actively traded in over-the-counter secondary markets.
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Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on these Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults of countries issuing
Brady Bonds, with respect to commercial bank loans by public and private
entities, investments in Brady Bonds may be viewed as speculative. Approximately
$152 billion in Brady Bonds have been issued in Africa, Asia, Eastern Europe,
Latin America and the Middle East, with over 90% of these Brady Bonds being
denominated in U.S. dollars.
Lending of Portfolio Securities. Each Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers, and are required to be secured continuously by collateral in
cash or liquid assets, maintained on a current basis at an amount at least equal
to the market value and accrued interest of the securities loaned. The Funds
have 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 Funds continue to receive
the equivalent of any distributions paid by the issuer on the securities loaned
and 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 may be made only to firms deemed by the Adviser to be of good
standing. The value of the securities loaned will not exceed 5% of the value of
each Fund's total assets at the time any loan is made.
Warrants. Each Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by a Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Reverse Repurchase Agreements. The Funds may enter into "reverse repurchase
agreements," which are repurchase agreements in which a Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. Each Fund will enter into reverse repurchase agreements only when
the Adviser believes that the interest income to be earned from the investment
of the proceeds of the transaction will be greater than the interest expense of
the transaction.
Borrowing. Each Fund may not borrow money, except as permitted under Federal
law. Each Fund will borrow only when the Adviser believes that borrowing will
benefit the Funds after taking into account considerations such as the costs of
the borrowing. Each Fund does not expect to borrow for investment purposes, to
increase return or leverage the portfolio. Borrowing by a Fund will involve
special risk considerations. Although the principal of a Fund's borrowings will
be fixed, a Fund's assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
Illiquid Securities. Each Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. This investment
practice, therefore, could have the effect of increasing the level of
illiquidity of a Fund. It is each Fund's policy that illiquid securities
(including repurchase agreements of more than seven days duration, certain
restricted securities, and other securities which are not readily marketable)
may not constitute, at the time of purchase, more than 15% of the value of the
Funds' net assets. The Trust's Board of Trustees has approved guidelines for use
by the Adviser in determining whether a security is illiquid. Each Fund has
adopted 144A procedures.
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Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; or (iii) in limited quantities after they have
been held for a specified period of time and other conditions are met pursuant
to an exemption from registration. Issuers of restricted securities may not be
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between a Fund's decision to sell a
restricted or illiquid security and the point at which the Fund is permitted or
able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, a Fund may be required to
bear all or part of the registration expenses. A Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Adviser will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Adviser may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Foreign Securities. While the Funds generally emphasize investments in companies
domiciled in the U.S., they may invest in listed and unlisted foreign securities
of the same types as the domestic securities in which the Funds may invest when
the anticipated performance of foreign securities is believed by the Adviser to
offer more potential than domestic alternatives in keeping with the investment
objectives of each Fund.
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 each Fund's performance. As foreign companies
are not generally subject to uniform accounting and auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic companies, there may be less publicly available information about a
foreign company than about a domestic company. Many foreign stock markets, while
growing in volume of trading activity, have substantially less volume than the
New York Stock Exchange, Inc. (the "Exchange"), and securities of some foreign
companies are less liquid and more volatile than securities of domestic
companies. Similarly, volume and liquidity in most foreign bond markets are less
than the volume and liquidity in the U.S. and at times, volatility of price can
be greater than in the U.S. Further, foreign markets have different clearance
and settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Funds are
uninvested and no return is earned thereon. The inability of the Funds to make
intended security purchases due to settlement problems could cause the Funds to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems either could result in losses to the Funds
due to subsequent declines in value of the portfolio security or, if the Funds
have entered into a contract to sell the security, could result in possible
liability to the purchaser. Fixed commissions on some foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
Funds will endeavor to achieve the most favorable net results on their portfolio
transactions. Further, the Funds may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts. There is generally
less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the U.S. It may be more
difficult for the Funds' agents to keep currently informed about corporate
actions such as stock dividends or other matters which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of nationalization, expropriation, the imposition of withholding or
confiscatory taxes, political, social, or economic instability, or diplomatic
developments which could affect U.S. investments in those countries. Investments
in foreign securities may also entail certain risks, such as possible currency
blockages or transfer restrictions, and the difficulty of enforcing rights in
other countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
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These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance may be greater in these countries than in developed
countries. The management of each Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may be subject to potentially greater risks than investments in developed
countries, a Fund will not invest in any securities of issuers located in
developing countries if the securities, in the judgment of the Adviser, are
speculative.
Investments in foreign securities usually will involve currencies of
foreign countries. Moreover, the Funds may temporarily hold funds in bank
deposits in foreign currencies during the completion of investment programs and
the value of these assets for the Funds 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 Funds may incur costs in connection
with conversions between various currencies. Although each Fund values its
assets daily in terms of U.S. dollars, it does not intend to convert its
holdings of foreign currencies, if any, into U.S. dollars on a daily basis. It
may do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Funds will conduct their 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 forward foreign currency
exchange contracts. (See "Currency Transactions" for more information.)
To the extent that the Funds invest in foreign securities, each Fund's
share price could reflect the movements of both the different stock and bond
markets in which it is invested and the currencies in which the investments are
denominated; the strength or weakness of the U.S. dollar against foreign
currencies could account for part of that Funds' investment performance.
Common stocks. Balanced Fund, Income Fund and High Yield Bond Fund may invest in
common stocks. Common stock is issued by companies to raise cash for business
purposes and represents a proportionate interest in the issuing companies.
Therefore, the Funds may participate in the success or failure of any company in
which it holds stock. The market values of common stock can fluctuate
significantly, reflecting the business performance of the issuing company,
investor perception and general economic or financial market movements. Smaller
companies are especially sensitive to these factors and may even become
valueless. Despite the risk of price volatility, however, common stocks also
offer the greatest potential for gain on investment, compared to other classes
of financial assets such as bonds or cash equivalents.
Convertible Securities. Each Fund may invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features.
The convertible securities in which each Fund may invest include
fixed-income or zero coupon debt securities which may be converted or exchanged
at a stated or determinable exchange ratio into underlying shares of common
stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
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As fixed-income securities, convertible securities are investments
which provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed-income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed-income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold
at substantial discounts from their value at maturity. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Loan Participations and Assignments. The High Yield Bond Fund may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between an issuer of emerging market debt instruments and one or more financial
institutions ("Lenders"). The Fund's investments in Loans in Latin America are
expected in most instances to be in the form of participations in Loans
("Participations") and assignments of portions of Loans ("Assignments") from
third parties. Participations typically will result in the Fund having a
contractual relationship only with the Lender and not with the borrower. The
Fund will have the right to receive payments of principal, interest and any fees
to which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and the Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. The Fund will acquire Participations only
if the Lender interpositioned between the Fund and the borrower is determined by
the Adviser to be creditworthy.
When the Fund purchases Assignments from Lenders, the Fund will acquire
direct rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and may be more limited than, those
held by the assigning Lender. The Fund may have difficulty disposing of
Assignments and Participations. Because no liquid market for these obligations
typically exists, the Fund anticipates that these obligations could be sold only
to a limited number of institutional investors. The lack of a liquid secondary
market will have an adverse effect on the Fund's ability to dispose of
particular Assignments or Participations when necessary to meet the Fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations may also make it more
difficult for the Fund to assign a value to those securities for purposes of
valuing the Fund's portfolio and calculating its net asset value.
Depositary Receipts. Balanced Fund, Corporate Bond Fund and High Yield Bond Fund
may invest indirectly in securities of foreign issuers through sponsored or
unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), International Depositary Receipts ("IDRs") and other types of
Depositary Receipts (which, together with ADRs, GDRs and IDRs are hereinafter
referred to as "Depositary Receipts"). Depositary Receipts may not necessarily
be denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the stock of unsponsored
Depositary Receipts are not obligated to disclose material
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information in the United States and, therefore, there may not be a correlation
between such information and the market value of the Depositary Receipts. ADRs
are typically issued by a United States bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by United States banks or trust companies, and evidence ownership of
underlying securities issued by either a foreign or a United States corporation.
Generally, Depositary Receipts in registered form are designed for use in the
United States securities markets and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. For purposes
of the Fund's investment policies, the Fund's investments in ADRs, GDRs and
other types of Depositary Receipts will be deemed to be investments in the
underlying securities. Depositary Receipts other than those denominated in U.S.
dollars will be subject to foreign currency exchange rate risk. Certain
Depositary Receipts may not be listed on an exchange and therefore may be
illiquid securities.
Investing in Emerging Markets. Corporate Bond Fund and High Yield Bond Fund may
invest in emerging markets. Most emerging securities markets may have
substantially less volume and are subject to less government supervision than
U.S. securities markets. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges, securities dealers,
and listed and unlisted companies in emerging markets than in the U.S.
Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no cash is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in U.S.
securities. Such transactions also involve additional costs for the purchase or
sale of foreign currency.
Foreign investment in certain emerging market debt obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses of the Fund. Certain emerging
markets require prior governmental approval of investments by foreign persons,
limit the amount of investment by foreign persons in a particular company, limit
the investment by foreign persons only to a specific class of securities of a
company that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose additional taxes on
foreign investors. Certain emerging markets may also restrict investment
opportunities in issuers in industries deemed important to national interest.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
In the course of investment in emerging market debt obligations, the
Fund will be exposed to the direct or indirect consequences of political, social
and economic changes in one or more emerging markets. Political changes in
emerging market countries may affect the willingness of an emerging market
country governmental issuer to make or provide for timely payments of its
obligations. The country's economic status, as reflected, among other things, in
its inflation rate, the amount of its external debt and its gross domestic
product, also affects its ability to honor its obligations. While the Fund
manages its assets in a manner that will seek to minimize the exposure to such
risks, and will further reduce risk by owning the bonds of many issuers, there
can be no assurance that adverse political, social or economic changes will not
cause the Fund to suffer a loss of value in respect of the securities in the
Fund's portfolio.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in such
markets may not be readily available. The Trust may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission (the "SEC"). Accordingly if the Fund
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believes that appropriate circumstances exist, it will promptly apply to the SEC
for a determination that an emergency is present. During the period commencing
from the Funds' identification of such condition until the date of the SEC
action, the Funds' securities in the affected markets will be valued at fair
value determined in good faith by or under the direction of the Trust `s Board
of Trustees.
Volume and liquidity in most foreign bond markets are less than in the
U.S. and securities of many foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of business and industry practices, securities
exchanges, brokers, dealers and listed companies than in the U.S. Mail service
between the U.S. and foreign countries may be slower or less reliable than
within the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. In addition, with
respect to certain emerging markets, there is the possibility of expropriation
or confiscatory taxation, political or social instability, or diplomatic
developments which could affect the Funds' investments in those countries.
Moreover, individual emerging market 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 chart below sets forth the risk ratings of
selected emerging market countries' sovereign debt securities.
Sovereign Risk Ratings for Selected Emerging Market Countries as of 12/31/98
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)
Country Moody's Investors Service Standard & Poor's Corporation
- ------- ------------------------- -----------------------------
Chile Baa1 A-
Turkey Ba3 B+
Mexico Ba2 BB
Czech Republic Baa1 A
Hungary Baa3 BBB-
Colombia Baa3 BBB-
Venezuela Ba2 B
Morocco NR NR
Argentina B1 BB-
Brazil B1 B+
Poland Baa3 BBB-
Ivory Coast NR NR
The Fund may have limited legal recourse in the event of a default with
respect to certain debt obligations it holds. If the issuer of a fixed-income
security owned by the Fund defaults, the Fund may incur additional expenses to
seek recovery. Debt obligations issued by emerging market country governments
differ from debt obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on private debt,
must be pursued in the courts of the defaulting party itself. The Funds' ability
to enforce its rights against private issuers may be limited. The ability to
attach assets to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws applicable to
private issuers of debt obligations may be substantially different from those of
other countries. The political context, expressed as an emerging market
governmental issuer's willingness to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be given
that the holders of commercial bank debt may not contest payments to the holders
of debt obligations in the event of default under commercial bank loan
agreements. With four exceptions, (Panama, Cuba, Costa Rica and Yugoslavia), no
sovereign emerging markets borrower has defaulted on an external bond issue
since World War II.
Income from securities held by the Fund could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. The Funds' net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the Fund or to entities in which the Fund has invested. The Adviser will
consider the cost of any taxes in determining whether to acquire any particular
investments, but can provide no assurance that the taxes will not be subject to
change.
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Many emerging markets have experienced substantial, and in some periods
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in the
Funds' portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Funds' assets should these conditions recur.
The ability of emerging market country governmental issuers to make
timely payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
Strategic Transactions and Derivatives. Each Fund may, but are not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as, hedging various market risks, managing the effective maturity
or duration of the fixed-income securities in each Fund's portfolio, enhancing
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.
In the course of pursuing these investment strategies, a Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit to attempt to
protect against possible changes in the market value of
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securities held in or to be purchased for a Fund's portfolio resulting from
securities markets or currency exchange rate fluctuations, to protect a Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio, or to establish a position in the
derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of a Fund's assets will be committed to Strategic
Transactions entered into for non-hedging purposes. Any or all of these
investment techniques may be used at any time and in any combination, and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of a Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. Each Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions will not be used to alter the
fundamental investment purposes and characteristics of a Fund and each Fund will
segregate assets (or as provided by applicable regulations, enter into certain
offsetting positions) to cover its obligations under options, futures and swaps
to limit leveraging of a Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Each Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
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With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. Each
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting a Fund to require the Counterparty to
sell the option back to a Fund at a formula price within seven days. Each Fund
expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. Each Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Adviser. The staff of the
Securities and Exchange Commission (the "SEC") currently takes the position that
OTC options purchased by a Fund, and portfolio securities "covering" the amount
of a Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
each Fund's limitation on investing no more than 15% of its net assets (taken at
market value) in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, 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
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securities indices, currencies and futures contracts. All calls sold by a Fund
must be "covered" (i.e., a Fund must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though a Fund will receive the
option premium to help protect it against loss, a call sold by a Fund exposes
that Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require that Fund to hold a security or instrument which it
might otherwise have sold.
Each Fund may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. Each Fund will not sell put options if, as a result, more
than 50% of a Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that a Fund
may be required to buy the underlying security at a disadvantageous price above
the market price.
General Characteristics of Futures. Each Fund may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management, and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed,
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
Each Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires a Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on futures involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur.
Each Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of that Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The
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gain or loss on an option on an index depends on price movements in the
instruments making up the market, market segment, industry or other composite on
which the underlying index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.
Currency Transactions. Each Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. Each Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
Each Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
Each Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which that Fund has or in which that Fund
expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, each Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of that Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Adviser believes that
the value of schillings will decline against the U.S. dollar, the Adviser may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, that Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the
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issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
each Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. Each Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. Each Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream a Fund may be
obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
Each Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch each Fund will segregate
assets (or enter into any offsetting position) to cover obligations under swaps,
the Adviser and the Funds believe such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to its borrowing restrictions. Each Fund will not enter into any swap,
cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, 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. Each Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Funds might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and
fixed-income instruments are linked.
Euro conversion. The new European currency, the Euro, may result in
uncertainties for European securities and operation of the Funds. The Euro was
introduced on January 1, 1999 by eleven countries of the European Economic and
Monetary Union (EMU). The introduction of the Euro requires the redenomination
of European debt and equity securities over a period of time, which may result
in various accounting differences and/or tax treatments. The Adviser is
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working to address Euro-related issues and understands that other key service
providers are taking similar steps. However, at this time no one knows precisely
what the degree of impact will be. To the extent that the market impact or
effect on a fund's holdings is negative, it could hurt the fund's performance.
Additional questions are raised by the fact that certain other European
Community members, including the United Kingdom, did not officially implement
the Euro on January 1, 1999.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Funds segregate liquid high
grade assets with its custodian to the extent that obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a Fund to pay
or deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid 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 a Fund will require that Fund to hold the
securities subject to the call or to segregate liquid securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require that Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires that Fund to segregate liquid assets equal to
the exercise price.
Except when a Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a Fund to buy or sell currency
will generally require that Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to that Fund's obligations or to
segregate liquid assets equal to the amount of that Fund's obligation.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, that Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and that 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, a 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, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to a Fund's net obligation, if any.
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Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by that Fund. Moreover, instead of segregating assets if a Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Investment Restrictions
Balanced Fund is under no restriction as to the amount of portfolio
securities which may be bought or sold. Unless specified to the contrary, the
following fundamental policies may not be changed without the approval of a
majority of the outstanding voting securities of each Fund which, under the 1940
Act and the rules thereunder and as used in this Statement of Additional
Information, means the lesser of (1) 67% or more of the voting securities
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy; or (2) more than 50%
of the outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, a Fund.
Each Fund has elected to be classified as a diversified series of an
open-end management investment company. In addition, as a matter of fundamental
policy, each Fund may not:
(1) borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(3) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(4) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(5) purchase physical commodities or contracts relating to
physical commodities;
(6) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
and
(7) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time.
The Trustees of the Trust have voluntarily adopted certain policies and
restrictions which are observed in the conduct of the Funds' affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of shareholders.
As a matter of non-fundamental policy each Fund does not currently
intend to:
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(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) For Balanced Fund only enter into either reverse repurchase
agreements or dollar rolls in an amount greater than 5% of its
total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(7) lend portfolio securities in an amount greater than 5% of its
total assets.
Income Fund has undertaken that if the Fund obtains an exemptive order
of the SEC which would permit the taking of action in contravention of any
policy which may not be changed without a shareholder vote, the Fund will not
take such action unless either (i) the applicable exemptive order permits the
taking of such action without a shareholder vote or (ii) the staff of the SEC
has issued to the Fund a "no action" or interpretive letter to the effect that
the Fund may proceed without a shareholder vote.
The foregoing restrictions with respect to repurchase agreements shall
be construed to be for repurchase agreements entered into for the investment of
available cash consistent with Income Fund's repurchase agreement procedures,
not repurchase commitments entered into for general investment purposes.
PURCHASES
(See Purchases and Transaction information in the Funds' prospectuses.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call
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1-800-225-5163 to get an account number. During the call, the investor will be
asked to indicate the Fund name, amount to be wired ($2,500 minimum), name of
bank or trust company from which the wire will be sent, the exact registration
of the new account, the taxpayer identification or Social Security number,
address and telephone number. The investor must then call the bank to arrange a
wire transfer to The Scudder Funds, State Street Bank and Trust Company, Boston,
MA 02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
Each Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the fee to be paid to each
Fund) for any non-fiduciary/non-custodial account without an automatic
investment plan (AIP) in place and a balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a reduction in
value has occurred due to a redemption, exchange or transfer out of the
account. The Funds will mail the proceeds of the redeemed account to
the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Funds' prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
the Funds or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Trust shall have the authority, as agent of the
shareholder, to redeem shares in the account in order to reimburse the Funds 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 Funds.
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 Funds by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"),
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normally 4 p.m. eastern time. Proceeds in the amount of your purchase will be
transferred from your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, shares will be purchased at the net asset value per share calculated
at the close of trading on the day of your call. QuickBuy requests received
after the close of regular trading on the Exchange will begin their processing
and be purchased at the net asset value calculated the following business day.
If you purchase shares by QuickBuy and redeem them within seven days of the
purchase, the Funds may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account the purchase will be canceled and you will be subject to any losses
or fees incurred in the transaction. QuickBuy transactions are not available for
most retirement plan accounts. However, QuickBuy transactions are available for
Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
Each Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that each Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Funds are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the applicable Fund or the
principal underwriter for the loss incurred. Investors whose orders have been
canceled may be prohibited from, or restricted in, placing future orders in any
of the Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Funds prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Funds.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than each
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
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Share Certificates
Due to the desire of the Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Funds.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
Each Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Funds' shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Funds when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Funds and
the broker, ordinarily orders will be priced at the Funds' net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Funds' shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Funds' principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Funds at any time for any reason.
The Board of Trustees and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Funds at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. Each Fund reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
(See Exchanges and redemptions and Transaction information
in the Funds' prospectuses.)
Special Redemption and Exchange Information for High Yield Bond Fund
In general, shares of the Fund may be exchanged or redeemed at net
asset value. However, shares of High Yield Bond Fund held for less than one year
are redeemable at a price equal to 99% of the then current net asset value per
share. This 1% discount, referred to in the prospectus and this statement of
additional information as a redemption fee, directly affects the amount a
shareholder who is subject to the discount receives upon exchange or redemption.
It is intended to encourage long-term investment in the Fund, to avoid
transaction and other expenses caused by early redemptions and to facilitate
portfolio management. The fee is not a deferred sales charge, is not a
commission paid to the Adviser or its subsidiaries, and does not benefit the
Adviser in any way. The Fund reserves the right to modify the terms of or
terminate this fee at any time.
The redemption discount will not be applied to (a) a redemption of
shares of the Fund outstanding for one year or more, (b) shares purchased
through certain retirement plans, including 401(k) plans, 403(b) plans, 457
plans, Keogh accounts, and Profit Sharing and Money Purchase Pension Plans, (c)
a redemption of reinvestment shares (i.e., shares purchased through the
reinvestment of dividends or capital gains distributions paid by the Fund), (d)
a redemption of shares due to the death of the registered shareholder of a Fund
account, or, due to the death of all registered shareholders of a Fund account
with more than one registered shareholder, (i.e., joint tenant account), upon
receipt by Scudder
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Service Corporation of appropriate written instructions and documentation
satisfactory to Scudder Service Corporation, or (e) a redemption of shares by
the Fund upon exercise of its right to liquidate accounts (i) falling below the
minimum account size by reason of shareholder redemptions or (ii) when the
shareholder has failed to provide tax identification information. However, if
shares are purchased for a retirement plan account through a broker, financial
institution or recordkeeper maintaining an omnibus account for the shares, such
waiver may not apply. (Before purchasing shares, please check with your account
representative concerning the availability of the fee waiver.) In addition, this
waiver does not apply to IRA and SEP-IRA accounts. For this purpose and without
regard to the shares actually redeemed, shares will be treated as redeemed as
follows: first, reinvestment shares; second, purchased shares held one year or
more; and third, purchased shares held for less than one year. Finally, if a
redeeming shareholder acquires Fund shares through a transfer from another
shareholder, applicability of the discount, if any, will be determined by
reference to the date the shares were originally purchased, and not from the
date of transfer between shareholders.
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange may be
either an additional investment into an existing account or may involve opening
a new account in another 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 into a new fund account must be for a minimum of $2,500. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is 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 Funds' prospectuses.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset value determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
However, shares that are exchanged from High Yield Bond Fund may be subject to
the Fund's 1% redemption fee. (See "Special Redemption and Exchange Information
for High Yield Bond)" 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 exchange may be subject to backup
withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. Each Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Funds do not follow such
procedures, they may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Funds and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-225-5163.
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Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption by Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may also request to have the proceeds
mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit Sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption payments
should either return a Telephone Redemption Option Form
(available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
Telephone redemption is not available with respect to shares
represented by share certificates for Income Fund or shares held in certain
retirement accounts.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made 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 $5.00
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 banks and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
Each Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A Fund will not be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the Trust and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared, which may take up to seven
business days.
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of a Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net asset
value per share calculated at the close of trading on the day of your call.
QuickSell requests received after the close of regular trading on the Exchange
35
<PAGE>
will begin their processing and be redeemed at the net asset value calculated
the following business day. QuickSell transactions are not available for Scudder
IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing an QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
Each Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A Fund will not be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
Redemption by Mail or Fax
Any existing share certificates for Income Fund 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 as
explained in that Fund's prospectus.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).
It is suggested that shareholders holding share certificates for Income
Fund or shares registered in other than individual names contact the Transfer
Agent prior to redemptions to ensure that all necessary documents accompany the
request. When shares are held in the name of a corporation, trust, fiduciary
agent, attorney or partnership, the Transfer Agent requires, in addition to the
stock power, certified evidence of authority to sign. These procedures are for
the protection of shareholders and should be followed to ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption will be sent within seven days after
receipt by the Transfer Agent of a request for redemption that complies with the
above requirements. Delays in payment of more than seven business days for
shares tendered for repurchase or redemption may result, but only until the
purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information please call 1-800-225-5163.
Redemption-In-Kind
The Trust reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by a
Fund and valued as they are for purposes of computing a Fund's net asset value
(a redemption-in-kind). If payment is made in securities, a shareholder may
incur transaction expenses in converting these securities into cash. The Trust
has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which a 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.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive in addition to the net asset
value thereof, all declared but unpaid dividends thereon. The value of shares
redeemed or repurchased may be more or less than the shareholder's cost
depending on the net asset value at the time of redemption or repurchase. The
Funds do not impose a redemption or repurchase charge although a wire charge may
be applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including an exchange
36
<PAGE>
into another Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment may be suspended at
times during which (a) the Exchange is closed, other than customary weekend and
holiday closings, (b) trading on the Exchange is restricted for any reason, (c)
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) the SEC may
by order permit such a suspension for the protection of the Trust's
shareholders; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b) or (c) exist.
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "About the Fund" and "How the funds work" in the Funds' prospectuses.)
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish funds in the Scudder Family of Funds from other no-load mutual
funds. Scudder pioneered the no-load concept when it created the nation's first
no-load fund in 1928, and later developed the nation's first family of no-load
mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder Family of Funds pure no-load fund over investing
the same amount in a load fund that collects an 8.50% front-end load, a load
fund that collects only a 0.75% 12b-1 and/or service fee, and a no-load fund
charging only a 0.25% 12b-1 and/or service fee. The hypothetical figures in the
chart show the value of an account assuming a constant 10% rate of return over
the time periods indicated and reinvestment of dividends and distributions.
37
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
Scudder Load Fund with 0.75% No-Load Fund with
YEARS No-Load Fund 8.50% Load Fund 12b-1 Fee 0.25% 12b-1 Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://www.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.
The Adviser has communicated with shareholders and other interested
parties on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- The Adviser is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
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<PAGE>
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 a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders may change their dividend option either by
calling 1-800-225-5163 or by sending written instructions to the Transfer Agent.
Please include your account number with your written request. See "Purchases" in
each Fund's prospectus for the address.
Reinvestment is usually made at the closing net asset value determined
on the day following the record date. Investors may leave standing instructions
with the Transfer Agent designating their option for either reinvestment or cash
distribution of any income dividends or capital gains distributions. If no
election is made, dividends and distributions will be invested in additional
shares of a Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after a Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation Statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Investors Centers
Investors may visit any of the Centers maintained by The Distributor.
The Centers are designed to provide individuals with services during any
business day. Investors may pick up literature or obtain assistance with opening
an account, adding monies or special options to existing accounts, making
exchanges within the Scudder Family of Funds, redeeming shares, or opening
retirement plans. Checks should not be mailed to the Centers but to "The Scudder
Funds" at the address listed under "Purchases" in the prospectuses.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights
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
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
39
<PAGE>
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series+ seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series+ seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series+ seeks to provide investors with
as high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
- --------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
40
<PAGE>
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide high income while
managing its portfolio in a way that is consistent with maintaining a
high degree of stability of shareholders' capital. It does this by
investing mainly in bonds with short remaining maturities.
Scudder GNMA Fund seeks to provide high income. It does this by
investing mainly in "Ginnie Maes": mortgage-backed securities that are
issued or guaranteed by the Government National Mortgage Association
(GNMA).
Scudder Income Fund seeks to provide high income while managing its
portfolio in a way that is consistent with the prudent investment of
shareholders' capital. It does this by using a flexible investment
program that emphasizes high-grade bonds.
Scudder Corporate Bond Fund seeks to provide high income. It does this
by investing mainly in corporate bonds.
Scudder High Yield Bond Fund seeks to provide high income and,
secondarily, capital appreciation. It does this by investing mainly in
lower rated, higher yielding corporate bonds, often called junk bonds.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
- --------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
investment approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder Select 500 Fund seeks to provide long-term growth and income
through investment in selected stocks of companies in the S&P 500
Index.
Scudder 500 Index Fund seeks to provide investment results that, before
expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's
500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
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<PAGE>
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Select 1000 Growth Fund seeks to provide long-term growth of
capital through investment in selected stocks of companies in the
Russell 1000 Growth Index.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
- --------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
43
<PAGE>
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service ("IRS") requirements, may be obtained by
contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the Federal
income tax
44
<PAGE>
treatment of the plan. State tax treatment may be different and may vary from
state to state. It is advisable for an investor considering the funding of the
investment plans described below to consult with an attorney or other investment
or tax adviser with respect to the suitability requirements and tax aspects
thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
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.)
45
<PAGE>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>
Scudder Roth IRA: Individual Retirement Account
Shares of the Funds may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
46
<PAGE>
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. 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. Requests for increases in withdrawal
amounts or to change 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 by the 15th of the month in which such change is to take effect. An
Automatic Withdrawal Plan may be terminated at any time by the shareholder, the
Trust or its agent on written notice, and will be terminated when all shares of
the Fund under the Plan have been liquidated or upon receipt by the Trust of
notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
47
<PAGE>
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. In this case, the minimum initial investment is $500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See Distributions and Taxes in the Funds' prospectuses.)
Each Fund intends to follow the practice of distributing substantially
all of its investment company taxable income, which includes any excess of net
realized short-term capital gains over net realized long-term capital losses. A
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,
each Fund may retain all or part of such gain for reinvestment, after paying the
related federal taxes for which shareholders may then be able to claim a credit
against their federal tax liability. If a 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, that Fund may be subject to that excise tax. In certain
circumstances, a Fund may determine that it is in the interest of shareholders
to distribute less than the required amount. (See "TAXES.")
Balanced Fund and Income Fund intend to distribute investment company
taxable income, exclusive of net short-term capital gains in excess of net
long-term capital losses, in March, June, September and December each year.
Distributions of net capital gains realized during each fiscal year will be made
annually before the end of each Fund's fiscal year on December 31. Additional
distributions, including distributions of net short-term capital gains in excess
of net long-term capital losses, may be made, if necessary.
Corporate Bond Fund and High Yield Bond Fund each pay dividends from
their net investment income which are declared daily and distributed monthly.
The Funds intend to distribute net realized capital gains after utilization of
capital loss carryforwards, if any, in November or December to prevent
application of a federal excise tax, although 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 each Fund. Distributions for High Yield Bond
Fund are not subject to the 1% redemption fee, whether paid in cash or
reinvested. If an investment is in the form of a retirement plan, all dividends
and capital gains distributions must be reinvested into the shareholder's
account. Distributions of investment company taxable income and net realized
capital gains are taxable (see "TAXES"), whether made in shares or cash.
Additional distributions may be made if necessary.
Both types of distributions will be made in shares of that Fund and
confirmation will be mailed to each shareholder unless a shareholder has elected
to receive cash, in which case a check will be sent.
PERFORMANCE INFORMATION
(See Performance information in the Funds' prospectuses.)
From time to time, quotations of the Funds' performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures are calculated in the following manners:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for periods of one year, five years, and ten years (or such shorter
periods as may be applicable dating from the commencement of a Fund's
operation), all ended on the last day of a recent calendar quarter. Average
annual total return quotations reflect changes in the price of a Fund's shares
and assume that all dividends and capital gains distributions during the
respective periods were
48
<PAGE>
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compound rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at
the beginning of the applicable period
Average Annual Total Return for periods ended December 31, 1998
One Year Five Years Ten Years Life of Fund
-------- ---------- --------- ------------
Balanced Fund(1) 21.10% 15.41% - 13.47%
Average Annual Total Return for periods ended January 31, 1999
One Year Five Years Ten Years Life of Fund
-------- ---------- --------- ------------
Corporate Bond Fund(2) - - - -
High Yield Bond Fund(3) 3.60% - - 11.83%
Income Fund(4) 6.04% 5.95% 8.77% -
(1) Life of the Fund is for the period beginning January 4, 1993
(commencement of operations). The Average Annual Total Return for the
one year, five years and life of the Fund periods would have been
lower, had the Adviser not maintained Fund expenses.
(2) The Fund commenced operations on August 31, 1998.
(3) Life of the Fund is for the period beginning June 28, 1996
(commencement of operations). The Average Annual Total Return for the
one year and life of the Fund periods would have been lower, had the
Adviser not maintained Fund expenses. On August 10, 1998, the Board of
Trustees changed the fiscal year end from February 28 to January 31.
(4) The Average Annual Total Return for the one year period would have been
lower, had the Adviser not maintained Fund expenses. On August 10,
1998, the Board of Trustees changed the fiscal year end from December
31 to January 31.
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 a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods
according to the following formula (cumulative total return is then expressed as
a percentage):
49
<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 periods ended December 31, 1998
One Year Five Years Ten Years Life of Fund
-------- ---------- --------- ------------
Balanced Fund(1) 21.10% 104.75% - 113.19%
Cumulative Total Return for periods ended January 31, 1999
One Year Five Years Ten Years Life of Fund
-------- ---------- --------- ------------
Corporate Bond Fund(2) - - - 5.53%
High Yield Bond Fund(3) 3.60% - - 33.61%
Income Fund(4) 6.04% 33.48% 131.70% -
(1) Life of the Fund is for the period beginning January 4, 1993
(commencement of operations). The Cumulative Total Return for the one
year, five years and life of the Fund periods would have been lower,
had the Adviser not maintained Fund expenses.
(2) The Fund commenced operations on August 31, 1998. The Cumulative Total
Return for the period would have been lower, had the Adviser not
maintained Fund expenses.
(3) Life of the Fund is for the period beginning June 28, 1996
(commencement of operations). The Cumulative Total Return for the one
year and life of the Fund periods would have been lower, had the
Adviser not maintained Fund expenses. On August 10, 1998, the Board of
Trustees changed the fiscal year end from February 28 to January 31.
(4) The Cumulative Total Return for the one year period would have been
lower, had the Adviser not maintained Fund expenses. On August 10,
1998, the Board of Trustees changed the fiscal year end from December
31 to January 31.
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.
SEC Yield
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield, sometimes
referred to as the Fund's "SEC yield," is calculated by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period according to the following
formula:
50
<PAGE>
YIELD = 2 [(a-b)/cd + 1)^6 - 1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
SEC 30-day yield for the period ended March 31, 1999.
Corporate Bond Fund 7.04%
High Yield Bond Fund 9.36%
Income Fund 5.89%
Quotations of a Fund's performance are based on historical earnings,
show the performance of a hypothetical investment, and are not intended to
indicate future performance of that Fund. An investor's shares when redeemed may
be worth more or less than their original cost. Performance of a Fund will vary
based on changes in market conditions and the level of that Fund's expenses. In
periods of declining interest rates a Fund's quoted yield will tend to be
somewhat higher than prevailing market rates, and in periods of rising interest
rates that Fund's quoted yield will tend to be somewhat lower.
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 a 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, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. 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.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations 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, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.
51
<PAGE>
The Funds 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 Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
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 Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
52
<PAGE>
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
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.
53
<PAGE>
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See Investment Adviser in the Funds' prospectuses.)
The Funds are separate diversified series of Scudder Portfolio Trust,
formerly Scudder Income Fund, a Massachusetts business trust established under a
Declaration of Trust dated September 20, 1984, as amended. The Trust's
predecessor was organized as a Massachusetts corporation in 1928 by the
investment counsel firm of Scudder, Stevens & Clark, Inc., the predecessor to
Scudder Kemper Investments, Inc.
On November 4, 1987, the par value of the shares of beneficial interest
of the Trust was changed from no par value to $0.01 par value per share. The
Trust's authorized capital consists of an unlimited number of shares of
beneficial interest of $0.01 par value, all of which are of one class and have
equal rights as to voting, dividends, and liquidation. The Trustees have the
authority to issue two or more series of shares and to designate the relative
rights and preferences as between the different series. If more than one series
of shares were issued and a series were unable to meet its obligations, the
remaining series might have to assume the unsatisfied obligations of that
series. All shares issued and outstanding will be fully paid and non-assessable
by the Trust, and redeemable as described in this combined Statement of
Additional Information and in each Fund's prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the
54
<PAGE>
Trust. If a series were unable to meet its obligations, the assets of all other
series may in some circumstances be available to creditors for that purpose, in
which case the assets of such other series could be used to meet liabilities
which are not otherwise properly chargeable to them. Expenses with respect to
any two or more series are to be allocated in proportion to the asset value of
the respective series except where allocations of direct expenses can otherwise
be fairly made. The officers of the Trust, subject to the general supervision of
the Trustees, have the power to determine which liabilities are allocable to a
given series, or which are general or allocable to two or more series. In the
event of the dissolution or liquidation of the Trust or any series, the holders
of the shares of any series are entitled to receive as a class the underlying
assets of such shares available for distribution to shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting 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 Trustees, in their discretion, may authorize the division of shares
of a series into different classes, permitting shares of different classes to be
distributed by different methods. Although shareholders of different classes of
a series would have an interest in the same portfolio of assets, shareholders of
different classes may bear different expenses in connection with different
methods of distribution.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, except if
it is determined, in the manner provided in the Declaration of Trust, that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
INVESTMENT ADVISER
(See Investment Adviser in the Funds' prospectuses.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc.,
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<PAGE>
Scudder Funds Trust, Global/International Fund, Inc., Scudder Global High Income
Fund, Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder International
Fund, Inc., Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds,
Inc., Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder
Pathway Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil
Fund, Inc., The Korea Fund, Inc. and The Japan Fund, Inc. Some of the foregoing
companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA 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 Funds may invest, the conclusions and
investment decisions of the Adviser with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for a Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a Fund. Purchase and sale orders for a Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
The transaction between Scudder and Zurich resulted in the assignment
of the Funds' investment management agreements with Scudder, those agreements
were deemed to be automatically terminated at the consummation of the
transaction. In anticipation of the transaction, however, the Trustees approved
new investment management agreements between the Funds and the Adviser on August
12, 1997. At the special meeting of the Funds' shareholders held on October 24,
1997, the shareholders also approved the investment management agreements. The
investment management agreements became effective as of December 31, 1997.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
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<PAGE>
Upon consummation of this transaction, the Funds' existing investment
management agreements with Scudder Kemper were deemed to have been assigned and,
therefore, terminated. The Board has approved new investment management
agreements (the "Agreements") with Scudder Kemper, which are substantially
identical to the current investment management agreements, except for the dates
of execution and termination. The Agreements became effective September 7, 1998,
upon the termination of the then current investment management agreements and
were approved at a shareholder meeting held on December 15, 1998.
The Agreements dated September 7, 1998 were approved by the Trustees on
August 10, 1998. The Agreements will continue in effect until September 30, 1999
and from year to year thereafter only if their continuance is approved annually
by the vote of a majority of those Trustees who are not parties to such
Agreements or interested persons of the Adviser or the Trust, cast in person at
a meeting called for the purpose of voting on such approval, and either by a
vote of the Trust's Trustees or of a majority of the outstanding voting
securities of the respective Fund. The Agreements may be terminated at any time
without payment of penalty by either party on sixty days' written notice and
automatically terminate in the event of their assignment.
Under each Agreement, the Adviser provides a Fund with continuing
investment management for that Fund's portfolio consistent with the Fund's
investment objective, policies, and restrictions, and determines what securities
will be purchased for the portfolio of that Fund, what portfolio securities will
be held or sold by a Fund, and what portion of a Fund's assets will be held
uninvested, subject always to the provisions of the Trust's Declaration of
Trust, By-Laws, the 1940 Act, the Code, a Fund's investment objective, policies,
and restrictions, and subject, further, to such policies and instructions as the
Trustees of the Trust may from time to time establish. The Adviser also advises
and assists the officers of a Fund in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of a Fund.
The Adviser also renders significant administrative services (not
otherwise provided by third parties) necessary for a Fund's operations as an
open-end investment company including, but not limited to preparing reports and
notices to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Funds is (such as the Funds' transfer agent, pricing agents, custodian,
accountants, and others); preparing and making filings with the SEC and other
regulatory agencies; assisting in the preparation and filing of the Funds'
federal, state, and local tax returns; preparing and filing the Funds' 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 Funds under applicable federal and
state securities laws; maintaining the Funds' books and records to the extent
not otherwise maintained by a third party; assisting in establishing accounting
policies of the Funds; assisting in the resolution of accounting and legal
issues; establishing and monitoring the Funds' operating budget; processing the
payment of the Funds' bills; assisting the Funds in, and otherwise arranging
for, the payment of distributions and dividends; and otherwise assisting the
Funds in the conduct of its business, subject to the direction and control of
the Trustees.
The Adviser pays the compensation and expenses (except those for
attending Board and committee meetings outside New York, New York and Boston,
Massachusetts) of all Trustees, officers, and executive employees of the Trust
affiliated with the Adviser, and makes available, without expense to the Trust,
the services of such Trustees, officers, and employees of the Adviser as may
duly be elected officers or Trustees of the Trust, subject to their individual
consent to serve, and to any limitations imposed by law, and provides the
Trust's office space and facilities.
For the Adviser's services, Balanced Fund pays the Adviser 0.70%,
payable monthly, provided the Fund will make such interim payments as may be
requested by Scudder not to exceed 75% of the amount of the fee then accrued on
the books of the Fund and unpaid. From November 1, 1997 until April 30, 1998,
the Adviser had agreed to waive management fees or reimburse the Fund to the
extent necessary so that the total annualized expenses of the Fund did not
exceed 1.10% of the average daily net assets. The Adviser retains the ability to
be repaid by the Fund if expenses fall below the specified limit prior to the
end of the fiscal year. These expense limitation arrangements can decrease the
Fund's expenses and improve its performance. For the fiscal year ended December
31, 1996, the Adviser did not impose a portion of its management fee amounting
to $387,170 and the fee imposed amounted to $340,364. For the fiscal year ended
December 31, 1997, the Adviser did not impose a portion of its management fee
amounting to $483,894 and the fee imposed amounted to $480,340. For the fiscal
year ended December 31, 1998, the Adviser did not impose a portion of its fees
amounting to $104,241, and the portion imposed amounted to $1,280,874, of which
$146,110 was unpaid on December 31, 1998.
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<PAGE>
For the Adviser's services, Income Fund pays the Adviser a fee equal to
0.65 of 1% on the first $200 million of the Funds' average daily net assets,
0.60 of 1% on the next $300 million of such net assets and 0.55 of 1% on such
net assets in excess of $500 million. The fee is payable monthly, provided the
Fund will make such interim payments as may be requested by the Adviser not to
exceed 75% of the amount of the fee then accrued on the books of the Fund and
unpaid. For the years ended December 31, 1997 and 1996 the Adviser charged the
Fund aggregate fees pursuant to its then effective investment advisory agreement
of $3,750,067 and $3,516,782, respectively. Effective March 2, 1998, the Adviser
had agreed to maintain the annualized expenses of the Fund at not more than
0.95% of average daily net assets until April 30, 1999. Accordingly, for the
year ended December 31, 1998, the Adviser did not impose a portion of its
management fee amounting to $2,586,543 and the amount imposed amounted to
$30,991. For the period ended January 31, 1999, the Adviser did not impose a
portion of its management fee amounting to $379,295 and the amount imposed
amounted to $30,991.
For the Adviser's services, Corporate Bond Fund pays the Adviser an
annual fee equal to 0.65% of the Fund's average daily net assets, payable
monthly, provided the Fund will make such interim payments as may be requested
by the Adviser not to exceed 75% of the amount of the fee then accrued on the
books of the Fund and unpaid. Until August 31, 1999, the Adviser has agreed to
maintain the total annualized expenses of the Fund at 0% of the average daily
net assets of the Fund. For the period August 31, 1998 (commencement of
operations) to January 31, 1999, the Adviser did not impose any portion of its
management fee amounting to $83,075.
For the Adviser's services High Yield Bond Fund pays the Adviser an
annual fee equal to 0.70% of the Fund's average daily net assets, payable
monthly, provided the Fund will make such interim payments as may be requested
by the Adviser not to exceed 75% of the amount of the fee then accrued on the
books of the Fund and unpaid. Until June 30, 1998, the Adviser agreed to
maintain the total annualized expenses of the Fund at 0.25% of the average daily
net assets of the Fund. Effective July 1, 1998, until December 31, 1998, the
Adviser agreed to maintain the total annualized expenses of the Fund at 0.50% of
the average daily net assets of the Fund. For the fiscal year ended February 28,
1998 the Adviser did not impose a management fee, which would have otherwise
amounted to $868,780. Effective January 1, 1999, the Adviser agreed to maintain
the total annualized expenses of the Fund at 0.75% of the average daily net
assets of the Fund. For the eleven months ended January 31, 1999, the Adviser
did not impose a management fee amounting to $1,229,100 and the amount imposed
amounted to $34,530.
Under each Agreement a 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 and any other expenses including clerical expenses of issue,
redemption or repurchase of shares; the expenses of and the fees for registering
or qualifying securities for sale; the fees and expenses of the Trustees,
officers and employees of the Trust who are not affiliated with the Adviser; the
cost of printing and distributing reports and notices to shareholders; and the
fees and disbursements of custodians. The Trust may arrange to have third
parties assume all or part of the expenses of sale, underwriting and
distribution of shares of the Funds. The Funds are also responsible for expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto. The Agreement expressly provides that the Adviser shall not be required
to pay a pricing agent of a Fund for portfolio pricing services, if any.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning each Agreement, the Trustees of the Trust who are not
"interested persons" of the Trust have been represented by independent counsel
at the Funds' expense.
Each Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with matters to which each Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
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<PAGE>
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Funds' custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with
the Trust as principals in the purchase or sale of securities, except as
individual subscribers or holders of shares of that Fund.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Position with Underwriter, Scudder
Name, Age and Address Fund Principal Occupation** Investor Services, Inc.
- --------------------- ---- ---------------------- -----------------------
<S> <C> <C> <C>
Daniel Pierce (65)+*= President and Trustee Managing Director of Director, Vice President
Scudder Kemper Investments, and Assistant Treasurer
Inc.
Henry P. Becton, Jr. (55)125 Trustee President and General --
Western Avenue Allston, MA 02134 Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll (52) Trustee Executive Fellow, Center --
4909 SW 9th Place for Business Ethics,
Cape Coral, FL 33914 Bentley College; President,
Driscoll Associates
(consulting firm)
Peter B. Freeman (66) Trustee Corporate Director and --
100 Alumni Avenue Trustee
Providence, RI 02906
George M. Lovejoy, Jr. (69)= Trustee President and Director, --
50 Congress Street, Suite 543 Fifty Associates
Boston, MA 02109 (real estate corporation)
59
<PAGE>
Position with
Position with Underwriter, Scudder
Name, Age and Address Fund Principal Occupation** Investor Services, Inc.
- --------------------- ---- ---------------------- -----------------------
Wesley W. Marple, Jr. (67)= Trustee Professor of Business --
Northeastern University Administration,
413 Hayden Hall Northeastern University,
360 Huntington Ave. College of Business
Boston, MA 02115 Administration
Kathryn L. Quirk (46)*#= Trustee, Vice Managing Director of Director, Senior Vice
President and Scudder Kemper Investments, President, Chief Legal
Assistant Secretary Inc. Officer and Assistant
Clerk
Jean C. Tempel (56) Trustee Venture Partner, Internet --
Internet Capital Group Capital Corp.
Ten Post Office Square
Suite 1325
Boston, MA 02109-4603
Kelly D. Babson (40)+ Vice President Managing Director of --
Scudder Kemper Investments,
Inc.
William M. Hutchinson (51)+ Vice President Senior Vice President of --
Scudder Kemper Investments,
Inc.
Thomas W. Joseph (59)+ Vice President Senior Vice President of Director, Vice
Scudder Kemper Investments, President, Treasurer and
Inc. Assistant Clerk
Valerie F. Malter (40)# Vice President Managing Director of --
Scudder Kemper Investments,
Inc.
Ann M. McCreary (42)# Vice President Managing Director of --
Scudder Kemper Investments,
Inc.
Stephen Wohler (50)+ Vice President Managing Director of --
Scudder Kemper Investments,
Inc.
John R. Hebble (40)+ Treasurer Senior Vice President, Assistant Treasurer
Scudder Kemper Investments,
Inc.
Caroline Pearson (37)+ Assistant Secretary Senior Vice President, Clerk
Scudder Kemper Investments,
Inc.; Associate, Dechert
Price & Rhoads (law firm)
1989 to 1997
</TABLE>
60
<PAGE>
* Mr. Pierce and Ms. Quirk are considered by the Trust and its counsel to
be persons who are "interested persons" of the Adviser or of the Trust
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
= Messrs. Lovejoy, Marple and Pierce and Ms. Quirk are members of the
Executive Committee, which has the power to declare dividends from
ordinary income and distributions of realized capital gains to the same
extent as the Board is so empowered.
+ Address: Two International Place, Boston, Massachusetts
# Address: 345 Park Avenue, New York, New York
As of May 31, 1999, all Trustees and officers of the Trust as a group
owned beneficially (as defined in Section 13(d) of the Securities Exchange Act
of 1934) 1,316,473 shares, or 4.99% of the shares of the Balanced Fund.
As of May 31, 1999, 7,515,805 shares in the aggregate, or 28.50% of the
outstanding shares of the Balanced Fund, were held in the name of Scudder Trust
Company, trustee for Farmer's Group Inc., Employees Profit Sharing Savings,
Attn: Linda Yezek, 4680 Whilshire Blvd., Los Angeles, CA 90010 who may be deemed
to be the beneficial owner of certain of these shares, but disclaims any
beneficial ownership therein.
Certain accounts for which the Adviser acts as investment adviser owned
3,726,805 shares in the aggregate, or 6.19% of the outstanding shares of Income
Fund on May 31, 1999. The Adviser may be deemed to be the beneficial owner of
such shares, but disclaims any beneficial ownership interest therein.
As of May 31, 1999, all Trustees and officers of the Trust as a group
owned beneficially (as defined in Section 13(d) of the Securities Exchange Act
of 1934) 955,632 shares, or 1.59% of the shares of the Income Fund.
As of May 31, 1999, 4,868,220 shares in the aggregate, 8.08% of the
outstanding shares of Income Fund, were held in the name of State Street Bank &
Trust Co., Custodian for the Scudder Pathway Series, Balanced Portfolio, One
Heritage Drive, Quincy, MA 02171-2128, who may be deemed to be the beneficial
owner of certain of these shares, but disclaims any beneficial ownership
therein.
As of May 31, 1999 all Trustees and Officers of the Trust as a group
owned beneficially (as the term is defined in Section 13 (d) of the Securities
Exchange Act of 1934) 443,344 shares, or 2.59% of the shares of the High Yield
Bond Fund.
Certain accounts for which the Adviser acts as investment adviser owned
2,203,564 shares in the aggregate, or 12.87% of the outstanding shares of the
High Yield Bond Fund on May 31, 1999. The Adviser may be deemed to be the
beneficial owner of such shares, but disclaims any beneficial interest in such
shares.
As of May 31, 1999, 2,824,950 shares in the aggregate, or 16.49% of the
outstanding shares of High Yield Bond Fund, were held in the name of Charles
Schwab & Co. Inc., 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.
As of May 31, 1999 all Trustees and Officers of the Trust as a group
owned beneficially (as the term is defined in Section 13 (d) of the Securities
Exchange Act of 1934) less than 1% of the shares of the Corporate Bond Fund.
As of May 31, 1999, 1,730,471 shares in the aggregate, or 52.32% of the
outstanding shares of the Corporate Bond Fund, were held in the name of State
Street Bank & Trust Co., Custodian for Scudder Pathway Series, Balanced
Portfolio, 1 Heritage Drive, #P5S, Quincy, MA. 02171 who may be deemed to be the
beneficial owner of these shares, but disclaims any beneficial ownership
therein.
As of May 31, 1999, 226,735 shares in the aggregate, or 6.86% of the
outstanding shares of the Corporate Bond Fund, were held in the name of State
Street Bank & Trust Co., Custodian for Scudder Pathway Series, Growth Portfolio,
1 Heritage Drive, #P5S, Quincy, MA. 02171 who may be deemed to be the beneficial
owner of these shares, but disclaims any beneficial ownership therein.
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As of May 31, 1999, 237,409 shares in the aggregate, 7.18% of the
outstanding shares of the Corporate Bond Fund, were held in the name of State
Street Bank & Trust Co., Custodian for Scudder Pathway Series, Conservative
Portfolio, 1 Heritage Drive, #P5S, Quincy, MA. 02171 who may be deemed to be the
beneficial owner of these shares, but disclaims any beneficial ownership
therein.
To the knowledge of the Trust, as of May 31, 1999, no person owned
beneficially more than 5% of the Fund's outstanding shares except as stated
above.
The Trustees and officers of the Trust also serve in similar capacities
with other Scudder funds.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that each Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by each Fund's independent public accountants and
by independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from the
Funds of Scudder Portfolio Trust: an annual Trustee's fee of $2,400 for a Fund
in which total net assets do not exceed $100 million; $4,800 for a Fund in which
total net assets exceed $100 million but do not exceed $1 billion and $7,200 for
a Fund in which total net assets exceed $1 billion; a fee of $150 for attendance
at each board meeting, audit committee meeting or other meeting held for the
purposes of considering arrangements between the Trust on behalf of each Fund
and the Adviser or any affiliate of the Adviser; $75 for all other committee
meetings; and reimbursement of expenses incurred for travel to and from Board
Meetings. The Independent Trustee who serves as lead or liaison trustee receives
an additional annual retainer fee of $500 from each Fund. No additional
compensation is paid to any Independent Trustee for travel time to meetings,
attendance at trustees' educational seminars or conferences, service on industry
or association committees, participation as speakers at trustees' conferences or
service on special trustee task forces or subcommittees. Independent Trustees do
not receive any employee benefits such as pension or retirement benefits or
health insurance. Notwithstanding the schedule of fees, the Independent Trustees
have in the past and may in the future waive a portion of their compensation.
The Independent Trustees of the Fund also serve as Independent Trustees
of certain other Scudder Funds, which enables them to address investment and
operational issues that are common to many of the Funds in a cost-efficient and
effective manner. During 1998, the Independent Trustees participated in 26
meetings of the Fund's board or board committees, which were held on 21
different days during the year.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1998 from the Trust
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and from all of the Scudder funds as a group. In 1998, the Trustees of Scudder
Portfolio Trust met nine times. Scudder Portfolio Trust consists of four funds:
Scudder Balanced Fund, Scudder Income Fund, Scudder High Yield Bond Fund and
Scudder Corporate Bond Fund.
Scudder Portfolio Trust* All Scudder Funds
------------------------ -----------------
Name
- ----
Henry Becton, Jr., $19,063 $135,000 (28 funds)
Trustee
Dawn-Marie Driscoll, $20,475 $145,000 (28 funds)
Trustee
Peter B. Freeman, $21,549 $172,425 (45 funds)
Trustee
George M. Lovejoy, Jr., $19,063 $148,600 (29 funds)
Trustee
Wesley W. Marple, Jr., $19,063 $135,000 (28 funds)
Trustee
Jean C. Tempel, Trustee $19,031 $135,000 (29 funds)
* Scudder Portfolio Trust consists of four funds: Scudder Balanced Fund,
Scudder Income Fund, Scudder High Yield Bond Fund and Scudder Corporate
Bond Fund.
Members of the Board of Trustees 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.
No fees were incurred by the Funds with respect to the alliance with B.A.T.
DISTRIBUTOR
The Trust, on behalf of each Fund, has an underwriting agreement with
Scudder Investor Services, Inc., Two International Place, Boston, MA 02110 (the
"Distributor"), a Massachusetts corporation, which is a subsidiary of the
Adviser. The Trust's underwriting agreement dated September 7, 1998 will remain
in effect until September 30, 1999 and from year to year thereafter only if its
continuance is approved annually by a majority of the Trustees who are not
parties to such agreement or interested persons of any such party and either by
vote of a majority of the Board of Trustees or a majority of the outstanding
voting securities of a Fund. The underwriting agreement was last approved by the
Trustees on August 10, 1998.
Under the underwriting agreement, the Trust is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of 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 Trust as a broker/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 Funds; the cost of
printing and mailing confirmations of purchases of shares and the prospectuses
accompanying such confirmations; any issuance taxes and/or any initial transfer
taxes; a portion of shareholder toll-free telephone charges and expenses of
customer service representatives; the cost of wiring funds for share purchases
and redemptions (unless paid by the shareholder who
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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 a 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 a Fund's shares
to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of each Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
service representatives, a portion of the cost of computer terminals, and
expenses of any activity which is primarily intended to result in the sale of
shares issued by a Fund, unless a Rule 12b-1 plan is in effect which provides
that a Fund will bear some or all of such expenses. As agent, the Distributor
currently offers the Funds' shares on a continuous basis to investors in all
states. The underwriting agreement provides that the Distributor accepts orders
for shares at net asset value and no sales commission or load is charged the
investor. The Distributor has made no firm commitment to acquire shares of each
Fund.
Note: Although the Funds do not currently have a 12b-1 Plan, a Fund
will also pay those fees and expenses permitted to be paid or
assumed by the Trust pursuant to a 12b-1 Plan, if any, adopted
by the Trust, notwithstanding any other provision to the
contrary in the underwriting agreement.
TAXES
(See "Taxes" in the Funds' prospectuses.)
Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, or a predecessor statute and has qualified as
such since its inception. Each Fund intends to continue to qualify for such
treatment. Such qualification does not involve governmental supervision or
management of investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90 percent of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.
Each Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of a Fund's ordinary income for the calendar year, at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) realized during the one-year period ending October 31
during such year, and all ordinary income and capital gains for prior years that
were not previously distributed.
Investment company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of a Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by 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 such reported gains and the
shareholder's tax credit. If a Fund makes such an election, it may not be
treated as having met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are not expected to comprise a
substantial part of Scudder Income Fund's gross income. If any such dividends
constitute a portion of a Fund's gross income, a portion of the income
distributions of the Fund may be eligible for the 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
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the shares of the Fund with respect to which the dividends are received are
treated as debt-financed under federal income tax law and is eliminated if
either those shares or the shares of the Fund are deemed to have been held by
the Fund or the shareholder, as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gains, 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
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 ($2,000 per
individual for married couples if only one spouse has earned income) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Dividend and interest income received by a Fund from sources outside
the U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains in respect of investments by foreign
investors.
Equity options (including covered call options written on portfolio
stock) and over-the-counter options on debt securities written or purchased by a
Fund will be subject to tax under Section 1234 of the Code. In general, no loss
will be recognized by a Fund upon payment of a premium in connection with the
purchase of a put or call option. The character of any gain or loss recognized
(i.e. long-term or short-term) will generally depend, in the case of a lapse or
sale of the option, on a Fund's holding period for the option, and in the case
of the exercise of a put option, on a Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income
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tax purposes, causing an adjustment in the holding period of any property in the
Fund's portfolio similar to the property underlying the put option. If a Fund
writes an option, no gain is recognized upon its receipt of a premium. If the
option lapses or is closed out, any gain or loss is treated as short-term
capital gain or loss. If the option is exercised, the character of the gain or
loss depends on the holding period of the underlying stock.
Positions of the Fund which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes the Fund's risk of loss with respect to such stock
could be treated as a "straddle" which is governed by Section 1092 of the Code,
the operation of which may cause deferral of losses, adjustments in the holding
periods of stocks or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for
certain "qualified covered call options" on stock written by the Fund.
Many futures and forward contracts entered into by the Funds and listed
nonequity options written or purchased by the Funds (including options on debt
securities, options on futures contracts, options on securities indices and
options on currencies), will be governed by Section 1256 of the Code. Absent a
tax election to the contrary, gain or loss attributable to the lapse, exercise
or closing out of any such position generally will be treated as 60% long-term
and 40% short-term capital gain or loss, 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 capital gain or loss. Under Section 988 of the Code,
discussed below, foreign currency gain or loss from foreign currency-related
forward contracts, certain futures and options and similar financial instruments
entered into or acquired by the Fund will be treated as ordinary income or loss.
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures or forward contract or nonequity option
or other position governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position will be treated as a
"mixed straddle." Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses, certain tax elections exist for
them which reduce or eliminate the operation of these rules. Each Fund will
monitor its transactions in options, foreign currency futures and forward
contracts and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may
require each Fund to recognize gain (but not loss) from a constructive sale of
certain "appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain 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 a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock.
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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.
A Fund may make an election to mark to market its shares of these
foreign investment companies in lieu of being subject to U.S. federal income
taxation. At the end of each taxable year to which the election applies, the
Fund would report as ordinary income the amount by which the fair market value
of the foreign company's stock exceeds the Fund's adjusted basis in these
shares; any mark-to-market losses and any loss from an actual disposition of
shares would be deductible as ordinary losses to the extent of any net
mark-to-market gains included in income in prior years. The effect of the
election would be to treat excess distributions and gain on dispositions as
ordinary income which is not subject to a fund-level tax when distributed to
shareholders as a dividend. Alternatively, a 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.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to a Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount imputed income will
comprise a part of the investment company taxable income of the Fund which must
be distributed to shareholders in order to maintain the qualification of the
Fund as a regulated investment company and to avoid federal income tax at the
Fund's level. In addition, if 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.
At January 31, 1999, the High Yield Bond Fund had a net tax basis
capital loss carryforward of approximately $1,705,000 which may be applied
against any realized net taxable capital gains of each succeeding year until
fully utilized or until January 31, 2007, the expiration date. In addition, from
November 1, 1998 through January 31, 1999, the Fund incurred approximately
$10,000 of net realized capital losses. As permitted by tax regulations, the
Fund intends to elect to defer these losses and treat them as arising in the
fiscal year ending January 31, 2000.
Each Fund will be required to report to the Internal Revenue Service
(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 and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Fund is notified
by the IRS or a broker that the taxpayer identification number furnished by the
shareholder is incorrect or that the shareholder has previously failed to report
interest or dividend income. If the withholding provisions are applicable, any
such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Shareholders of a Fund may be subject to state and local taxes on
distributions received from a Fund and on redemptions of the Fund's shares.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of a Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
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Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by a Fund to reported commissions paid by others.
The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Funds' purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by a Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or a
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for a
Fund to pay a brokerage commission in excess of that which another broker might
charge for executing the same transaction on account of execution services and
the receipt of research services. The Adviser has negotiated arrangements, which
are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or a Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of a Fund. In effecting transactions in
over-the-counter securities, orders are placed with the principal market makers
for the security being traded unless, after exercising care, it appears that
more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.
Although certain research services from broker/dealers may be useful to
a Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than a Fund, and not all such information is used by the Adviser
in connection with a Fund. Conversely, such information provided to the Adviser
by broker/dealers through whom other clients of the Adviser effect securities
transactions may be useful to the Adviser in providing services to a Fund.
The Trustees review from time to time whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by a Fund on portfolio transactions is legally permissible and advisable.
For the fiscal years ended December 31, 1998, 1997 and 1996, Balanced
Fund paid brokerage commissions of $130,158, $85,249 and $87,557, respectively.
In the fiscal year ended December 31, 1998, Balanced Fund paid
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$108,674 (83.49% of the total brokerage commissions), resulting from orders
placed, consistent with the policy of seeking to obtain the most favorable net
results, for transactions placed with brokers and dealers who provided
supplementary research services to the Trust or Adviser. The amount of brokerage
transactions aggregated $214,135,086, of which 97,685,573 (45.62% of all
brokerage transactions) were transactions which included research commissions.
For the one month ended January 31, 1999 and the fiscal years ended
December 31, 1998, 1997 and 1996, Income Fund paid no brokerage commissions.
For the fiscal year ended January 31, 1999 Corporate Bond Fund paid no
brokerage commissions.
For the eleven months ended January 31, 1999 and the fiscal year ended
February 28, 1998 and Scudder High Yield Bond Fund paid no brokerage
commissions.
Portfolio Turnover
Each 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. A higher rate
involves greater brokerage and transaction expenses to a Fund and may result in
the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for a Fund's portfolio whenever
necessary, in management's opinion, to meet each Fund's objective.
For the years ended December 31, 1998 and 1997 the portfolio turnover rate for
Balanced Fund was 74.7% and 69.7%.
For the one month ended January 31, 1999 and fiscal years ended December 31,
1997 and 1998 the portfolio turnover rate for Income Fund was 20.6%(not
annualized), 125.7% and 66.9%. For the period of August 31, 1998 (commencement
of operations) to January 31, 1999, Corporate Bond Fund had a portfolio turnover
rate of 96.7% (annualized). For the eleven months ended January 31, 1999 and
fiscal year ended February 28, 1998 the portfolio turnover rate for High Yield
Bond Fund was 83%(not annualized)and 113%.
NET ASSET VALUE
The net asset value of shares of each Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading
(the "Value Time"). The Exchange is scheduled to be closed on the following
holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Net asset value per share is
determined by dividing the value of the total assets of the Fund, less all
liabilities, by the total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An equity
security which is traded on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") system will be valued at its most recent sale
price on such system as of the Value Time. Lacking any sales, the security will
be valued at the most recent bid quotation as of the Value Time. The value of an
equity security not quoted on the Nasdaq system, but traded in another
over-the-counter market, is its most recent sale price if there are any sales of
such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at
prices supplied by the Fund's pricing agent(s) which reflect broker/dealer
supplied valuations and electronic data processing techniques. Money market
instruments with an original maturity of sixty days or less maturing at par
shall be valued at amortized cost, which the Board believes approximates market
value. If it is not possible to value a particular debt security pursuant to
these valuation methods, the value of such security is the most recent bid
quotation supplied by a bona fide marketmaker. If it
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is not possible to value a particular debt security pursuant to the above
methods, the Adviser may calculate the price of that debt security, subject to
limitations established by the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial highlights of each Fund included in the Funds' respective
prospectuses and the Financial Statements incorporated by reference in this
Statement of Additional Information have been so included or incorporated by
reference in reliance on the report of PricewaterhouseCoopers LLP, One Post
Office Square, Boston, Massachusetts 02109, independent accountants, and given
on the authority of that firm as experts in accounting and auditing.
PricewaterhouseCoopers LLP is responsible for performing annual audits of the
financial statements and financial highlights of each Fund in accordance with
generally accepted auditing standards, and the preparation of federal tax
returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with a Fund's property or the
acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of a Fund's property of any shareholder held
personally liable for the claims and liabilities to which a shareholder may
become subject by reason of being or having been a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations.
Other Information
The CUSIP number of Balanced Fund is 811192-20-2.
The CUSIP number of Income Fund is 811192-10-3.
The CUSIP number of High Yield Bond Fund is 811192-30-1.
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<PAGE>
The CUSIP number of Corporate Bond Fund is 811192-40-0.
Balanced Fund has a fiscal year end of December 31.
Income Fund has a fiscal year end of January 31.
High Yield Bond Fund has a fiscal year end of January 31.
Corporate Bond Fund has a fiscal year end of January 31.
Many of the investment changes in a Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of a Fund. These transactions will reflect investment
decisions made by the Adviser in light of each Fund's objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
Portfolio securities of each Fund are held separately pursuant to a
custodian agreement by the Funds' custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02101.
The law firm of Dechert Price & Rhoads is counsel to each Fund.
The name "Scudder Portfolio Trust" is the designation of the Trust for
the time being under a Declaration of Trust dated September 20, 1984, as amended
from time to time, and all persons dealing with a Fund must look solely to the
property of a Fund for the enforcement of any claims against a Fund as neither
the Trustees, officers, agents, shareholders nor other series of the Trust
assume any personal liability for obligations entered into on behalf of a Fund.
No other series of the Trust assumes any liabilities for obligations entered
into on behalf of a Fund. Upon the initial purchase of shares, the shareholder
agrees to be bound by the Trust's Declaration of Trust, as amended from time to
time. The Declaration of Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts.
Scudder Fund Accounting Corporation
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110-4103, 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 each Fund. Each Fund pays Scudder
Fund Accounting Corporation an annual fee equal to 0.025% of the first $150
million of average daily net assets, 0.0075% of such assets in excess of $150
million and 0.0045% of such assets in excess of $1 billion, plus holding and
transaction charges for this service.
For the fiscal year ended December 31, 1996, 1997 and 1998 Balanced
Fund incurred charges of $42,622, $48,318 and $+58,918, respectively, of which
$5,190 was unpaid on December 31, 1998.
For the fiscal year ended December 31, 1996, 1997 and 1998 Income Fund
incurred charges of $97,111, $91,363 and, $94,878 respectively, of which
$7,961was unpaid on December 31, 1998. For the period ended January 31, 1999,
the amount charged to the Fund amounted to $8,196, all of which was unpaid on
January 31, 1999.
For the period August 31, 1998 (commencement of operations) to January
31, 1999 Scudder Fund Accounting Corporation did not impose any of its fees
amounting to $15,625 for the Corporate Bond Fund.
For the period June 28, 1996 (commencement of operations) to February
28, 1997, for High Yield Bond Fund, SFAC did not impose any of its fee, which
amounted to $25,168. For the fiscal year ended February 28, 1998, SFAC did not
impose any of its fee, which amounted to $46,705. For the eleven months ended
January 31, 1999, SFAC imposed fees amounting to $37,889, $23,265 of which was
unpaid on January 31, 1999 and did not impose fees amounting to $16,203.
Scudder Service Corporation
Scudder Service Corporation ("SSC"), P.O. Box 2291, Boston,
Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer,
dividend-paying and shareholder service agent for each Fund. Each Fund pays
Service Corporation an annual fee of $26.00 for each account maintained for a
participant.
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For the fiscal year ended December 31, 1997 and 1998 Balanced Fund
incurred charges of $269,472 and $360,787, respectively, of which $31,970 was
unpaid on December 31, 1998.
For the fiscal year ended December 31, 1997 and 1998 Income Fund
incurred charges of $787,239 and, $863,333, respectively, of which $68,414 was
unpaid on December 31, 1998. For the period ended January 31, 1999, the amount
charged to the Fund amounted to $69,112, all of which was unpaid at January 31,
1999.
For the period August 31, 1998 (commencement of operations) to January
31, 1999, for the Corporate Bond Fund, SSC did not impose any of its fees
amounting to $8,263.
For the period June 28, 1996 (commencement of operations) to February
28, 1997, for High Yield Bond Fund, SSC did not impose any of its fee, which
amounted to $65,932. For the fiscal year ended February 28, 1998, SSC did not
impose any of its fee, which amounted to $178,661. For the eleven months ended
January 31, 1999, SSC imposed fees of $159,547, all of which were unpaid on
January 31, 1999 and did not impose fees amounting to $65,800.
The Funds, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are generally
held in an omnibus account.
Scudder Trust Company
Scudder Trust Company ("STC"), Two International Place, Boston, MA
02110-4103, a subsidiary of the Adviser provides recordkeeping and other
services in connection with certain retirement and employee benefit plans for
each Fund. Each Fund pays Scudder Trust Company an annual fee of $29.00 for each
account maintained for a participant.
For the fiscal year ended December 31, 1996, 1997 and 1998 Balanced
Fund incurred charges of $188,390, $294,504 and $496,988, respectively, of which
$56,830 was unpaid on December 31, 1998.
For the fiscal year ended December 31, 1996, 1997 and 1998 Income Fund
incurred charges of $872,411 $1,641,229 and, $2,727,704, respectively, of which
$251,955 was unpaid on December 31, 1998. For the period ended January 31, 1999,
the amount charged to the Fund amounted to $255,934, all of which was unpaid on
January 31, 1999.
For the period August 31, 1998 (commencement of operations) to January
31, 1999 the Corporate Bond Fund did not incur any fees.
For the period June 28, 1996 (commencement of operations) to February
28, 1997, for High Yield Bond Fund STC did not impose any of its fee, which
amounted to $1,488. For the fiscal year ended February 28, 1998, STC did not
impose any of its fee, which amounted to $7,775. For the eleven months ended
January 31, 1999, STC imposed fees of $12,186, of which $8,114 was unpaid on
January 31, 1999, and did not impose fees amounting to $3,539.
The Funds' prospectuses and this combined Statement of Additional
Information omit certain information contained in the Registration Statement and
its amendments which the Funds have filed with the SEC under the Securities Act
of 1933 and reference is hereby made to the Registration Statement for further
information with respect to the Funds and the securities offered hereby. The
Registration Statement and its amendments are available for inspection by the
public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Scudder Balanced Fund
The financial statements, including the Investment Portfolio of
Balanced Fund, together with the Report of Independent Accountants, and
Financial Highlights, are incorporated by reference and attached hereto in the
Annual Report to Shareholders of the Fund dated December 31, 1998, and are
deemed to be a part of this Statement of Additional Information.
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Scudder Income Fund
The financial statements, including the Investment Portfolio of Income
Fund, together with the Report of Independent Accountants, and Financial
Highlights, are incorporated by reference and attached hereto in the Annual
Report to Shareholders of the Fund dated January 31, 1999, and are deemed to be
a part of this Statement of Additional Information.
Scudder Corporate Bond Fund
The financial statements, including the Investment Portfolio of
Corporate Bond Fund, together with the Report of Independent Accountants, and
Financial Highlights, are incorporated by reference and attached hereto in the
Annual Report to Shareholders of the Fund dated January 31, 1999, and are deemed
to be a part of this Statement of Additional Information.
Scudder High Yield Bond Fund
The financial statements, including the Investment Portfolio of High
Yield Bond Fund, together with the Report of Independent Accountants, and
Financial Highlights, are incorporated by reference and attached hereto in the
Annual Report to Shareholders of the Fund dated January 31, 1999, and are deemed
to be a part of this Statement of Additional Information.
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APPENDIX
The following is a description of the ratings given by Moody's and
Standard & Poor's to corporate and municipal bonds.
Ratings of Municipal and Corporate Bonds
Standard & Poor's Corporation:
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.
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
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.
<PAGE>
Standard & Poor's Corporation Earnings and Dividend Rankings for Common Stocks
The investment process involves assessment of various factors -- such
as product and industry position, corporate resources and financial policy --
with results that make some common stocks more highly esteemed than others. In
this assessment, Standard & Poor's Corporation believes that earnings and
dividend performance is the end result of the interplay of these factors and
that, over the long run, the record of this performance has a considerable
bearing on relative quality. The rankings, however, do not pretend to reflect
all of the factors, tangible or intangible, that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of protection
for principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements
in establishing Standard & Poor's earnings and dividend rankings for common
stocks, which are designed to capsulize the nature of this record in a single
symbol. It should be noted, however, that the process also takes into
consideration certain adjustments and modifications deemed desirable in
establishing such rankings.
The point of departure in arriving at these rankings is a computerized
scoring system based on per-share earnings and dividend records of the most
recent ten years -- a period deemed long enough to measure significant time
segments of secular growth, to capture indications of basic change in trend as
they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.
Further, the ranking system makes allowance for the fact that, in
general, corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the
stock is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no substitute for complete
analysis. They cannot take into account potential effects of management changes,
internal company policies not yet fully reflected in the earnings and dividend
record, public relations standing, recent competitive shifts, and a host of
other factors that may be relevant to investment status and decision.
<PAGE>
SCUDDER PORTFOLIO TRUST
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits:
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<S> <C> <C>
(a) (a)(1) Amended and Restated Declaration of Trust dated November 3, 1987 is
incorporated by reference to Post-Effective Amendment No. 69.
(a)(2) Certificate of Amendment of Declaration of Trust dated November 13,
1990 is incorporated by reference to Post-Effective Amendment No.
69.
(a)(3) Certificate of Amendment of Declaration of Trust dated October 13,
1992 is incorporated by reference to Post-Effective Amendment No.
69.
(a)(4) Establishment and Designation of Series dated October 13, 1992 is
incorporated by reference to Post-Effective Amendment No. 69.
(a)(5) Establishment and Designation of Series dated April 9, 1996 is
incorporated by reference to Post-Effective Amendment No. 61.
(a)(6) Establishment and Designation of Series, on behalf of Corporate
Bond Fund, dated August 25, 1998 is incorporated by reference to
Post-Effective Amendment No. 77.
(b) (b)(1) By-Laws of the Registrant dated September 20, 1984 are incorporated
by reference to Post-Effective Amendment No. 69.
(b)(2) Amendment to By-Laws of the Registrant dated August 13, 1991 is
incorporated by reference to Post-Effective Amendment No. 69.
(b)(3) Amendment to By-Laws of the Registrant dated November 12, 1991 is
incorporated by reference to Post-Effective Amendment No. 78.
(c) Inapplicable.
(d) (d)(1) Investment Management Agreement between the Registrant, on behalf
of Scudder Income Fund, and Scudder Kemper Investments, Inc. dated
September 7,1998 is incorporated by reference to Post-Effective
Amendment No. 78.
(d)(2) Investment Management Agreement between the Registrant, on behalf
of Scudder Balanced Fund, and Scudder Kemper Investments, Inc.
dated September 7,1998 is incorporated by reference to
Post-Effective Amendment No. 78.
(d)(3) Investment Management Agreement between the Registrant, on behalf
of Scudder High Yield Bond Fund, and Scudder Kemper Investments,
Inc. dated September 7,1998 is incorporated by reference to
Post-Effective Amendment No. 78.
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(d)(4) Investment Management Agreement between the Registrant, on behalf
of Scudder Corporate Bond Fund, and Scudder Kemper Investments,
Inc. dated September 7,1998 is incorporated by reference to
Post-Effective Amendment No. 78.
(e) (e)(1) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., dated September 7, 1998, is incorporated by
reference to Post-Effective Amendment No. 77.
(f) Inapplicable.
(g) (g)(1) Custodian Contract and fee schedule between the Registrant and
State Street Bank and Trust Company ("State Street") dated December
31, 1984 is incorporated by reference to Post-Effective Amendment
No. 69.
(g)(2) Fee schedule for Exhibit (g)(1) dated October 7, 1986 is
incorporated by reference to Post-Effective Amendment No. 69.
(g)(3) Amendment to Custodian Contract between the Registrant and State
Street dated April 1, 1985 is incorporated by reference to
Post-Effective Amendment No. 69.
(g)(4) Amendment to Custodian Contract between the Registrant and State
Street dated March 10, 1987 is incorporated by reference to
Post-Effective Amendment No. 69.
(g)(5) Amendment to Custodian Contract between the Registrant and State
Street dated March 10, 1987 is incorporated by reference to
Post-Effective Amendment No. 69.
(g)(6) Amendment to Custodian Contract between the Registrant and State
Street dated August 11, 1987 is incorporated by reference to
Post-Effective Amendment No. 69.
(g)(7) Amendment to Custodian Contract between the Registrant and State
Street dated August 9, 1988 is incorporated by reference to
Post-Effective Amendment No. 69.
(g)(8) Fee schedule for Exhibit (g)(1) is incorporated by reference to
Post-Effective Amendment No. 60.
(g)(9) Amendment to Custodian Contract between the Registrant and State
Street dated April 9, 1996 is incorporated by reference to
Post-Effective Amendment No. 63.
(g)(10) Fee schedule for Exhibit (g)(1) is incorporated by reference to
Post-Effective Amendment No. 63.
(g)(11) Subcustodian Agreement with fee schedule between State Street and
The Bank of New York, London office, dated December 31, 1978 is
incorporated by reference to Post-Effective Amendment No. 69.
(g)(12) Amendment dated February 8, 1999 to Custodian Contract between the
Registrant and State Street dated December 31, 1984 is incorporated
by reference to Post-Effective Amendment No. 78.
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(h) (h)(1) Transfer Agency and Service Agreement with fee schedule between the
Registrant and Scudder Service Corporation dated October 2, 1989 is
incorporated by reference to Post-Effective Amendment No. 69.
(h)(2) Revised Fee Schedule dated October 1, 1995 for Exhibit (h)(1) is
incorporated by reference to Post-Effective Amendment No. 67.
(h)(3) Revised Fee Schedule dated October 1, 1996 for Exhibit (h)(1) is
incorporated by reference to Post-Effective Amendment No. 67.
(h)(4) COMPASS Service Agreement between Scudder Trust Company and the
Registrant dated October 1, 1995 is incorporated by reference to
Post-Effective Amendment No. 61.
(h)(5) Revised Fee Schedule dated October 1, 1996 for Exhibit (h)(4) is
incorporated by reference to Post-Effective Amendment No. 67.
(h)(6) Service Agreement between Copeland Associates, Inc. and Scudder
Service Corporation (on behalf of Scudder Balance Fund) dated June
8, 1995 is incorporated by reference to Post-Effective Amendment
No. 62.
(h)(7) Shareholder Services Agreement between the Registrant and Charles
Schwab & Co., Inc. dated June 1, 1990 is incorporated by reference
to Post-Effective Amendment No. 69.
(h)(8) Fund Accounting Services Agreement between the Registrant, on
behalf of Scudder Balanced Fund, and Scudder Fund Accounting
Corporation dated January 18, 1995 is incorporated by reference to
Post-Effective Amendment No. 69.
(h)(9) Fund Accounting Services Agreement between the Registrant, on
behalf of Scudder Income Fund, and Scudder Fund Accounting
Corporation dated January 12, 1995 is incorporated by reference to
Post-Effective Amendment No. 60.
(h)(10) Fund Accounting Services Agreement between the Registrant, on
behalf of Scudder High Yield Bond Fund, and Scudder Fund Accounting
Corporation dated June 28, 1996 is incorporated by reference to
Post-Effective Amendment No. 63.
(h)(11) Fund Accounting Services Agreement between the Registrant, on
behalf of Scudder Corporate Bond Fund, and Scudder Fund Accounting
Corporation dated August 31, 1998 is incorporated by reference to
Post-Effective Amendment No. 78.
(i) Consent of Legal Counsel is filed herein.
(j) Consent of Independent Accountants is filed herein.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable
4
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(n) Article 6 Financial Data Schedules are filed herein.
(o) Inapplicable
</TABLE>
Power of Attorney for Daniel Pierce, Henry P. Becton, Jr., George M. Lovejoy,
Jr. and Wesley W. Marple, Jr. is incorporated by reference to the Signature Page
of Post-Effective Amendment No. 69.
Power of Attorney for Jean C. Tempel is incorporated by reference to the
Signature Page of Post-Effective Amendment No. 60.
Power of Attorney for Dawn-Marie Driscoll, Kathryn L. Quirk and Peter B. Freeman
is incorporated by reference to the signature page of Post-Effective Amendment
No. 70.
Item 24. Persons Controlled by or under Common Control with Registrant.
- -------- --------------------------------------------------------------
None
Item 25. Indemnification.
- -------- ----------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its affiliates including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
Trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV Sections 4.1 - 4.3 of Registrant's Declaration of
Trust provide as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all such Persons shall look solely to the Trust Property
for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement by the
preceding sentence shall be made only out of the assets of the
one or more series of which the Shareholder who is entitled to
indemnification or reimbursement was a Shareholder at the time
the act or event occurred which gave rise to the claim against
or liability of said Shareholders. The rights accruing to a
Shareholder under this Section 4.1 shall not impair any other
right to which such Shareholder may be lawfully entitled, nor
shall anything herein contained restrict the right of the
Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided
herein.
Section 4.2. Non-Liability of Trustees, etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
5
<PAGE>
Section 4.3 Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, or other, including appeals),
actual or threatened; and the words "liability" and "expenses"
shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and
other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to the Trust or the
Shareholders by reason of a final adjudication by the court or
other body before which the proceeding was brought that he
engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Trust;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as provided in
paragraph (b)(i) resulting in a payment by a Trustee or
officer, unless there has been a determination that such
Trustee or officer did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office;
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available facts
(as opposed to a full trial-type inquiry) by (x) vote
of a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any
Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs,
executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than
Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a defense to
any claim, action, suit, or proceeding of the character
described in paragraph (a) of this Section 4.3 shall be
advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient, to
repay such amount if it is ultimately determined that he is
not entitled to indemnification under this Section 4.3,
provided that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-
6
<PAGE>
type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to
indemnification.
As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an "Interested Person" of the
Trust (including anyone who has been exempted from being an
"Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or
proceeding.
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
7
<PAGE>
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Financial Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 27. Principal Underwriters.
- -------- -----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
8
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Treasurer Vice President
Two International Place and Assistant Clerk
Boston, MA 02110
James J. McGovern Chief Financial Officer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Daniel Pierce Director, Vice President President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
9
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Kathryn L. Quirk Director, Senior Vice President, Chief Trustee, Vice President
345 Park Avenue Legal Officer and Assistant Clerk and Assistant Secretary
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 28. Location of Accounts and Records.
- -------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder, Stevens &
Clark, Two International Place, Boston, MA 02110. Records
relating to the duties of the Registrant's custodian are
maintained by State Street Bank and Trust Company, Heritage
Drive, North Quincy, Massachusetts. Records relating to the
duties of the Registrant's transfer agent are maintained by
Scudder Service Corporation, Two International Place, Boston,
Massachusetts.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30 Undertakings.
- ------- -------------
Inapplicable.
10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on June 16, 1999.
SCUDDER PORTFOLIO TRUST
By: /s/ DANIEL PIERCE
----------------------------
Daniel Pierce, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ HENRY P. BECTON, JR.
- --------------------------------------
Henry P. Becton, Jr.* Trustee June 16, 1999
/s/ DAWN-MARIE DRISCOLL
- --------------------------------------
Dawn-Marie Driscoll* Trustee June 16, 1999
/s/ PETER B. FREEMAN
- --------------------------------------
Peter B. Freeman* Trustee June 16, 1999
/s/ GEORGE M. LOVEJOY, JR.
- --------------------------------------
George M. Lovejoy, Jr.* Trustee June 16, 1999
/s/ WESLEY W. MARPLE, JR.
- --------------------------------------
Wesley W. Marple, Jr.* Trustee June 16, 1999
/s/ KATHRYN L. QUIRK
- --------------------------------------
Kathryn L. Quirk* Trustee, Vice President and Assistant June 16, 1999
Secretary
/s/ JEAN C. TEMPEL
- --------------------------------------
Jean C. Tempel* Trustee June 16, 1999
/s/ JOHN R. HEBBLE
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and June 16, 1999
Accounting Officer)
</TABLE>
<PAGE>
*By: /s/ SHELDON A. JONES
----------------------------
Sheldon A. Jones**
** Attorney-in-fact pursuant to a power of
attorney contained in the signature page
of the Post-Effective Amendment Nos. 52,
60 and 70 to the Registration Statement
filed February 22, 1991, April 17, 1995
and March 2, 1998, respectively.
2
<PAGE>
File No.2-13627
File No. 811-42
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 79
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 40
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER PORTFOLIO TRUST
<PAGE>
SCUDDER PORTFOLIO TRUST
EXHIBIT INDEX
Exhibit (i)
Exhibit (j)
Exhibit (n)
2
Exhibit (i)
[LETTERHEAD OF DECHERT PRICE AND RHOADS APEARS HERE]
June 16, 1999
Scudder Portfolio Trust
Two International Place
Boston, Massachusetts 02110
Re: Post-Effective Amendment No. 79 to the
Registration Statement on Form N-1A
(SEC File No. 2-13627)
Ladies and Gentlemen:
Scudder Portfolio Trust, formerly Scudder Income Fund, (the "Trust") is a trust
created under a written Declaration of Trust, as amended and restated, dated
November 3, 1987. The Amended and Restated Declaration of Trust, as amended from
time to time, is referred to as the "Declaration of Trust." The beneficial
interest under the Declaration of Trust is represented by transferable shares,
$.01 par value per share ("Shares"). The Trustees have the powers set forth in
the Declaration of Trust, subject to the terms, provisions and conditions
therein provided.
We are of the opinion that all legal requirements have been complied with in the
creation of the Trust and that said Declaration of Trust is legal and valid.
Under Article V, Section 5.4 of the Declaration of Trust, the Trustees are
empowered, in their discretion, from time to time, to issue Shares for such
amount and type of consideration, at such time or times and on such terms as the
Trustees may deem best. Under Article V, Section 5.1, it is provided that the
number of Shares authorized to be issued under the Declaration of Trust is
unlimited. Under Article V, Section 5.11, the Trustees may authorize the
division of Shares into two or more series. By written instruments, the Trustees
have from time to time established various series of the Trust. The Shares are
currently divided into four series (the "Funds").
By votes adopted on November 11, 1997, June 9, 1998 (for one Fund only) and
November 9, 1998, the Trustees of the Trust authorized the President, any Vice
President, the Secretary and the Treasurer, from time to time, to determine the
appropriate number of Shares to be registered, to register with the Securities
and Exchange Commission, and to issue and sell to the public, such Shares.
We understand that you are about to file with the Securities and Exchange
Commission, on Form N-1A, Post Effective Amendment No. 79 to the Trust's
Registration Statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), in connection with the continuous
offering of the Shares of each Fund. We understand that our opinion is required
to be filed as an exhibit to the Registration Statement.
We are of the opinion that all necessary Trust action precedent to the issue of
the Shares of all Funds has been duly taken, and that all such Shares may be
legally and validly issued for cash, and when sold will be fully paid and
non-assessable by the Trust upon receipt by the Trust or its agent of
consideration for such Shares in accordance with the terms in the Registration
Statement, subject to compliance with the Securities Act, the Investment Company
Act of 1940, as amended, and applicable state laws regulating the sale of
securities.
We consent to your filing this opinion with the Securities and Exchange
Commission as an Exhibit to Post-Effective Amendment No. 79 to the Registration
Statement.
<PAGE>
Very truly yours,
/s/Dechert Price and Rhoads
2
Exhibit (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information constituting the Post-Effective Amendment
No. 79 to the Registration Statement on Form N-1A (the "Registration Statement")
of Scudder Portfolio Trust, comprised of Scudder Balanced Fund, Scudder Income
Fund, Scudder Corporate Bond Fund, and Scudder High Yield Bond Fund, of our
reports dated February 12, 1999, February 26, 1999, March 12, 1999, and March
22, 1999, respectively, on the financial statements and financial highlights
appearing in the December 31, 1998 Annual Report to Shareholders of Scudder
Balanced Fund and the January 31, 1999 Annual Reports to the Shareholders of
Scudder Income Fund, Scudder Corporate Bond Fund, and Scudder High Yield Bond
Fund, which are also incorporated by reference into the Registration Statement.
We further consent to the references to our Firm under the headings "Financial
Highlights," in the Prospectus and "Experts" in the Statement of Additional
Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 15, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Balanced Fund Annual Report for the fiscal year ended 12/31/98 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> Scudder Balanced Fund
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 207,835,285
<INVESTMENTS-AT-VALUE> 266,515,717
<RECEIVABLES> 5,282,368
<ASSETS-OTHER> 1,033
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 271,799,118
<PAYABLE-FOR-SECURITIES> 7,294,055
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 599,170
<TOTAL-LIABILITIES> 7,893,225
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 205,569,727
<SHARES-COMMON-STOCK> 13,918,098
<SHARES-COMMON-PRIOR> 9,416,710
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (344,266)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 58,680,432
<NET-ASSETS> 263,905,893
<DIVIDEND-INCOME> 984,080
<INTEREST-INCOME> 5,499,531
<OTHER-INCOME> 0
<EXPENSES-NET> 2,555,463
<NET-INVESTMENT-INCOME> 3,928,148
<REALIZED-GAINS-CURRENT> 11,308,836
<APPREC-INCREASE-CURRENT> 24,853,873
<NET-CHANGE-FROM-OPS> 40,090,857
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,059,339)
<DISTRIBUTIONS-OF-GAINS> (12,314,730)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 132,016,807
<NUMBER-OF-SHARES-REDEEMED> (66,566,262)
<SHARES-REINVESTED> 16,026,652
<NET-CHANGE-IN-ASSETS> 105,193,985
<ACCUMULATED-NII-PRIOR> 105,659
<ACCUMULATED-GAINS-PRIOR> 688,297
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,385,115
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,659,704
<AVERAGE-NET-ASSETS> 197,878,510
<PER-SHARE-NAV-BEGIN> 16.85
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> 3.14
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> (1.02)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.96
<EXPENSE-RATIO> 1.29
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
High Yield Bond Fund Annual Report for the fiscal year ended 1/31/99 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> Scudder High Yield Bond Fund
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> JAN-31-1999
<INVESTMENTS-AT-COST> 213,250,243
<INVESTMENTS-AT-VALUE> 209,692,505
<RECEIVABLES> 3,615,628
<ASSETS-OTHER> 1,676
<OTHER-ITEMS-ASSETS> 42,121
<TOTAL-ASSETS> 213,351,930
<PAYABLE-FOR-SECURITIES> 3,495,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 806,428
<TOTAL-LIABILITIES> 4,301,428
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 214,176,987
<SHARES-COMMON-STOCK> 16,863,913
<SHARES-COMMON-PRIOR> 13,323,225
<ACCUMULATED-NII-CURRENT> 39,336
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,639,953)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,525,868)
<NET-ASSETS> 209,050,502
<DIVIDEND-INCOME> 1,024,529
<INTEREST-INCOME> 16,628,340
<OTHER-INCOME> 0
<EXPENSES-NET> 780,731
<NET-INVESTMENT-INCOME> 16,872,138
<REALIZED-GAINS-CURRENT> (1,748,908)
<APPREC-INCREASE-CURRENT> (9,372,538)
<NET-CHANGE-FROM-OPS> 5,750,692
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16,930,159)
<DISTRIBUTIONS-OF-GAINS> (1,392,936)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 110,837,491
<NUMBER-OF-SHARES-REDEEMED> (78,633,998)
<SHARES-REINVESTED> 12,998,607
<NET-CHANGE-IN-ASSETS> 32,829,265
<ACCUMULATED-NII-PRIOR> 320,732
<ACCUMULATED-GAINS-PRIOR> 1,262,306
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,263,630
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,095,373
<AVERAGE-NET-ASSETS> 194,011,184
<PER-SHARE-NAV-BEGIN> 13.23
<PER-SHARE-NII> 1.08
<PER-SHARE-GAIN-APPREC> (0.73)
<PER-SHARE-DIVIDEND> (1.10)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0.01
<PER-SHARE-NAV-END> 12.40
<EXPENSE-RATIO> 0.44
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Corporate Bond Fund Annual Report for the period ended 1/31/99 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> Scudder Corporate Bond Fund
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> AUG-31-1998
<PERIOD-END> JAN-31-1999
<INVESTMENTS-AT-COST> 38,054,026
<INVESTMENTS-AT-VALUE> 38,673,570
<RECEIVABLES> 2,052,201
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 223,164
<TOTAL-ASSETS> 40,948,935
<PAYABLE-FOR-SECURITIES> 4,125,303
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 107,766
<TOTAL-LIABILITIES> 4,233,069
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36,037,040
<SHARES-COMMON-STOCK> 2,991,753
<SHARES-COMMON-PRIOR> 100
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 59,282
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 619,544
<NET-ASSETS> 36,715,866
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 901,007
<OTHER-INCOME> 0
<EXPENSES-NET> (0)
<NET-INVESTMENT-INCOME> 901,007
<REALIZED-GAINS-CURRENT> 141,244
<APPREC-INCREASE-CURRENT> 619,544
<NET-CHANGE-FROM-OPS> 1,661,795
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (901,007)
<DISTRIBUTIONS-OF-GAINS> (81,962)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 36,901,098
<NUMBER-OF-SHARES-REDEEMED> (1,821,904)
<SHARES-REINVESTED> 956,646
<NET-CHANGE-IN-ASSETS> 36,714,666
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 83,075
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 330,071
<AVERAGE-NET-ASSETS> 30,690,658
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> 0.30
<PER-SHARE-DIVIDEND> (0.36)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.27
<EXPENSE-RATIO> (0.00)
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
