Scudder Investments (SM)
[LOGO]
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EQUITY/GROWTH & INCOME
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Scudder Balanced Fund
Fund #062
Scudder Dividend & Growth Fund Fund #303
Prospectus
April 12, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
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How the funds work
2 Scudder Balanced Fund
6 Scudder Dividend & Growth Fund
10 Other Policies and Risks
11 Who Manages and Oversees the Funds
14 Financial Highlights
How to invest in the funds
17 How to Buy Shares
18 How to Exchange or Sell Shares
19 Policies You Should Know About
24 Understanding Distributions and Taxes
<PAGE>
How the funds work
These funds seek a combination of capital growth and income.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency. Their share
prices will go up and down, so be aware that you could lose money.
You can access all Scudder fund prospectuses online at: www.scudder.com
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ticker symbol | SCBAX fund number | 062
Scudder Balanced Fund
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Investment Approach
The fund seeks a balance of growth and income from a diversified portfolio of
equity and fixed-income securities.
In deciding which types of securities to buy and sell, the fund managers first
analyze the overall financial climate, including interest rates, capital flows
and inflation, among other factors. They then weigh the relative attractiveness
of stocks compared to bonds and decide on allocations for each. The fund
normally invests 50% to 75% of net assets in common stocks and other equities
and 25% to 50% of net assets in investment grade bonds and other fixed- income
securities. At all times the fund invests at least 25% of net assets in
fixed-income senior securities.
In choosing stocks, the managers invest primarily in U.S. companies that they
believe offer the potential for sustainable above-average earnings growth and
whose market values appear reasonable in light of their business prospects. The
managers follow a disciplined buy and sell strategy in which proprietary
research gathered from meetings with senior management teams, government experts
and industry leaders plays an important role.
In deciding which bonds to buy and sell, the managers review each bond's
fundamentals, comparing yields, credit quality and maturities. The fund can buy
many types of bonds of any maturity, including mortgage- and asset-backed
securities and government securities, but invests mainly in corporate bonds.
The managers may favor different types of securities at different times, while
still maintaining variety in terms of the types of securities and issuers
represented.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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OTHER INVESTMENTS
The fund's bond investments are normally in the top four grades of credit
quality. The fund could put up to 10% of total assets -- though no more than 20%
of its bond assets -- in junk bonds (i.e., grade BB/Ba and below). Compared to
investment-grade bonds, junk bonds may pay higher yields and have higher
volatility and risk of default.
Although the fund is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
2 | Scudder Balanced Fund
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[ICON] This fund may make sense for investors who are looking for stock and bond
investments in a single fund.
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Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform. When stock prices fall, you should expect the value of your
investment to fall as well. Because a stock represents ownership in its issuer,
stock prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
With the bond portion of the fund, the most important factor is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. To the extent that the fund
invests in bonds from any given industry, it could be hurt if that industry does
not do well. An increase in the fund's dollar-weighted average maturity could
make it more sensitive to this risk.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies, the relative attractiveness of stocks and bonds or
other matters
o a bond could decline in credit quality or go into default; this risk is
greater with lower-rated bonds
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
Scudder Balanced Fund | 3
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[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know. This page
looks at fund performance two different ways: year by year and over time.
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The Fund's Track Record
The bar chart shows how the fund's returns have varied from year to year,
which may give some idea of risk. The table shows average annual total
returns for the fund and two broad-based market indices (which, unlike
the fund, do not have any fees or expenses). The performance of both the
fund and the indices varies over time. All figures on this page assume
reinvestment of dividends and distributions.
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Annual Total Returns (%) as of 12/31 each year
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
'94 -2.39
'95 26.48
'96 11.54
'97 22.78
'98 21.10
'99 13.46
2000 Total Return as of March 31: 1.61%
Best Quarter: 14.71%, Q4 1998 Worst Quarter: -6.32%, Q3 1998
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Average Annual Total Returns (%) as of 12/31/1999
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1 Year 5 Years Since Inception*
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Fund 13.46 18.94 13.47
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Index 1 21.04 28.56 21.53
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Index 2 -0.82 7.73 6.42
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Index 1: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged, capitalization-weighted index that includes 500 large-cap stocks.
Index 2: Lehman Brothers Aggregate Bond Index, an unmanaged, value-weighted
measure of treasury, agency and mortgage securities and corporate bonds.
In both the chart and the table, total returns for 1995 through 1998 would have
been lower if operating expenses hadn't been reduced.
* Inception: 1/4/1993. Index comparisons begin 1/1/1993.
4 | Scudder Balanced Fund
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How Much Investors Pay
This fund has no sales charge or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder you pay them indirectly.
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Fee Table
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Shareholder Fees (paid directly from your investment) None
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Annual Operating Expenses (deducted from fund assets)
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Management Fee 0.70%
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Distribution (12b-1) Fee None
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Other Expenses* 0.59%
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Total Annual Operating Expenses 1.29%
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* Includes costs of shareholder servicing, custody, accounting services,and
similar expenses, which may vary with fund size and other factors.
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Expense Example
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Based on the costs above, this example is designed to help you compare this
fund's expenses to those of other funds. The example assumes operating expenses
remain the same and that you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions and sold your shares at the end of
each period. This is only an example; your actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
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$131 $409 $708 $1,556
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Scudder Balanced Fund | 5
<PAGE>
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ticker symbol | SDGFX fund number | 303
Scudder Dividend & Growth Fund
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Investment Approach
The fund seeks high current income and long-term growth of capital by investing
primarily in common stocks, convertible securities and real estate investment
trusts. The fund may invest up to 80% of net assets in common stocks, up to 30%
of net assets in convertible securities and up to 25% of net assets in
securities of real estate investment trusts (REITs).
In choosing securities, the portfolio managers begin by determining the relative
attractiveness of each type of allowable security, based on their analysis of
outlooks for interest rates and the economy.
In choosing stocks, the managers seek medium- and large-sized companies whose
dividend and earning prospects are attractive relative to the S&P 500 Index. The
fund may invest in dividend paying and non-dividend paying stocks.
In choosing convertible securities (which are often below investment-grade debt
securities), the managers favor those issued by undervalued companies, examining
securities with many different types of structures. In choosing REITs, the
managers seek those issued by companies with strengths in acquisition,
development and property management.
The fund will typically sell a security when it reaches a target price or when
the managers believe other investments offer better opportunities.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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OTHER INVESTMENTS
While most of the fund's investments are equities, the fund may also invest up
to 20% of net assets in bonds, including those rated below investment-grade
(i.e., grade BB and below).
Although the fund is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies, or securities), the
managers don't intend to use them as principal investments, and may not use them
at all.
6 | Scudder Dividend & Growth Fund
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[ICON] This fund is designed for long-term investors who want to participate in
the stock market while keeping a focus on income.
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Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform. When stock prices fall, you should expect the value of your
investment to fall as well. Because a stock represents ownership in its issuer,
stock prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies. The value of any convertible securities the fund owns may be affected
by the issuer's stock price. To the extent that the fund focuses on income, it
may end up missing opportunities in faster-growing industries or companies.
REITs carry additional risks and may be more volatile than other types of
income-paying equity securities. Rising interest rates, for example, tend to
lower the yields of existing REITs and may discourage real estate companies from
developing new projects.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies, types of securities or other matters
o prices of bonds or convertible securities could be hurt by rising interest
rates or declines in credit quality
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
Scudder Dividend & Growth Fund | 7
<PAGE>
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[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know.
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The Fund's Track Record
The bar chart shows the fund's return for its first complete calendar year. The
table shows average annual total returns for the fund and a broad-based market
index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions.
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Annual Total Returns
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
'99 16.20
2000 Total Return as of March 31: 2.74%
Best Quarter: 10.57%, Q4 1999 Worst Quarter: -7.60%, Q3 1999
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Average Annual Total Returns (%) as of 12/31/1999
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1 Year Since Inception*
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Fund 16.20 7.79
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Index 21.04 20.98
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Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index),
an unmanaged capitalization-weighted index that includes 500 large-cap
U.S. stocks.
In the chart, the total return for 1999 would have been lower if operating
expenses hadn't been reduced. In the table, total returns from inception through
1999 would have been lower if operating expenses hadn't been reduced.
* Since 07/17/1998. Index comparison begins 7/31/1998.
8 | Scudder Dividend & Growth Fund
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How Much Investors Pay
This fund has no sales charge or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder you pay them indirectly.
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Fee Table
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Shareholder Fees (paid directly from your
investment) None
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Annual Operating Expenses (deducted from fund assets)
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Management Fee 0.75%
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Distribution (12b-1) Fee None
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Other Expenses* 1.32%
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Total Annual Operating Expenses 2.07%
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Expense Reimbursement 1.02%
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Net Expenses** 1.05%
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* Includes costs of shareholder servicing, custody, accounting services, and
similar expenses, which may vary with fund size and other factors.
** By contract, expenses are capped at 0.75% through April 30, 2000. Effective
May 1, 2000, expenses are capped, by contract, at 1.05% through April 30,
2001. Additionally, the adviser will voluntarily cap expenses at 0.75%
through September 30, 2000.
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Expense Example
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Based on the costs above (including one year of expenses contractually capped at
1.05%), this example is designed to help you compare this fund's expenses to
those of other funds. The example assumes operating expenses remain the same and
that you invested $10,000, earned 5% annual returns, reinvested all dividends
and distributions and sold your shares at the end of each period. This is only
an example; your actual expenses will be different.
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1 Year 3 Years 5 Years 10 Years
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$107 $550 $1,020 $2,319
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Scudder Dividend & Growth Fund | 9
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could change
the fund's investment goal without seeking shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of its
assets into investments such as money market securities. This could prevent
losses, but would mean that the fund was not pursuing its goal.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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FOR MORE INFORMATION
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the funds' allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
10 | Other Policies and Risks
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[ICON] Scudder Kemper, the company with overall responsibility for managing the
fund, takes a team approach to asset management.
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Who Manages and Oversees the Fund
The investment adviser
The funds' investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
Each fund is managed by a team of investment professionals, who individually
represent different areas of expertise and who together develop investment
strategies and make buy and sell decisions. Supporting the fund managers are
Scudder Kemper's many economists, research analysts, traders and other
investment specialists, located in offices across the United States and around
the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates paid by each fund for
the 12 months through the most recent fiscal year end, as a percentage of
average daily net assets.
Fund Fee Paid
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Scudder Balanced Fund 0.70%
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Scudder Dividend & Growth Fund 0.00%*
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* Reflecting the effect of expense limitations and/or fee waivers then in
effect.
Who Manages and Oversees the Fund | 11
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The portfolio managers
The following people handle the day-to-day management of each fund in this
prospectus.
Scudder Balanced Fund Scudder Dividend & Growth Fund
Gary A. Langbaum Kathleen T. Millard
Lead Portfolio Manager Lead Portfolio Manager
o Began investment career in 1970 o Began investment career in 1983
o Joined the adviser in 1988 o Joined the adviser in 1991
o Joined the fund team in 1999 o Joined the fund team in 1999
Tracy McCormick Gregory S. Adams
o Began investment career in 1980 o Began investment career in 1987
o Joined the adviser in 1994 o Joined the adviser in 1999
o Joined the fund team in 1999 o Joined the fund team in 1999
Robert S. Cessine Nicholas Anisimov
o Began investment career in 1982 o Began investment career in 1987
o Joined the adviser in 1993 o Joined the adviser in 1987
o Joined the fund team in 1999 o Joined the fund team in 1998
David I. Hoffman
o Began investment career in 1994
o Joined the adviser in 1999
o Joined the fund team in 2000
12 | Who Manages and Oversees the Fund
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The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. The
independent members have primary responsibility for assuring that each fund is
managed in the best interests of its shareholders. The following people comprise
each fund's Board.
<TABLE>
<S> <C>
Linda C. Coughlin Wesley W. Marple, Jr.
o Managing Director, Scudder o Professor of Business Administration,
Kemper Investments, Inc. Northeastern University, College of
Business Administration
o President of each fund
Kathryn L. Quirk
Henry P. Becton, Jr. o Managing Director, Scudder Kemper
o President and General Manager, Investments, Inc.
WGBH Educational Foundation
o Vice President and Assistant Secretary
Dawn-Marie Driscoll of each fund
o Executive Fellow, Center for
Business Ethics, Bentley College Jean C. Tempel
o Venture Partner, Internet Capital Group
o President, Driscoll Associates (internet holding company)
(consulting firm)
Peter B. Freeman
o Corporate director and trustee
George M. Lovejoy, Jr.
o President and Director, Fifty
Associates (real estate corporation)
</TABLE>
Who Manages and Oversees the Fund | 13
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Financial Highlights
This table is designed to help you understand each fund's financial performance
in recent years. The figures in the first part of each table are for a single
share. The total return figures represent the percentage that an investor in a
particular fund would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover).
<TABLE>
<CAPTION>
Scudder Balanced Fund
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Years Ended December 31, 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 18.96 $ 16.85 $ 14.60 $ 14.12 $ 11.63
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Income (loss) from investment operations:
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Net investment income (loss) (a) .33 .36 .38 .36 .32
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Net realized and unrealized gain
(loss) on investment transactions 2.20 3.14 2.91 1.25 2.74
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Total from investment operations 2.53 3.50 3.29 1.61 3.06
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Less distributions from:
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Net investment income (.32) (.37) (.36) (.34) (.32)
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Net realized gains on investment
transactions (.02) (1.02) (.68) (.79) (.25)
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Total distributions (.34) (1.39) (1.04) (1.13) (.57)
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Net asset value, end of period $ 21.15 $ 18.96 $ 16.85 $ 14.60 $ 14.12
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Total Return (%) 13.46 21.10(b) 22.78(b) 11.54(b) 26.48(b)
Ratios to Average Net Assets and Supplemental Data
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Net assets, end of period ($
millions) 572 264 159 110 90
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Ratio of expenses before expense
reductions (%) 1.29 1.34 1.37 1.37 1.40
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Ratio of expenses after expense
reductions (%) 1.29 1.29 1.02 1.00 1.00
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Ratio of net investment income
(loss) (%) 1.69 1.99 2.32 2.42 2.51
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Portfolio turnover rate (%) 102 75 43 70 103
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</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total returns would have been lower had certain expenses not been reduced.
14 | Financial Highlights
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Scudder Dividend & Growth Fund
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Years Ended December 31, 1999 1998(b)
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Net asset value, beginning of period $ 11.35 $ 12.00
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Income (loss) from investment operations:
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Net investment income (loss) (a) .29 .17
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Net realized and unrealized gain (loss) on t
investmen transactions 1.52 (.65)
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Total from investment operations 1.81 (.48)
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Less distributions from:
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Net investment income (.40) (.17)
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Total distributions (.40) (.17)
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Net asset value, end of period $ 12.76 $ 11.35
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Total Return (%) (c) 16.20 (4.00)**
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Ratios to Average Net Assets and Supplemental Data
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Net assets, end of period ($ millions) 25 25
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Ratio of expenses before expense reductions (%) 2.07 2.56*
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Ratio of expenses after expense reductions (%) .75 .75*
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Ratio of net investment income (loss) (%) 2.44 3.36*
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Portfolio turnover rate (%) 93 41*
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(a) Based on monthly average shares outstanding during the period.
(b) For the period July 17, 1998 (commencement of operations) to December
31,1998.
(c) Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
Financial Highlights | 15
<PAGE>
How to invest in the funds
The following pages tell you how to invest in these funds and what to expect as
a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket or financial adviser -- your provider may
have its own policies or instructions, and you should follow those.
<PAGE>
How to Buy Shares
Use these instructions to invest directly with Scudder. Make out your
check to "The Scudder Funds."
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First investment Additional investments
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$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an
Automatic Investment Plan
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By mail or o Fill out and sign an o Send a check and a Scudder
express application investment slip to us at
(see below) the appropriate address
o Send it to us at the below
appropriate address, along
with an investment check o If you don't have an
investment slip, simply
include a letter with your
name, account number, the
full name of the fund and
your investment
instructions
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By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
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By phone -- o Call 1-800-SCUDDER for
instructions
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With an automatic -- o To set up regular
investment plan investments from a bank
checking account, call
1-800-SCUDDER
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Using QuickBuy -- o Call 1-800-SCUDDER
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On the Internet o Go to the "funds and prices" o Call 1-800-SCUDDER to
section at www.scudder.com ensure you have enabled
electronic services
o Access and print out an
on-line prospectus and a new o Go to www.scudder.com and
account application register
o Complete and return the o Follow the instructions for
application with your check buying shares with money
from your bank account
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[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
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How to Buy Shares | 17
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in an account opened directly
with Scudder.
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Exchanging into another fund Selling shares
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$2,500 or more to open a new Some transactions, including
account ($1,000 for IRAs) most for over $100,000, can
only be ordered in writing;
$100 or more for exchanges if you're in doubt, see page
between existing accounts 21
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By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
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Using SAIL(TM) o Call 1-800- 343-2890 and o Call 1-800- 343-2890 and
follow the instructions follow the instructions
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By mail, Write a letter that includes: Write a letter that includes:
express or fax
(see previous o the fund, class and account o the fund, class and account
page) number you're exchanging number from which you want to
out of sell shares
o the dollar amount or number
of shares you want to exchange o the dollar amount or number
of shares you want to sell
o the name and class of the
fund you want to exchange into o your name(s), signature(s)
and address, as they appear
o your name(s), signature(s) on your account
and address, as they appear
on your account o a daytime telephone number
o a daytime telephone number
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By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
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With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
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Using QuickSell -- o Call 1-800-SCUDDER
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On the Internet o Go to www.scudder.com and --
register
o Follow the instructions for
making on-line exchanges
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18 | How to Exchange or Sell Shares
<PAGE>
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[ICON] Questions? You can speak to a Scudder representative between 8 a.m. and 8
p.m. Eastern time on any fund business day by calling 1-800-SCUDDER.
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Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
Policies You Should Know About | 19
<PAGE>
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[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. Go to www.scudder.com to get up-to-date information,
review balances or even place orders for exchanges.
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SAIL(TM), the Scudder Automated Information Line, is available 24 hours a day by
calling 1-800-343-2890. You can use SAIL to get information on Scudder funds
generally and on accounts held directly at Scudder. You can also use it to make
exchanges and to sell shares.
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-SCUDDER.
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The fund
can only accept wires of $100 or more.
Exchanges among Scudder funds are an option for shareholders who bought their
fund shares directly from Scudder and many other investors as well. Exchanges
are a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
20 | Policies You Should Know About
<PAGE>
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
Policies You Should Know About | 21
<PAGE>
- --------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
- --------------------------------------------------------------------------------
How the funds calculate share price
Each fund's share price is its net asset value per share, or NAV. To calculate
NAV, the funds use the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, a fund's value for a security is likely to be different from quoted market
prices.
22 | Policies You Should Know About
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o charge you $10 a year if your account balance falls below $2,500, and close
your account and send you the proceeds if your balance falls below $1,000; in
either case, we will give you 60 days' notice so you can either increase your
balance or close your account (these policies don't apply to retirement
accounts, to investors with $100,000 or more in Scudder fund shares or in any
case where a fall in share price created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash; generally, the fund won't make a redemption
in kind unless your requests over a 90-day period total more than $250,000 or
1% of the fund's net asset value, whichever is less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
Policies You Should Know About | 23
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
- --------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The funds intend to pay income dividends to their shareholders quarterly, in
March, June, September and December. Capital gains will be paid to shareholders
in November or December. Additional distributions may be made if necessary.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
24 | Understanding Distributions and Taxes
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
- --------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
- --------------------------------------------------------------------------------
o taxable income dividends you receive from the fund
- --------------------------------------------------------------------------------
o short-term capital gains distributions you receive from the fund
Generally taxed at capital gains rates
- --------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
- --------------------------------------------------------------------------------
o long-term capital gains distributions you receive from the fund
- --------------------------------------------------------------------------------
Each fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
Understanding Distributions and Taxes | 25
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effect of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. To reduce costs, we may mail one copy per
household. For more copies, call 1-800-SCUDDER.
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Scudder or the SEC (see below). Materials you
get from Scudder are free; those from the SEC involve a copying fee. If you
like, you can look over these materials in person at the SEC's Public Reference
Room in Washington, DC or request them electronically at [email protected].
Scudder Funds SEC
PO Box 2291 450 Fifth Street, N.W.
Boston, MA 02107-2291 Washington, DC 20549-6009
1-800-SCUDDER 1-202-942-8090
www.scudder.com www.sec.gov
Fund Name SEC File #
- --------------------------------------------------------------------------------
Scudder Balanced Fund 811-42
- --------------------------------------------------------------------------------
Scudder Dividend & Growth Fund 811-43
- --------------------------------------------------------------------------------
<PAGE>
SCUDDER BALANCED FUND
A series of Scudder Portfolio Trust
A Mutual Fund which
Seeks a Balance of Growth and Income, from a
Diversified Portfolio of Equity and Fixed-income Securities.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
April 12, 2000
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectuses of Scudder Balanced Fund, dated
April 12, 2000, as amended from time to time, a copy of which may be obtained
without charge by writing to Scudder Investor Services, Inc., Two International
Place, Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders for Scudder Balanced Fund, dated
December 31, 1999, is incorporated by reference and is hereby deemed to be part
of this Statement of Additional Information.
<PAGE>
<TABLE>
TABLE OF CONTENTS
Page
<S> <C>
THE FUND'S INVESTMENT OBJECTIVES AND POLICIES............................................................1
General Investment Objectives and Policies .....................................................1
Investments.....................................................................................1
Equity Investments..............................................................................2
Fixed-Income Investments........................................................................2
Master/feeder structure.........................................................................2
Investments and Investment Techniques...........................................................3
Investment Restrictions........................................................................20
PURCHASES...............................................................................................22
Additional Information About Opening An Account................................................22
Minimum balances...............................................................................22
Additional Information About Making Subsequent Investments.....................................22
Additional Information About Making Subsequent Investments by QuickBuy.........................23
Checks.........................................................................................23
Share Price....................................................................................24
Share Certificates.............................................................................24
Other Information..............................................................................24
EXCHANGES AND REDEMPTIONS...............................................................................25
Exchanges......................................................................................25
Redemption by Telephone........................................................................25
Redemption By QuickSell........................................................................26
Redemption by Mail or Fax......................................................................27
Redemption-In-Kind.............................................................................27
Other Information..............................................................................27
FEATURES AND SERVICES OFFERED BY THE FUND...............................................................28
The No-Load Concept............................................................................28
Internet access................................................................................28
Dividend and Capital Gain Distribution Options.................................................29
Reports to Shareholders........................................................................29
Transaction Summaries..........................................................................29
THE SCUDDER FAMILY OF FUNDS.............................................................................29
SPECIAL PLAN ACCOUNTS...................................................................................31
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS...............................................................34
PERFORMANCE INFORMATION.................................................................................35
Average Annual Total Return....................................................................35
Cumulative Total Return........................................................................35
Total Return...................................................................................36
Comparison of Fund Performance.................................................................36
ORGANIZATION OF THE FUND................................................................................37
INVESTMENT ADVISER......................................................................................38
Personal Investments by Employees of the Adviser...............................................41
TRUSTEES AND OFFICERS...................................................................................41
REMUNERATION............................................................................................43
Responsibilities of the Board -- Board and Committee Meetings..................................43
Compensation of Officers and Trustees..........................................................43
DISTRIBUTOR.............................................................................................44
TAXES ...............................................................................................45
PORTFOLIO TRANSACTIONS..................................................................................49
<PAGE>
TABLE OF CONTENTS (continued)
Page
Brokerage Commissions..........................................................................49
Portfolio Turnover.............................................................................50
NET ASSET VALUE.........................................................................................50
ADDITIONAL INFORMATION..................................................................................51
Experts........................................................................................51
Shareholder Indemnification....................................................................51
Other Information..............................................................................51
Scudder Fund Accounting Corporation 52
Scudder Service Corporation 52
Scudder Trust Company 52
FINANCIAL STATEMENTS....................................................................................52
APPENDIX
Ratings of Municipal and Corporate Bonds.........................................................
Standard & Poor's Ratings Services Earnings and Dividend Rankings for Common Stocks..............
</TABLE>
ii
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
Scudder Balanced Fund (the "Fund"), is a 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 the Fund may engage (such
as hedging, etc.) or a financial instrument which the Fund may purchase (such as
options, forward foreign currency contracts, etc.) are meant to describe the
spectrum of investments that Scudder Kemper Investments, Inc. (the "Adviser"),
in its discretion, might, but is not required to, use in managing the Fund's
portfolio assets. The Adviser may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of the Fund but, to the extent employed, could from time to time have
a material impact on the Fund's performance.
General Investment Objectives and Policies
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities.
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.
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.
<PAGE>
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 common stocks and other 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.
Fixed-Income Investments
To enhance income and stability, the Fund normally invests 25% to 50%
of its net assets in investment grade bonds and other fixed-income securities.
However, at all times, at least 25% of the Fund's net assets will 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 with
in the four highest quality ratings of Moody's Investor Service, Inc.
("Moody's") (Aaa, Aa, Aaa and A) or S&P (AAA, AA, A and BBB), or if unrated,
judged to be of equivalent quality as determined by the Adviser at the time of
purchase. Securities must also meet credit standards applied by the Adviser. The
Fund could put up to 10% of total assets, though no more than 20% of its bond
assets, in 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.")
Master/feeder structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder 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
2
<PAGE>
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program
The Trust has received exemptive relief from the SEC, which permits the
Fund to participate in an interfund lending program among certain investment
companies advised by the Adviser. The interfund lending program allows the
participating funds to borrow money from and loan money to each other for
temporary or emergency purposes. The program is subject to a number of
conditions designed to ensure fair and equitable treatment of all participating
funds, including the following: (1) no fund may borrow money through the program
unless it receives a more favorable interest rate than a rate approximating the
lowest interest rate at which bank loans would be available to any of the
participating funds under a loan agreement; and (2) no fund may lend money
through the program unless it receives a more favorable return than that
available from an investment in repurchase agreements and, to the extent
applicable, money market cash sweep arrangements. In addition, a fund may
participate in the program only if and to the extent that such participation is
consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging), except that the Fund may engage in reverse repurchase
agreements and dollar rolls for any purpose.
Investments and Investment Techniques
Zero Coupon Securities. The Fund may invest in zero coupon securities, which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (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 Fund, most likely
will be deemed the beneficial holder of the underlying U.S. government
securities.
3
<PAGE>
The U.S. 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 Fund 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.
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 Fund may invest in REITs. REITs are sometimes
informally characterized as equity REITs, mortgage REITs and hybrid REITs.
Investment in REITs may subject the Fund to risks associated with the direct
ownership of real estate, such as decreases in real estate values, overbuilding,
increased competition and other risks related to local or general economic
conditions, increases in operating costs and property taxes, changes in zoning
laws, casualty or condemnation losses, possible environmental liabilities,
regulatory limitations on rent and fluctuations in rental income. Equity REITs
generally experience these risks directly through fee or leasehold interests,
whereas mortgage REITs generally experience these risks indirectly through
mortgage interests, unless the mortgage REIT forecloses on the underlying real
estate. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Changes in interest rates may also affect the value
of the Fund's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986 as amended (the "Code"), and to maintain exemption from the registration
requirements of the Investment Company Act of 1940 (the "1940 Act"). By
investing in REITs indirectly through the Fund, a shareholder will bear not only
his or her proportionate share of the expenses of the Fund, but also,
indirectly, similar expenses of the REITs. In addition, REITs depend generally
on their ability to generate cash flow to make distributions to shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities. The 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
Fund 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 Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
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,
4
<PAGE>
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.
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 the 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
governmental 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 the 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 Fund 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 the 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
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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 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 Fund 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 the 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 the 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 the Fund's investment objectives and policies, the
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) ("CARSSM").
CARSSM represent undivided fractional interests in a trust (Trust) whose assets
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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.
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 Fund 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.
The 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 the 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 Fund to dispose of any then existing holdings of such
securities.
Indexed Securities. The 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 Fund 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
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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.
When-Issued Securities. The 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 Fund to
the issuer and no interest on the when-issued or forward delivery securities
accrues to the Fund. To the extent that assets of the Fund are held in cash
pending the settlement of a purchase of securities, the Fund will earn no
income; however, it is the Fund's intention to be fully invested to the extent
practicable and subject to the policies stated above. While when-issued or
forward delivery securities may be sold prior to the settlement date, the Fund
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the Fund
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 Fund does not believe that its net asset values or income
will be adversely affected by their purchase of securities on a when-issued or
forward delivery basis.
Municipal Obligations. The 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 Fund 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 Fund has no current intention of purchasing tax-exempt
municipal obligations that would amount to greater than 5% of the Fund's total
assets.
Repurchase Agreements. The 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 the Fund may purchase or to be at least equal to that of
issuers of commercial paper rated within the two highest grades assigned by
Moody's or S&P.
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
Fund acquires 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 Fund, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to the Fund together with the repurchase price upon repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the Obligation
itself. Obligations will be held by the Fund's custodian or in the Federal
Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, the Fund may encounter delay and incur costs
before being able to sell
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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 Fund
has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
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 Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case, the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the Obligation, in which
case the Fund may incur a loss if the proceeds to the Fund of their sale of the
securities underlying the 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 Fund 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 Fund will be
unsuccessful in seeking to impose on the seller a contractual obligation to
deliver additional securities.
Repurchase Commitments. The 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 Fund may purchase. Such transactions may not provide the
Fund with collateral marked-to-market during the term of the commitment.
Dollar Roll Transactions. The Fund may enter into "dollar roll" transactions,
which consist of the sale by the Fund to a bank or broker/dealers (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. The Fund receives a fee from the counterparty
as consideration for entering into the commitment to purchase. Dollar rolls may
be renewed over a period of several months with a different purchase and
repurchase price fixed and a cash settlement made at each renewal without
physical delivery of securities. Moreover, the transaction may be preceded by a
firm commitment agreement pursuant to which the Fund agrees to buy a security on
a future date.
The Fund 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. The Fund will also
maintain asset coverage of at least 300% for all outstanding firm commitments,
dollar rolls and other borrowings. Notwithstanding such safeguards, the Fund's
overall investment exposure may be increased by such transactions to the extent
that the Fund bears a risk of loss on the securities it is committed to purchase
as well as on the segregated assets.
Dollar rolls are treated for purposes of the 1940 Act as borrowings by
the Fund because they involve the sale of a security coupled with an agreement
to repurchase. Like all borrowings, a dollar roll involves costs to the Fund.
For example, while the Fund receives a fee as consideration for agreeing to
repurchase the security, the Fund forgos 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 Fund, thereby effectively
charging the Fund interest on their borrowing. Further, although the Fund 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 the 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 Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund 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 Fund, the security that the Fund are
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's 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 Fund, have adopted
guidelines to ensure that those securities received are substantially identical
to those sold. To reduce the risk of default, the Fund will engage in such
transactions only with counterparties selected pursuant to such guidelines.
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Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers, and are required to be secured continuously by collateral in
cash 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 Fund has
the right to call a loan and obtain the securities loaned on no more than five
days' notice. During the existence of a loan, the Fund continues 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
the Fund's total assets at the time any loan is made.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered to be speculative investments.
Warrants pay no dividends and confer no rights other than a purchase option.
Thus, if a warrant held by the Fund were not exercised by the date of its
expiration, the Fund would lose the entire purchase price of the warrant.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed upon time and price. The
Fund maintains a segregated account in connection with outstanding reverse
repurchase agreements. The Fund will enter into reverse repurchase agreements
only when the Adviser believes that the interest income to be earned from the
investment of the proceeds of the transaction will be greater than the interest
expense of the transaction.
Borrowing. The Fund may not borrow money, except as permitted under Federal law.
The Fund will borrow only when the Adviser believes that borrowing will benefit
the Fund after taking into account considerations such as the costs of the
borrowing. The Fund does not expect to borrow for investment purposes, to
increase return or leverage the portfolio. Borrowing by the Fund will involve
special risk considerations. Although the principal of the Fund's borrowings
will be fixed, the Fund's assets may change in value during the time a borrowing
is outstanding, thus increasing exposure to capital risk.
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). Index-based
investments may not replicate exactly the performance of their specified index
because of transaction costs and because of the temporary unavailability of
certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
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Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Illiquid Securities. The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. This investment
practice, therefore, could have the effect of increasing the level of
illiquidity of the Fund. It is the Fund's policy that illiquid securities
(including repurchase agreements of more than seven days duration, certain
restricted securities, and other securities which are not readily marketable)
may not constitute, at the time of purchase, more than 15% of the value of the
Fund's net assets. The Trust's Board of Trustees has approved guidelines for use
by the Adviser in determining whether a security is illiquid.
The Fund has adopted 144A procedures.
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 the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
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 Fund generally emphasizes investments in companies
domiciled in the U.S., it may invest in listed and unlisted foreign securities
of the same types as the domestic securities in which the Fund may invest when
the anticipated performance of foreign securities is believed by the Adviser to
offer more potential than domestic alternatives in keeping with the investment
objectives of the Fund.
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Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in U.S. securities and which may
favorably or unfavorably affect the Fund's performance. As foreign companies are
not generally subject to uniform accounting and auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign stock markets, while growing
in volume of trading activity, have substantially less volume than the New York
Stock Exchange, Inc. (the "Exchange"), and securities of some foreign companies
are less liquid and more volatile than securities of domestic companies.
Similarly, volume and liquidity in most foreign bond markets are less than the
volume and liquidity in the U.S. and at times, volatility of price can be
greater than in the U.S. Further, foreign markets have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Fixed commissions on some foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
Fund will endeavor to achieve the most favorable net results on their portfolio
transactions. Further, the Fund may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts. There is generally
less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the U.S. It may be more
difficult for the Fund's agents to keep currently informed about corporate
actions such as stock dividends or other matters which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of 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.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance may be greater in these countries than in developed
countries. The management of the Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may be subject to potentially greater risks than investments in developed
countries, the Fund will not invest in any securities of issuers located in
developing countries if the securities, in the judgment of the Adviser, are
speculative.
Foreign Securities. Investments in foreign securities usually will involve
currencies of foreign countries. Moreover, the Fund may temporarily hold funds
in bank deposits in foreign currencies during the completion of investment
programs and the value of these assets for the Fund as measured in U.S. dollars
may be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. Although the Fund values
its assets daily in terms of U.S. dollars, it does not intend to convert its
holdings of foreign currencies, if any, into U.S. dollars on a daily basis. It
may do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Fund will conduct 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 Fund invests in foreign securities, the 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 Fund's investment performance.
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Common stocks. The 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 Fund 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 a greater potential for gain on investment, compared to
other classes of financial assets such as bonds or cash equivalents.
Convertible Securities. The Fund may invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common 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 the 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.
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.
Depositary Receipts. The 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
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Receipts are not obligated to disclose material information in the United States
and, therefore, there may not be a correlation between such information and the
market value of the Depositary Receipts. ADRs are typically issued by a United
States bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. GDRs, IDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by United States banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the United States securities markets and Depositary Receipts in bearer
form are designed for use in securities markets outside the United States. For
purposes of the Fund's investment policies, the Fund's investments in ADRs, GDRs
and other types of Depositary Receipts will be deemed to be investments in the
underlying securities. Depositary Receipts other than those denominated in U.S.
dollars will be subject to foreign currency exchange rate risk. Certain
Depositary Receipts may not be listed on an exchange and therefore may be
illiquid securities subject to the Fund's restrictions on investment in illiquid
securities.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts. These 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, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limitations imposed by the 1940 Act) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time
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they tend to limit any potential gain which might result from an increase in
value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision
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permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, are determined to be of equivalent credit quality by the Adviser.
The staff of the SEC currently takes the position that OTC options purchased by
the Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 15% of its net assets in illiquid
securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets, and on
securities indices, currencies and futures contracts. . The Fund will not
purchase call options unless the aggregate premiums paid on all options held by
the Fund at any time do not exceed 20% of its total assets. All calls sold by
the Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. The Fund will not purchase put options unless the aggregate premiums
paid on all options held by the Fund at any time do not exceed 20% of its total
assets. The Fund will not sell put options if, as a result, more than 50% of the
Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
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The Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
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time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive
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<PAGE>
payments on a notional principal amount from the party selling such floor to the
extent that a specified index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of the Fund's obligation.
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<PAGE>
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid assets
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Investment Restrictions
The 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 the Fund which, under the 1940
Act and the rules thereunder and as used in this Statement of Additional
Information, means the lesser of (1) 67% or more of the 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, the Fund. The Fund
is under no restriction as to the amount of portfolio securities which may be
bought or sold.
The 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, the Fund may not:
(1) borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
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(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 Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of shareholders.
As a matter of non-fundamental policy the Fund does not currently
intend to:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) enter into either reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(7) lend portfolio securities in an amount greater than 5% of its
total assets.
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PURCHASES
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-SCUDDER
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the fee to be paid
to the Fund) for any non-fiduciary/non-custodial account
without an automatic investment plan (AIP) in place and a
balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange
or transfer out of the account. The Fund will mail the
proceeds of the redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be
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<PAGE>
directed to any office of the Distributor listed in the Fund's prospectus.
Contact the Distributor at 1-800-SCUDDER for additional information. A
confirmation of the purchase will be mailed out promptly following receipt of a
request to buy. Federal regulations require that payment be received within
three business days. If payment is not received within that time, the order is
subject to cancellation. In the event of such cancellation or cancellation at
the purchaser's request, the purchaser will be responsible for any loss incurred
by the Fund or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Trust shall have the authority, as agent of the
shareholder, to redeem shares in the account in order to reimburse the Fund or
the principal underwriter for the loss incurred. Net losses on such transactions
which are not recovered from the purchaser will be absorbed by the principal
underwriter. Any net profit on the liquidation of unpaid shares will accrue to
the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the 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 Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
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The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
The Board of Trustees and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Fund at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Fund 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.
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EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and
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 to be different in any respect, the
exchange request must be in writing and must contain an original signature
guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time. There is
no charge to the shareholder for any exchange described above (except for
exchanges from funds which impose a redemption fee on shares held less than a
year. An exchange into another Scudder fund is a redemption of shares, and
therefore may result in tax consequences (gain or loss) to the shareholder and
the proceeds of such exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Fund
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-SCUDDER.
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.
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(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 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.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the 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 the Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net asset
value per share calculated at the close of trading on the day of your call.
QuickSell requests received after the close of regular trading on the Exchange
will begin their processing and be redeemed at the net asset value calculated
the following business day. QuickSell transactions are not available for Scudder
IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing an QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
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Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed .
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to 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-SCUDDER.
Redemption-In-Kind
The Trust reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. The
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of 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
Fund does not impose a redemption or repurchase charge, although a wire charge
may be applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including an exchange into another Scudder fund, may
result in tax consequences (gain or loss) to the shareholder and the proceeds of
such redemptions may be subject to backup withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The 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.
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FEATURES AND SERVICES OFFERED BY THE FUND
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish 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.
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.
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.
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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 the 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-SCUDDER or by sending written instructions to the Transfer Agent.
Please include your account number with your written request.
Reinvestment is usually made at the closing net asset value determined
on the day following the record date. Investors may leave standing instructions
with the Transfer Agent designating their option for either reinvestment or cash
distribution of any income dividends or capital gains distributions. If no
election is made, dividends and distributions will be invested in additional
shares of the Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-SCUDDER. Confirmation Statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights.
Transaction Summaries
Annual summaries of all transactions in the Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-SCUDDER.
THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds; a list of Scudder's
funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
Scudder Government Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series+
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
- ----------------------------------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
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TAX FREE
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Limited Term Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder 500 Index Fund
Scudder Real Estate Investment Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
- ----------------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
** Only the Scudder Shares are part of the Scudder Family of Funds.
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GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund***
Scudder International Growth Fund
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
Certain Scudder funds or classes thereof may not be available for
purchase or exchange. For more information, please call 1-800-SCUDDER.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
- ----------------------------------
*** Only the International Shares are part of the Scudder Family of Funds.
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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, such as a pension or profit sharing plan, a
governmental plan, a simplified employee pension plan, a simple retirement
account, or a tax-deferred annuity program (a "qualified plan"), and a married
individual who is not an active participant in a qualified plan and whose spouse
is also not an active participant in a qualified plan, are eligible to make tax
deductible contributions of up to $2,000 to an IRA prior to the year such
individual attains age 70 1/2. In addition, certain individuals who are active
participants in qualified plans (or who have spouses who are active
participants) are also eligible to make tax-deductible contributions to an IRA;
the annual amount, if any, of the contribution which such an individual will be
eligible to deduct will be determined by the amount of his, her, or their
adjusted gross income for the year. If an individual is an active participant,
the deductibility of his or her IRA contributions in 2000 is phased out if the
individual has gross income between $32,000 and $42,000 and is single, if the
individual has gross income between $52,000 and $62,000 and is married filing
jointly, or if the individual has gross income between $0 and $10,000 and is
married filing separately; the phase-out ranges for individuals who are single
or married filing jointly are subject to annual adjustment through 2005 and
2007, respectively. If an individual is married filing jointly and the
individual's spouse is an active participant but the individual is not, the
deductibility of his or her IRA contributions is phased out if their combined
gross income is between $150,000 and $160,000. Whenever the adjusted gross
income limitation prohibits an individual from contributing what would otherwise
be the maximum tax-deductible contribution he or she could make, the individual
will be eligible to contribute the difference to an IRA in the form of
nondeductible contributions. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
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A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Redeeming shares -- Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the Trust or its agent on written notice, and will be terminated
when all shares of the Fund under the Plan have been liquidated or upon receipt
by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-SCUDDER.
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
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minimum monthly deposit per investor is $20. Except for trustees or custodian
fees for certain retirement plans, at present there is no separate charge for
maintaining group or salary deduction plans; however, the Trust and its agents
reserve the right to establish a maintenance charge in the future depending on
the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income, which includes any excess of net
realized short-term capital gains over net realized long-term capital losses.
The Fund may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, the Fund may retain all or part of such gain for reinvestment, after
paying the related federal taxes for which shareholders may then be able to
claim a credit against their federal tax liability. If the Fund does not
distribute the amount of capital gain and/or ordinary income required to be
distributed by an excise tax provision of the Code, that Fund may be subject to
that excise tax. In certain circumstances, the Fund may determine that it is in
the interest of shareholders to distribute less than the required amount. (See
"TAXES.")
The Fund intends to distribute investment company taxable income,
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 the 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.
The Fund intends 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
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received on December 31 of the calendar year declared. According to preference,
shareholders may receive distributions in cash or have them reinvested in
additional shares of the Fund. If an investment is in the form of a retirement
plan, all dividends and capital gains distributions must be reinvested into the
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
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures are calculated in the following 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 the 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 the Fund's shares
and assume that all dividends and capital gains distributions during the
respective periods were reinvested in Fund shares. Average annual total return
is calculated by finding the average annual compound rates of return of a
hypothetical investment over such periods according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial 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, 1999
One Year Five Years Life of Fund
-------- ---------- ------------
Balanced Fund(1) 13.46% 18.94% 13.47%
(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.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of the Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods
according to the following formula (cumulative total return is then expressed as
a percentage):
35
<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, 1999
One Year Five Years Life of Fund
-------- ---------- ------------
Balanced Fund(1) 13.46% _137.99% _141.88%
(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.
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.
Comparison of Fund Performance2
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs.
From time to time, in advertising and marketing literature, the Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Fund, the Fund's portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Fund. In addition, the amount of assets that the Adviser has under management in
various geographical areas may be quoted in advertising and marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond
36
<PAGE>
funds these factors include, but are not limited to, a fund's overall investment
objective, the average portfolio maturity, credit quality of the securities
held, and interest rate movements. For equity funds, factors include a fund's
overall investment objective, the types of equity securities held and the
financial position of the issuers of the securities. The risks/returns
associated with an investment in international bond or equity funds also will
depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Fund, including reprints of, or selections from, editorials or
articles about the Fund.
ORGANIZATION OF THE FUND
The Fund is a 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 the Fund's prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting 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.
37
<PAGE>
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
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On December 31, 1997, Zurich
Insurance Company ("Zurich") acquired a majority interest in the Adviser, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Adviser. The Adviser's name changed to Scudder Kemper Investments, Inc. On
September 7, 1998, the businesses of Zurich (including Zurich's 70% interest in
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. By way of a dual holding
company structure, former Zurich shareholders initially owned approximately 57%
of Zurich Financial Services Group, with the balance initially owned by former
B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations, as well as providing investment advice to over 280 open- and
closed-end mutual funds. The Adviser maintains a large research department,
which conducts continuous studies of the factors that affect the position of
various industries, companies and individual securities. The Adviser receives
published reports and statistical compilations from issuers and other sources,
as well as analyses from brokers and dealers who may execute portfolio
transactions for the Adviser's clients. However, the Adviser regards this
information and material as an adjunct to its own research activities. Scudder's
international investment management team travels the world, researching hundreds
of companies. In selecting the securities in which the Fund may invest, the
conclusions and investment decisions of the Adviser with respect to the Fund are
based primarily on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
38
<PAGE>
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
In certain cases, the investments for the Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser,
that have similar names, objectives and investment styles. You should be aware
that the Fund is likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of the
Fund can be expected to vary from those of these other mutual funds.
The present investment management agreement (the "Agreement") was
approved by the Trustees on August 10, 1998, became effective September 7, 1998
and was approved at a shareholder meeting held on December 15, 1998. The
Agreement will continue in effect until September 30, 2000 and from year to year
thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreement or interested
persons of the Adviser or the Trust, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Trust's Trustees
or of a majority of the outstanding voting securities of the Fund. The Agreement
may be terminated at any time without payment of penalty by either party on
sixty days' written notice, and automatically terminates in the event of its
assignment.
Under the Agreement, the Adviser provides the Fund with continuing
investment management for 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 the Fund, what portfolio securities will
be held or sold by the Fund, and what portion of the 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, the 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 the Fund in taking such steps
as are necessary or appropriate to carry out the decisions of its Trustees and
the appropriate committees of the Trustees regarding the conduct of the business
of the Fund.
The Adviser also renders significant administrative services (not
otherwise provided by third parties) necessary for the Fund's operations as an
open-end investment company including, but not limited to preparing reports and
notices to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Fund is (such as the Fund's transfer agent, pricing agents, custodian,
accountants, and others); preparing and making filings with the SEC and other
regulatory agencies; assisting in the preparation and filing of the Fund's
federal, state, and local tax returns; preparing and filing the Fund's federal
excise tax returns; assisting with investor and public relations matters;
monitoring the valuation of securities and the calculation of net asset value;
monitoring the registration of shares of the Fund under applicable federal and
state securities laws; maintaining the Fund's books and records to the extent
not otherwise maintained by a third party; assisting in establishing accounting
policies of the Fund; assisting in the resolution of accounting and legal
issues; establishing and monitoring the Fund's operating budget; processing the
payment of the Fund's bills; assisting the Fund in, and otherwise arranging for,
the payment of distributions and dividends; and otherwise assisting the Fund in
the conduct of its business, subject to the direction and control of the
Trustees.
The Adviser pays the compensation and expenses (except those for
attending Board and committee meetings outside New York, New York and Boston,
Massachusetts) of all Trustees, officers, and executive employees of the 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, the 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,
1997, the Adviser did not impose
39
<PAGE>
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. For the fiscal year ended December 31, 1999, the
Adviser received a management fee in the amount of $3,325,085.
Under the Agreement the Fund is responsible for all of its other
expenses including fees and expenses incurred in connection with membership in
investment company organizations; brokers' commissions; legal, auditing and
accounting expenses; the calculation of net asset value; taxes and governmental
fees; the fees and expenses of the transfer agent; the cost of preparing share
certificates 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 Fund. The Fund is also responsible for expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto. The Agreement expressly provides that the Adviser shall not be required
to pay a pricing agent of the 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 the Agreement and in discussions with the
Adviser concerning the Agreement, the Trustees of the Trust who are not
"interested persons" of the Trust have been represented by independent counsel
at the Fund's expense.
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Fund that may have different
distribution arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with
the Trust as principals in the purchase or sale of securities, except as
individual subscribers or holders of shares of that Fund.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
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<PAGE>
Personal Investments by Employees of the Adviser
The Fund, the Adviser and principal underwriter have each adopted codes
of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Fund and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
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>
Linda C. Coughlin (48)+ Trustee and Managing Director of Senior Vice President
President Scudder Kemper Investments,
Inc.
Henry P. Becton, Jr. (56) Trustee President and General --
125 Western Avenue Manager, WGBH Educational
Allston, MA 02134 Foundation
Dawn-Marie Driscoll (53) 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 (67) Trustee Corporate Director and --
100 Alumni Avenue Trustee
Providence, RI 02906
George M. Lovejoy, Jr. (70)= Trustee President and Director, --
50 Congress Street, Suite 543 Fifty Associates
Boston, MA 02109 (real estate corporation)
Wesley W. Marple, Jr. (68)= 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 (47)*#= Trustee, Vice Managing Director of Director, Senior Vice
President and Scudder Kemper Investments, President, Chief Legal
Assistant Secretary Inc. Officer and Assistant
Clerk
41
<PAGE>
Position with
Position with Underwriter, Scudder
Name, Age and Address Fund Principal Occupation** Investor Services, Inc.
- --------------------- ---- ---------------------- -----------------------
Jean C. Tempel (57) Trustee Venture Partner, Internet --
Internet Capital Group Capital Group
Ten Post Office Square
Suite 1325
Boston, MA 02109-4603
Kelly D. Babson (41)+ Vice President Managing Director of --
Scudder Kemper Investments,
Inc.
Robert S. Cessine (50)@ Vice President Managing Director of --
Scudder Kemper Investments,
Inc.
Gary A. Langbaum (51)@ Vice President Managing Director of --
Scudder Kemper Investments,
Inc.
Ann M. McCreary (43)# Vice President Managing Director of --
Scudder Kemper Investments,
Inc.
John R. Hebble (41)+ Treasurer Senior Vice President, Assistant Treasurer
Scudder Kemper Investments,
Inc.
John Millette (37)+ Vice President and Assistant Vice President of __
Secretary Scudder Kemper Investments
Inc.
Caroline Pearson (38)+ Assistant Secretary Senior Vice President, Clerk
Scudder Kemper Investments,
Inc.; Associate, Dechert
Price & Rhoads (law firm)
1989 to 1997
</TABLE>
* Ms. Quirk and Ms. Coughlin 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 and Marple and Ms. Quirk and Ms. Coughlin 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
@ 222 South Riverside Plaza, Chicago, Illinois
As of March 15, 2000, 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) less than 1% of the shares of the Fund outstanding on such date.
42
<PAGE>
As of March 15, 2000, 5,938,924 shares in the aggregate, or 22.27% 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.
To the knowledge of the Trust, as of March 15, 2000, 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 the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from the
Funds of Scudder 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 the 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 the 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 1999, the Independent Trustees participated in 25
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
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following table shows the aggregate compensation received by each Independent
Trustee during 1999 from the Trust and from all of the Scudder funds as a group.
In 1999, the Trustees of Scudder Portfolio Trust met nine times.
<TABLE>
<CAPTION>
Name Scudder Portfolio Trust* All Scudder Funds
---- ------------------------ -----------------
<S> <C> <C>
Henry Becton, Jr., Trustee $21,785 $140,000 (28 funds)
Dawn-Marie Driscoll Trustee $23,153 $150,000 (28 funds)
Peter B. Freeman, Trustee $23,854 $179,783 (50 funds)
George M. Lovejoy, Jr. Trustee $21,690 $153,200 (29 funds)
Wesley W. Marple, Jr. Trustee $21,690 $140,000 (28 funds)
Jean C. Tempel, Trustee $21,690 $140,000 (28 funds)
</TABLE>
* 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 the Adviser or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
DISTRIBUTOR
The Trust, on behalf of the Fund, has an underwriting agreement 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, 2000 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 the Fund. The Trustees last approved the underwriting
agreement on August 9, 1999.
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 Fund; 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 initiates the transaction);
the cost of printing and postage of business reply envelopes; and a portion of
the cost of computer terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Fund's
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Fund to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
service representatives, a portion of the cost of computer terminals, and
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<PAGE>
expenses of any activity which is primarily intended to result in the sale of
shares issued by the Fund, unless a Rule 12b-1 plan is in effect which provides
that the Fund will bear some or all of such expenses. As agent, the Distributor
currently offers the Fund's 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 the
Fund.
Note: Although the Fund does not currently have a 12b-1 Plan, the
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
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, or a predecessor statute and has qualified as
such since its inception. The 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.
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions would be taxable to shareholders to the extent of the
Fund's earnings and profits, and would be eligible for the dividends-received
deduction in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses) realized during the one-year period ending October
31 during such year, and all ordinary income and capital gains for prior years
that were not previously distributed.
Investment company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of the Fund.
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 the 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 expected to comprise a
substantial part of the Fund's gross income. To the extend that such dividends
constitute a portion of the Fund's gross income, a portion of the income
distributions of the Fund may be eligible for the 70% deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares of the Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law and is eliminated if
either those shares or the shares of the Fund are deemed to have been held by
the Fund or the
45
<PAGE>
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 ($52,000 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $52.000 and
$62,000; $32,000 for a single individual, with a phase-out for adjusted gross
income between $32,000 and $42,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA ($2,500 per
individual for married couples if only one spouse has earned income) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Dividend and interest income received by the Fund from sources outside
the U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains 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
the Fund will be subject to tax under Section 1234 of the Code. In general, no
loss will be recognized by the Fund upon payment of a premium in connection with
the purchase of a put or call option. The character of any gain or loss
recognized (i.e. long-term or short-term) will generally depend, in the case of
a lapse or sale of the option, on the Fund's holding period for the option, and
in the case of the exercise of a put option, on the Fund's holding period for
the underlying property. The purchase of a put option may constitute a short
sale for federal income tax purposes, causing an adjustment in the holding
period of any property in the Fund's portfolio similar to the property
underlying the put option. If the Fund writes an option, no gain is recognized
upon its receipt of a premium. If the
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<PAGE>
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 Fund and listed
nonequity options written or purchased by the Fund (including options on debt
securities, options on futures contracts, options on securities indices and
options on currencies), will be governed by Section 1256 of the Code. Absent a
tax election to the contrary, gain or loss attributable to the lapse, exercise
or closing out of any such position generally will be treated as 60% long-term
and 40% short-term 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 the 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. The 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 the Fund to recognize gain (but not loss) from a constructive sale of
certain "appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that
becomes substantially worthless, the Fund will be required to recognize gain at
that time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain options, futures
and forward contracts, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
If the Fund invests in stock of certain foreign investment companies,
the Fund may be subject to U.S. federal income taxation on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the Fund's holding period for the stock. The distribution
or gain so allocated to any taxable year of the Fund, other than the taxable
year of the excess
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<PAGE>
distribution or disposition, would be taxed to the Fund at the highest ordinary
income rate in effect for such year, and the tax would be further increased by
an interest charge to reflect the value of the tax deferral deemed to have
resulted from the ownership of the foreign company's stock. Any amount of
distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may make an election to mark to market its shares of these
foreign investment companies in lieu of being subject to U.S. federal income
taxation. At the end of each taxable year to which the election applies, the
Fund would report as ordinary income the amount by which the fair market value
of the foreign company's stock exceeds the 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, the Fund may elect to include as
income and gain its share of the ordinary earnings and net capital gain of
certain foreign investment companies in lieu of being taxed in the manner
described above.
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.
The 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 the Fund is notified
by the IRS or a broker that the taxpayer identification number furnished by the
shareholder is incorrect or that the shareholder has previously failed to report
interest or dividend income. If the withholding provisions are applicable, any
such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. corporations, partnerships, trusts and estates. Each shareholder who is
not a U.S. person should consider the U.S. and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of 30% (or at a
lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations.
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<PAGE>
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and not all such information is used by the Adviser
in connection with the Fund. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Fund.
The Trustees review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
For the fiscal years ended December 31, 1999, 1998 and 1997, the Fund paid
brokerage commissions of $552,074, $130,158 and $85,249, respectively. In the
fiscal year ended December 31, 1999, the Fund paid $488,279 (88.44% 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
$1,188,271,246, of which 980,778,431 (82.54% of all brokerage transactions) were
transactions which included research commissions.
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<PAGE>
Portfolio Turnover
The Fund's average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. A higher rate
involves greater brokerage and transaction expenses to the Fund and may result
in the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for the Fund's portfolio whenever
necessary, in management's opinion, to meet the Fund's objective.
For the years ended December 31, 1999, 1998 and 1997, the portfolio
turnover rates for the Fund were 102%, 75% and 43%, respectively.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading
(the "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 is not possible to value a
particular debt security pursuant to the above methods, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
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If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial highlights of the Fund included in the Fund's prospectus
and the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, 160 Federal Street,
Boston, Massachusetts 02110, independent accountants, given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP
audits the financial statements of the Fund and provides other audit, tax, and
related services.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Fund's property or
the acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the Fund's property of any shareholder held
personally liable for the claims and liabilities 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 the Fund itself would be unable to meet its
obligations.
Other Information
The CUSIP number of the Fund is 811192-20-2.
The Fund has a fiscal year end of December 31.
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Fund. These transactions will reflect investment
decisions made by the Adviser in light of the 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 the Fund are held separately pursuant to a
custodian agreement by the Fund's custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02101.
The law firm of Dechert Price & Rhoads is counsel to the 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 the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents, shareholders nor other series of the
Trust assume any personal liability for obligations entered into on behalf of
the Fund. No other series of the Trust assumes any liabilities for obligations
entered into on behalf of the Fund. Upon the initial purchase of shares, the
shareholder agrees to be bound by the 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.
51
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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 the Fund. The Fund pays Scudder Fund
Accounting Corporation an annual fee equal to 0.025% of the first $150 million
of average daily net assets, 0.0075% of such assets in excess of $150 million
and 0.0045% of such assets in excess of $1 billion, plus holding and transaction
charges for this service.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Fund
incurred charges of $48,318, $58,918 and $84,694, respectively, of which $7,839
was unpaid on December 31, 1999.
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 the Fund. The Fund pays
Service Corporation an annual fee of $26.00 for each account maintained for a
participant. Pursuant to a services agreement with SSC, Kemper Service Company,
an affiliate of Scudder Kemper, may perform, from time to time, certain
transaction and shareholder servicing functions.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Fund
incurred charges of $269,472, $360,787 and $508,682, respectively, of which
$83,555 was unpaid on December 31, 1999.
The Fund, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are generally
held in an omnibus account.
Scudder Trust Company
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
the Fund. The Fund pays Scudder Trust Company an annual fee of $29.00 for each
account maintained for a participant.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Fund
incurred charges of $294,504, $496,988 and $1,601,215, respectively, of which
$481,644 was unpaid on December 31, 1999.
The Fund's prospectus and Statement of Additional Information omits
certain information contained in the Registration Statement and its amendments,
which the Fund has filed with the SEC under the Securities Act of 1933, and
reference is hereby made to the Registration Statement for further information
with respect to the Fund and the securities offered hereby. The Registration
Statement and its amendments are available for inspection by the public at the
SEC in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the Investment Portfolio of the
Fund, together with the Report of Independent Accountants, and Financial
Highlights, are incorporated by reference and attached hereto in the Annual
Report to Shareholders of the Fund dated December 31, 1999, and are deemed to be
a part of this Statement of Additional Information.
52
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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 Ratings Services:
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 Investor Services, Inc.:
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.
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Standard & Poor's Ratings Services 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 Ratings Services 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.
