SCUDDER CAPITAL GROWTH FUND
SCUDDER SMALL COMPANY STOCK FUND
Both funds seek to provide long-term capital growth
while actively seeking to reduce downside risk
compared with other similar funds
Each a series of Investment Trust
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STATEMENT OF ADDITIONAL INFORMATION
Dated July 17, 2000, As Revised August 23, 2000
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This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus for Scudder Capital Growth Fund and
Scudder Small Company Stock Fund dated July 17, 2000, as amended from time to
time, a copy of which may be obtained without charge by writing to Scudder
Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
The Annual Report to Shareholders of each Fund, dated September 30,
1999 and the unaudited Semi-Annual Report dated March 31, 2000 are incorporated
by reference and are hereby deemed to be part of this Statement of Additional
Information.
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TABLE OF CONTENTS
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THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.................................................................1
General Investment Objective and Policies............................................................1
Investments..........................................................................................3
Master/feeder Structure.............................................................................19
INVESTMENT RESTRICTIONS......................................................................................19
PURCHASES....................................................................................................21
Additional Information About Opening an Account.....................................................21
Additional Information About Making Subsequent Investments..........................................21
Minimum Balances....................................................................................21
Additional Information About Making Subsequent Investments By Quickbuy..............................22
Checks..............................................................................................23
Wire Transfer of Federal Funds......................................................................23
Share Price.........................................................................................23
Share Certificates..................................................................................23
Other Information...................................................................................23
EXCHANGES AND REDEMPTIONS....................................................................................24
Exchanges...........................................................................................24
Redemption By Telephone.............................................................................25
Redemption By Quicksell.............................................................................26
Redemption By Mail Or Fax...........................................................................26
Redemption-in-Kind..................................................................................26
Other Information...................................................................................27
FEATURES AND SERVICES OFFERED BY THE FUND....................................................................27
The No-Load Concept.................................................................................27
Internet Access.....................................................................................28
Dividends and Capital Gains Distribution Options....................................................28
Transaction Summaries...............................................................................28
THE SCUDDER FAMILY OF FUNDS..................................................................................29
SPECIAL PLAN ACCOUNTS........................................................................................32
Scudder Retirement Plans: Profit-Sharing and Money Purchase.........................................32
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and
Self-Employed Individuals......................................................................32
Scudder IRA: Individual Retirement Account..........................................................32
Scudder Roth IRA: Individual Retirement Account.....................................................33
Scudder 403(b) Plan.................................................................................33
Automatic Withdrawal Plan...........................................................................33
Group or Salary Deduction Plan......................................................................34
Automatic Investment Plan...........................................................................34
Uniform Transfers/Gifts to Minors Act...............................................................34
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS....................................................................34
PERFORMANCE INFORMATION......................................................................................35
Average Annual Total Return.........................................................................35
Cumulative Total Return.............................................................................36
Total Return........................................................................................37
Comparison of Fund Performance......................................................................37
FUND ORGANIZATION............................................................................................38
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TABLE OF CONTENTS (continued)
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INVESTMENT ADVISER...........................................................................................39
Investment Adviser..................................................................................39
AMA InvestmentLinkSM Program........................................................................42
Code of Ethics......................................................................................42
TRUSTEES AND OFFICERS........................................................................................42
REMUNERATION.................................................................................................44
Responsibilities of the Board -- Board and Committee Meetings.......................................44
Compensation of Officers and Trustees...............................................................44
DISTRIBUTOR..................................................................................................46
Administrative Fee..................................................................................46
TAXES........................................................................................................47
PORTFOLIO TRANSACTIONS.......................................................................................51
Brokerage Commissions...............................................................................51
Portfolio Turnover..................................................................................52
NET ASSET VALUE..............................................................................................52
ADDITIONAL INFORMATION.......................................................................................53
Experts.............................................................................................53
Other Information...................................................................................54
FINANCIAL STATEMENTS.........................................................................................55
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THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
Scudder Capital Growth Fund and Scudder Small Company Stock Fund (each
a "Fund," collectively, the "Funds") are each a no-load, diversified series of
Investment Trust (the "Trust"), an open-end management investment company which
continuously offers and redeems shares at net asset value. Each Fund is a
company of the type commonly known as a mutual fund and is advised by Scudder
Kemper Investments, Inc. (the "Adviser"). Each Fund offers two classes of
shares, Class S and Class AARP. On or about July 17, 2000, AARP Capital Growth
Fund and AARP Small Company Stock Fund were reorganized into a newly-formed
series of Investment Trust called Scudder Capital Growth Fund and Scudder Small
Company Stock Fund, respectively, and all outstanding shares of each fund were
redesignated as shares of Class AARP.
Except as otherwise indicated, each Fund's objective and policies are
not fundamental and may be changed without a shareholder vote. There can be no
assurance that either Fund will achieve its objective. If there is a change in a
Fund's investment objective, shareholders should consider whether that Fund
remains an appropriate investment in light of their then current financial
position and needs.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which a Fund may engage (such as
short selling, hedging, etc.) or a financial instrument which a Fund may
purchase (such as options, etc.) are meant to describe the spectrum of
investments that the Adviser, in its discretion, might, but is not required to,
use in managing a Fund's assets. The Adviser may, in its discretion, at any time
employ such practice, technique or instrument for one or more funds, but not for
all funds advised by it. Furthermore, it is possible that certain types of
financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of a Fund, but, to the extent employed, could from time
to time have a material impact on a Fund's performance.
General Investment Objective and Policies
Scudder Capital Growth Fund. The Fund is designed to provide long-term capital
growth while actively seeking to reduce downside risk compared with other growth
mutual funds. The Fund pursues this investment objective by investing at least
65% of total assets in equities, mainly common stocks of established medium- and
large-sized companies. Through a broadly diversified portfolio consisting
primarily of the securities of high quality, medium- to large-sized companies
with strong competitive positions in their industries and reasonable stock
market valuation the Fund seeks to offer less share price volatility than many
growth funds. Unlike many other diversified growth funds that typically may
invest up to 5% in any one company, the fund adheres to a more restrictive
policy that limits the majority of the portfolio to 3.5% of total assets in any
one issuer. It may also invest in rights to purchase common stocks, the growth
prospects of which are greater than most stocks but which may also have
above-average market risk. The Fund may also invest in preferred stocks
consistent with the Fund's objective. While most of the fund's investments are
common stocks, some may be other types of equities, such as convertible
securities and preferred stocks. The fund does not invest in securities issued
by tobacco-producing companies.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and companies of all sizes. In addition, since 1945, the overall
performance of common stocks has exceeded the rate of inflation. It is a
fundamental policy of the Fund, which may not be changed without approval of a
majority of the Fund's outstanding shares (see "Investment Restrictions",
herein, for majority voting requirements), that the Fund will not concentrate
its investments in any particular industry.
The Fund may invest up to 100% of its assets in high-quality money
market instruments (including U.S. Treasury bills, commercial paper,
certificates of deposit, and bankers' acceptances), repurchase agreements and
other debt securities for temporary defensive purposes when the Fund Manager
deems such a position advisable in light of economic or market conditions.
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The Fund may also invest in real estate investment trusts, futures
contracts, covered call options, options on stock indices, foreign securities,
and foreign currency exchange contracts.
Scudder Small Company Stock Fund. The Fund is designed to provide long-term
capital growth while actively seeking to reduce downside risk compared with
other small company stock funds. The Fund pursues this investment objective by
investing at least 65% of total assets in common stocks of small U.S. companies
with above-average long-term capital growth. The fund does not invest in
securities issued by tobacco-producing companies.
Under normal circumstances, the Fund may invest up to 5% of its assets
in certain short-term fixed income securities including high-quality money
market securities such as U.S. Treasury bills, repurchase agreements, commercial
paper, certificates of deposit issued by domestic and foreign branches of U.S.
banks and bankers' acceptances, although cash or cash equivalents are normally
expected to represent less than 1% of the Fund's assets. The Fund may invest up
to 20% of its assets in stock futures contracts and options in order to invest
uncommitted cash balances, to maintain liquidity to meet shareholder
redemptions, or to minimize trading costs.
The Fund may also invest in securities of other investment companies,
such as Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs typically trade
like a share of common stock and provide investment results that generally
correspond to the price and yield performance of the component common stocks of
the S&P 500 Composite Stock Index ("S&P 500 Index"). There can be no assurance
that this can be accomplished as it may not be possible for the trust to
replicate and maintain exactly the composition and relative weightings of the
component securities of the S&P 500 Index. SPDRs are subject to the risks of an
investment in a broadly based portfolio of common stocks, including the risk
that the general level of stock prices may decline, thereby adversely affecting
the value of such investment. SPDRs are also subject to risks other than those
associated with an investment in a broadly based portfolio of common stocks in
that the selection of the stocks included in the trust may affect trading in
SPDRs, as compared with trading in a broadly based portfolio of common stocks.
The Fund is neither sponsored by nor affiliated with Standard & Poor's.
In pursuing its objective of long-term capital growth, the Fund
normally remains substantially invested in the common stocks of small U.S.
companies. Using a quantitative investment approach developed by the Fund
Manager, the Fund focuses on equity securities of companies with market
capitalization below $2 billion and that the Fund Manager believes are
undervalued relative to the stocks in Russell 2000 Index(R). The Russell 2000
Index(R) is a widely used measure of small stock performance. The Fund will sell
securities of companies that have grown in market capitalization above this
level as necessary to keep the Fund focused on small companies.
The Fund takes a diversified approach to investing. It generally limits
the majority of the portfolio to no more than 2% of its total assets in any one
issuer and typically invests in over 150 securities, representing a variety of
U.S. industries.
While the Fund invests predominantly in common stocks, it can purchase
other types of equity securities including preferred stocks (either convertible
or non-convertible), rights and warrants. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and may make use of financial futures contracts and
related options. The Fund may purchase and sell options or futures on stock
indices for hedging purposes as a temporary investment to accommodate cash
flows. The Fund may also invest in reverse repurchase agreements, real estate
investment trusts, covered call options, foreign securities, and foreign
currency exchange contracts.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
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Investments
Investment Company Securities. Each Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. Each Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies. For example, each Fund may invest in a variety of
investment companies which seek to track the composition and performance of
specific indexes or a specific portion of an index. These index-based
investments hold substantially all of their assets in securities representing
their specific index. Accordingly, the main risk of investing in index-based
investments is the same as investing in a portfolio of equity securities
comprising the index. The market prices of index-based investments will
fluctuate in accordance with both changes in the market value of their
underlying portfolio securities and due to supply and demand for the instruments
on the exchanges on which they are traded (which may result in their trading at
a discount or premium to their NAVs). Index-based investments may not replicate
exactly the performance of their specified index because of transaction costs
and because of the temporary unavailability of certain component securities of
the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDSSM: DIAMONDS are based on the Dow Jones Industrial AverageSM. They are
issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio of
all the component common stocks of the Dow Jones Industrial Average and seeks to
closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBsSM: WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Dollar Roll Transactions. Dollar roll transactions consist of the sale by a Fund
to a bank or broker/dealers (the "counterparty") of GNMA certificates or other
mortgage-backed securities together with a commitment to purchase from the
counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The Funds
receive a fee from the counterparty as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed over a period of several
months with a different purchase and repurchase price fixed and a cash
settlement made at each
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renewal without physical delivery of securities. Moreover, the transaction may
be preceded by a firm commitment agreement pursuant to which the Funds agree to
buy a security on a future date.
The Funds will not use dollar rolls for leveraging purposes and,
accordingly, will segregate cash, U.S. Government securities or other liquid
assets in an amount sufficient to meet their purchase obligations under the
transactions. Each Fund will also maintain asset coverage of at least 300% for
all outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the 1940 Act as borrowings of
the Funds because they involve the sale of a security coupled with an agreement
to repurchase. Like all borrowings, a dollar roll involves costs to the Funds.
For example, while the Funds receive a fee as consideration for agreeing to
repurchase the security, the Funds forgo the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Funds, thereby effectively
charging the Funds interest on their borrowing. Further, although the Funds can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of each Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Funds' right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Funds are able to purchase them.
Similarly, the Funds may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Funds, the security that the Funds
are required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Funds' use of the cash
that they receive from a dollar roll will provide a return that exceeds
borrowing costs.
U.S. Government Securities. U.S. Treasury securities, backed by the full faith
and credit of the U.S. Government, include a variety of securities which differ
in their interest rates, maturities and times of issuance. Treasury bills have
original maturities of one year or less. Treasury notes have original maturities
of one to ten years and Treasury bonds generally have original maturities of
greater than ten years.
U.S. Government agencies and instrumentalities which issue or guarantee
securities include, for example, the Export-Import Bank of the United States,
the Farmers Home Administration, the Federal Home Loan Mortgage Corporation, the
Fannie Mae, the Small Business Administration and the Federal Farm Credit Bank.
Obligations of some of these agencies and instrumentalities, such as the
Export-Import Bank, are supported by the full faith and credit of the United
States; others, such as the securities of the Federal Home Loan Bank, by the
ability of the issuer to borrow from the Treasury; while still others, such as
the securities of the Federal Farm Credit Bank, are supported only by the credit
of the issuer. No assurance can be given that the U.S. Government would provide
financial support to the latter group of U.S. Government instrumentalities, as
it is not obligated to do so.
Interest rates on U.S. Government obligations which the Funds may
purchase may be fixed or variable. Interest rates on variable rate obligations
are adjusted at regular intervals, at least annually, according to a formula
reflecting the current specified standard rates, such as 91-day U.S. Treasury
bill rates. These adjustments tend to reduce fluctuations in the market value of
the securities.
Municipal Obligations. Municipal obligations are issued by or on behalf of
states, territories and possessions of the United States 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."
Municipal notes are generally used to provide for short-term capital needs and
generally have maturities of one year or less. Municipal notes include Tax
Anticipation Notes; Revenue Anticipation Notes; Bond Anticipation Notes; and
Construction Loan Notes.
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Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
seasonal revenue such as income, sales, use and business taxes. Bond
Anticipation Notes are sold to provide interim financing and Construction Loan
Notes are sold to provide construction financing. These notes are generally
issued in anticipation of long-term financing in the market. In most cases,
these monies provide for the repayment of the notes. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the FHA under Fannie Mae or GNMA. There are, of course, a number of
other types of notes issued for different purposes and secured differently than
those described above.
Municipal bonds, which meet longer-term capital needs and generally
have maturities of more than one year when issued, have two principal
classifications: "general obligation" bonds and "revenue" bonds.
Issuers of general obligation bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully-insured, rent-subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt reserve fund.
Lease rental bonds issued by a state or local authority for capital projects are
secured by annual lease rental payments from the state or locality to the
authority sufficient to cover debt service on the authority's obligations.
Some issues of municipal bonds are payable from United States Treasury
bonds and notes held in escrow by a Trustee, frequently a commercial bank. The
interest and principal on these U.S. Government securities are sufficient to pay
all interest and principal requirements of the municipal securities when due.
Some escrowed Treasury securities are used to retire municipal bonds at their
earliest call date, while others are used to retire municipal bonds at their
maturity.
Private activity bonds, although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the municipal authority derived from payments
by an industrial or other non-governmental user.
Securities purchased for either Fund may include variable/floating rate
instruments, variable mode instruments, put bonds, and other obligations which
have a specified maturity date but also are payable before maturity after notice
by the holder ("demand obligations"). Demand obligations are considered for the
Funds' purposes to mature at the demand date.
There are, in addition, a variety of hybrid and special types of
municipal obligations as well as numerous differences in the security of
municipal obligations both within and between the two principal classifications
(i.e., notes and bonds) discussed above.
An entire issue of municipal securities may be purchased by one or a
small number of institutional investors such as the Funds. Thus, such an issue
may not be said to be publicly offered. Unlike the equity securities of
operating
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companies or mutual funds which must be registered under the Securities Act of
1933 prior to offer and sale unless an exemption from such registration is
available, municipal securities, whether publicly or privately offered municipal
securities, may nevertheless be readily marketable. A secondary market exists
for municipal securities which have publicly offered as well as securities which
have not been publicly offered initially but which may nevertheless be readily
marketable. Municipal securities purchased for a Fund are subject to the
limitations on holdings of securities which are not readily marketable based on
whether it may be sold in a reasonable time consistent with the customs of the
municipal markets (usually seven days) at a price (or interest rate) which
accurately reflects its recorded value. The Funds believe that the quality
standards applicable to their investments enhance marketability. In addition,
stand-by commitments, participation interests and demand obligations also
enhance marketability.
For the purpose of the Funds' investment restrictions, the
identification of the "issuer" of municipal obligations which are not general
obligation bonds is made by the Fund Manager on the basis of the characteristics
of the obligation as described above, the most significant of which is the
source of funds for the payment of principal and interest on such obligations.
Trust Preferred Securities. Trust Preferred Securities are hybrid instruments
issued by a special purpose trust (the "Special Trust"), the entire equity
interest of which is owned by a single issuer. The proceeds of the issuance to
the Funds of Trust Preferred Securities are typically used to purchase a junior
subordinated debenture, and distributions from the Special Trust are funded by
the payments of principal and interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by
the Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount obligations for the remainder of their term.
As a result, holders of Trust Preferred Securities, such as the Funds, would be
required to accrue daily for federal income tax purposes their share of the
stated interest and the de minimis original issue discount on the debentures
(regardless of whether the Funds receive any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Funds, to sell their holdings.
Tax-exempt custodial receipts. Tax-exempt custodial receipts (the "Receipts")
evidence ownership in an underlying bond that is deposited with a custodian for
safekeeping. Holders of the Receipts receive all payments of principal and
interest when paid on the bonds. Receipts can be purchased in an offering or
from a financial counterparty (typically an investment bank). To the extent that
any Receipt is illiquid, it is subject to the Fund's limit on illiquid
securities.
Municipal Lease Obligations and Participation Interests. Participation interests
represent undivided interests in municipal leases, installment purchase
contracts, conditional sales contracts or other instruments. These are typically
issued by a Trust or other entity which has received an assignment of the
payments to be made by the state or political subdivision under such leases or
contracts.
A Fund may purchase from banks participation interests in all or part
of specific holdings of municipal obligations, provided the participation
interest is fully insured. Each participation is backed by an irrevocable letter
of credit or guarantee of the selling bank that the Fund Manager has determined
meets the prescribed quality standards of the Fund. Therefore either the credit
of the issuer of the municipal obligation or the selling bank, or both, will
meet the quality standards of the particular Fund. Each Fund has the right to
sell the participation back to the bank after seven days' notice for the full
principal amount of the Fund's interest in the municipal obligation plus accrued
interest, but only (i) as required to provide liquidity to the Fund, (ii) to
maintain a high quality investment portfolio or (iii) upon a default under the
terms of the municipal obligation. The selling bank will receive a fee from the
Fund in connection
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with the arrangement. Neither Fund will purchase participation interests unless
it receives an opinion of counsel or a ruling of the Internal Revenue Service
satisfactory to the Trustees that interest earned by that Fund on municipal
obligations on which it holds participation interests is exempt from federal
income tax.
A municipal lease obligation may take the form of a lease, installment
purchase contract or conditional sales contract which is issued by a state or
local government and authorities to acquire land, equipment and facilities.
Income from such obligations is generally exempt from state and local taxes in
the state of issuance. Municipal lease obligations frequently involve special
risks not normally associated with general obligations or revenue bonds. Leases
and installment purchase or conditional sale contracts (which normally provide
for title in the leased asset to pass eventually to the governmental issuer)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt issuance limitations are deemed to be inapplicable
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
property in the event of nonappropriation or foreclosure might prove difficult,
time consuming and costly, and result in a delay in recovery or the failure to
fully recover a Fund's original investment.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Fund Manager to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Fund Manager will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Fund Manager will consider factors unique to particular lease
obligations and participation interests affecting the marketability thereof.
These include the general creditworthiness of the issuer, the importance to the
issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by a Fund.
A Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide a Fund with the right to a pro rata undivided interest in
the underlying municipal lease obligations. In addition, such participations
generally provide a Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of such Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. Each Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Fund Manager,
the interest from such participations is exempt from regular federal income tax
and state income tax for each state specific fund.
Repurchase Agreements. Each of the Funds may enter into repurchase agreements
with any member bank of the Federal Reserve System and any broker-dealers which
are recognized as a reporting government securities dealer, whose
creditworthiness has been determined by the Fund Manager to be at least equal to
that of issuers of commercial paper rated within the two highest grades assigned
by any of the nationally-recognized rating agencies including Moody's and S&P. A
repurchase agreement, which provides a means for a Fund to earn income on monies
for periods as short as overnight, is an arrangement under which the purchaser
(i.e., the Fund) acquires a security ("Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price.
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 at the time of repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the Obligation
itself. For purposes of the Investment Company Act of 1940, as amended ("1940
Act") a repurchase agreement is deemed to be a loan to the seller of the
Obligation and is therefore covered by each Fund's investment restriction
applicable to loans. Each repurchase agreement entered into by a Fund requires
that if the market value of the Obligation becomes less than the repurchase
price (including interest), a Fund will direct the seller of the Obligation, on
a daily basis to deliver additional securities so that the market value of all
securities subject
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to the repurchase agreement will equal or exceed the repurchase price. In the
event that a Fund is unsuccessful in seeking to enforce the contractual
obligation to deliver additional securities, and the seller defaults on its
obligation to repurchase, the Fund bears the risk of any drop in market value of
the Obligation(s). In the event that bankruptcy or insolvency proceedings were
commenced with respect to a bank or broker-dealer before its repurchase of the
Obligation, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in price of the
Obligation. In the case of repurchase agreements, it is not clear whether a
court would consider a repurchase agreement as being owned by the particular
Fund or as being collateral for a loan by the Fund. If a court were to
characterize the transaction as a loan and the Fund had not perfected a security
interest in the Obligation, the Fund could be required to return the Obligation
to the bank's estate and be treated as an unsecured creditor. As an unsecured
creditor, the Fund would be at the risk of losing some or all of the principal
and income involved in that transaction. The Fund Manager seeks to minimize the
risk of loss through repurchase agreements by analyzing the creditworthiness of
the obligor, in this case the seller of the Obligations.
Securities subject to a repurchase agreement are held in a segregated
account, and the amount of such securities is adjusted so as to provide a market
value at least equal to the repurchase price on a daily basis.
Reverse Repurchase Agreements. Scudder Small Company Stock 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 such securities
at an agreed time and price. The Fund maintains a segregated account in
connection with outstanding reverse repurchase agreements. Reverse repurchase
agreements are deemed to be borrowings subject to the Fund's investment
restrictions on borrowing. The Fund will enter into reverse repurchase
agreements only when the Adviser Investment Manager believes that the interest
income to be earned from the investment of the proceeds of the transaction will
be greater than the interest expense of the transaction. Such transaction may
increase fluctuations in the market value of Fund assets and its yield.
Real Estate Investment Trusts. Real estate investment trusts ("REITs") are
sometimes informally characterized as equity REITs, mortgage REITs and hybrid
REITs. Investment in REITs may subject the Fund to risks associated with the
direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of
the Fund's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986, as amended and to maintain exemption from the 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. Mortgage-backed
securities 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.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and may 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
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of the mortgage-backed securities held by the Fund may not appreciate as rapidly
as the price of non-callable debt securities. Mortgage-backed securities are
subject to the risk or prepayment and the risk that the underlying loans will
not be repaid. Because principal may be prepaid at any time, mortgage-backed
securities may involve significantly greater price and yield volatility than
traditional debt securities.
When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of a mortgage-related security and increasing the
price volatility of that security, affecting the price volatility of the Fund's
shares.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Because principal may be prepaid at any
time, mortgage-backed securities may involve significantly greater price and
yield volatility than traditional debt securities. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association ("GNMA") are described as "modified pass-through." These securities
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment dates regardless of
whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the 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 Fund 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 Fannie Mae and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Fannie Mae is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general regulation by
the Secretary of Housing and Urban Development. Fannie Mae 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 and credit unions and mortgage bankers. Pass-through securities
issued by Fannie Mae are guaranteed as to timely payment of principal and
interest by Fannie Mae but are not backed by the full faith and credit of the
U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related
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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 Fund Manager 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"). CMOs are hybrids between
mortgage-backed bonds and mortgage pass-through securities. 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
Fannie Mae, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also 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.
Zero Coupon Securities. Zero coupon securities pay no cash income and are sold
at substantial discounts from their value at maturity. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
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 securities which are convertible
into common stock offer the opportunity for capital appreciation as increases
(or decreases) in market value of such securities closely follow the movements
in the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks, as they usually are issued with maturities of 15 years or less and are
issued with options and/or redemption features exercisable by the holder of the
obligation entitling the holder to redeem the obligation and receive a defined
cash payment.
Zero coupon securities include municipal securities, 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, 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(TM)) and Certificate of Accrual on Treasuries
(CATS(TM)). 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 have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Funds, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Funds understand that the staff of the SEC no longer considers
such privately stripped obligations to be
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U.S. Government securities, as defined in the Investment Company Act of 1940;
therefore, the Funds intend to adhere to this staff position and will not treat
such privately stripped obligations to be U.S. Government securities for the
purpose of determining if the Funds are "diversified" under the 1940 Act.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such 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" herein).
Loans of Portfolio Securities. Mutual funds may lend their portfolio securities
provided: (1) the loan is secured continuously by collateral consisting of U.S.
Government securities or cash or cash equivalents adjusted daily to have a
market value at least equal to the current market value of the securities
loaned; (2) the Fund may at any time call the loan and regain the securities
loaned; (3) the Fund will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund, unless otherwise
restricted by each Fund's policies (see "Investment Restrictions" on page 18).
In addition, many mutual funds share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium for
the loan. In determining whether to lend securities, a mutual fund's investment
adviser considers all relevant factors and circumstances including the
creditworthiness of the borrower. The Funds have no current intention of lending
their portfolio securities, except to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in indebtedness in
accordance with a Fund's investment objectives and policies may be deemed to be
loans.
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts. Such strategies are generally accepted as a part of modern portfolio
management and are regularly utilized by many other mutual funds and other
institutional investors.
In the course of pursuing these investment strategies, each Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limitations imposed by the 1940 Act) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect a Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in a Fund's portfolio, or to establish a position in the derivatives
markets as a substitute for purchasing or selling particular securities. Some
Strategic Transactions may also be used to enhance potential gain although no
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,
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and there is no particular strategy that dictates the use of one technique
rather than another, as use of any Strategic Transaction is a function of
numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. Each
Fund will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of a Fund, and a
Fund will segregate assets (or as provided by applicable regulations, enter into
certain offsetting positions) to cover its obligations under options, futures
and swaps to limit leveraging of 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 a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of a Fund's assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. Each Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Each Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the
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value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised. Frequently, rather than taking or making delivery
of the underlying instrument through the process of exercising the option,
listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
Each Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. Each
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting a Fund to require the Counterparty to
sell the option back to a Fund at a formula price within seven days. Each Fund
expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. Each Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Adviser. The staff of the
SEC currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing no
more than 15% of its net assets in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-
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counter markets, and on securities indices, currencies and futures contracts.
All calls sold by a Fund must be "covered" (i.e., a Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though a
Fund will receive the option premium to help protect it against loss, a call
sold by a Fund exposes a Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require a Fund to hold a security or instrument
which it might otherwise have sold.
Each Fund may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. Each Fund will not sell put options if, as a result, more
than 50% of a Fund's total assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that a
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
General Characteristics of Futures. Each Fund may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
Each Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires a Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of a Fund. If a Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
Each Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of a Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the
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option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
Currency Transactions. Each Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of,
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. Each Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of a Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
Each Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
Each Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which a Fund has or in which a Fund expects to
have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, each Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of a Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Adviser believes that
the value of schillings will decline against the U.S. dollar, the Adviser may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, a Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
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planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. Each Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. Each Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream a Fund may be
obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
Each Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as a 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. Each Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, a Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. Each Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate
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("LIBOR"), although foreign currency-denominated instruments are available from
time to time. Eurodollar futures contracts enable purchasers to obtain a fixed
rate for the lending of funds and sellers to obtain a fixed rate for borrowings.
Each Fund might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed income
instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that a Fund segregate cash or liquid
assets with its custodian to the extent a Fund's obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a Fund to pay
or deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by a Fund will require 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 a 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 a Fund requires the Fund to segregate cash or liquid assets
equal to the exercise price.
Except when a Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a Fund to buy or sell currency
will generally require a Fund to hold an amount of that currency or liquid
assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of a Fund's obligation.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by a Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when a Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, 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 a Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and, in connection with such
options, a Fund will segregate an amount of cash or liquid assets equal to the
full value of the option. OTC options settling with physical delivery, or with
an election of either physical delivery or cash settlement will be treated the
same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such assets may consist of cash or liquid
assets.
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With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, if a Fund held a futures or forward contract instead
of segregating cash or liquid assets, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Convertible Securities. Convertible securities include convertible bonds, notes
and debentures, convertible preferred stocks, and other securities that give the
holder the right to exchange the security for a specific number of shares of
common stock. Convertible securities entail less credit risk than the issuer's
common stock because they are considered to be "senior" to common stock.
Convertible securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar quality. They may also reflect
changes in value of the underlying common stock.
Foreign Securities. The Funds may invest without limit in foreign securities.
Investors should recognize that investing in foreign securities involves certain
special considerations, including those set forth below, which are not typically
associated with investing in United States securities and which may favorably or
unfavorably affect the Funds' performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the United States and, at times,
volatility of price can be greater than in the United States. Fixed commissions
on some foreign securities exchanges and bid to asked spreads in foreign bond
markets are generally higher than commissions on bid to asked spreads on U.S.
markets, although the Funds will endeavor to achieve the most favorable net
results on their portfolio transactions. There is generally less governmental
supervision and regulation of securities exchanges, brokers and listed companies
in most foreign countries than in the U.S. It may be more difficult for the
Funds' agents to keep currently informed about corporate actions which may
affect the prices of portfolio securities. Communications between the United
States and foreign countries may be less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Payment for securities without
delivery may be required in certain foreign markets. In addition, with respect
to certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect United States 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 United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, to the
extent investments in foreign securities involve currencies of foreign
countries, the Funds may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversion between currencies.
Investments in companies domiciled in developing countries may be
subject to potentially greater risks than investments in developed countries.
The possibility of revolution and the dependence on foreign economic assistance
may be greater in these countries than in developed countries. The management of
each Fund seeks to mitigate the risks associated with these considerations
through diversification and active professional management.
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Master/feeder Structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for each Fund while investing in a master fund in a
master/feeder structure fund as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program. Each Fund has received exemptive relief
from the SEC which permits each Fund to participate in an interfund lending
program among certain investment companies advised by the Adviser. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent a Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging), except that the Fund may engage in reverse repurchase
agreements and dollar rolls for any purpose.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed with respect to a Fund
without the approval of a majority of the outstanding voting securities of such
Fund which, under the 1940 Act and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (i) 67% of the shares
of such Fund present at a meeting if the holders of more than 50% of the
outstanding shares of such Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of such Fund.
Each Fund has elected to be classified as a diversified series of an
open-end, management investment company.
In addition, as a matter of fundamental policy, each Fund will
not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(3) purchase physical commodities or contracts relating to
physical commodities;
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(4) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(5) 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;
(6) 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; and
(7) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
The Trustees of the Trust have voluntarily adopted certain policies and
restrictions, which are observed in the conduct of each Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of shareholders.
As a matter of nonfundamental policy, each Fund currently does not
intend to:
(a) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(b) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(c) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(d) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(e) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(f) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(g) lend portfolio securities in an amount greater than 5% of its
total assets.
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The foregoing nonfundamental policies are in addition to policies
otherwise stated in the Prospectus or Statement of Additional Information.
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, a Fund.
PURCHASES
Additional Information About Opening an Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Class S
and $1,000 for Class AARP through Scudder Investor Services, Inc. by letter,
fax, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have certified a tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. Investors interested in investing in
Class S must call 1-800-SCUDDER to get an account number. During the call the
investor will be asked to indicate the Fund name, class name, amount to be wired
($2,500 minimum for Class S and $1,000 for Class AARP), name of bank or trust
company from which the wire will be sent, the exact registration of the new
account, the tax identification number or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, Boston, MA 02101, ABA Number 011000028, DDA
Account 9903-5552. The investor must give the Scudder fund name, class name,
account name and the new account number. Finally, the investor must send a
completed and signed application to the Fund promptly. Investors interested in
investing in Class AARP should call 800-253-2277 for further instructions.
The minimum initial purchase amount is less than $2,500 for Class S
under certain plan accounts and is $1,000 for Class AARP.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Contact the Distributor at 1-800-SCUDDER for additional
information. A confirmation of the purchase will be mailed out promptly
following receipt of a request to buy. Federal regulations require that payment
be received within three business days. If payment is not received within that
time, the order is subject to cancellation. In the event of such cancellation or
cancellation at the purchaser's request, the purchaser will be responsible for
any loss incurred by the Fund or the principal underwriter by reason of such
cancellation. If the purchaser is a shareholder, 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.
Minimum Balances
Shareholders should maintain a share balance worth at least $2,500 for
Class S and $1,000 for Class AARP. For fiduciary accounts such as IRAs, and
custodial accounts such as Uniform Gift to Minor Act, and Uniform Trust to Minor
Act accounts, the minimum balance is $1,000 for Class S and $500 for Class AARP.
These amounts may be
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changed by the Board of Trustees. A shareholder may open an account with at
least $1,000 ($500 for fiduciary/custodial accounts), if an automatic investment
plan (AIP) of $100/month ($50/month for Class AARP and fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Funds reserve the right, following 60 days' written notice to
applicable shareholders, to:
o for Class S assess an annual $10 per Fund charge (with the Fee
to be paid to the Fund) for any non-fiduciary/non-custodial
account without an automatic investment plan (AIP) in place
and a balance of less than $2,500 for Class S shareholders;
and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange
or transfer out of the account. The Fund will mail the
proceeds of the redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days written notice to applicable shareholders.
Additional Information About Making Subsequent Investments By Quickbuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of a Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, a Fund may hold the
redemption proceeds for a period of up to seven business days. If you purchase
shares and there are insufficient funds in your bank account the purchase will
be canceled and you will be subject to any losses or fees incurred in the
transaction. QuickBuy transactions are not available for most retirement plan
accounts. However, QuickBuy transactions are available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing an QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 15 days for this service to be available.
Each Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine and to discourage fraud. To the extent
that the Funds do not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
Investors interested in making subsequent investments in Class AARP
should call 800-253-2277 or 1-800-SCUDDER for Class S for further instruction.
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Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser may be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of a Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
per share next computed after receipt of the application in good order. Net
asset value normally will be computed for each class as of the close of regular
trading on each day during which the Exchange is open for trading. Orders
received after the close of regular trading on the Exchange will be executed at
the next business day's net asset value. If the order has been placed by a
member of the NASD, other than the Distributor, it is the responsibility of that
member broker, rather than a Fund, to forward the purchase order to Scudder
Service Corporation (the "Transfer Agent") in Boston by the close of regular
trading on the Exchange.
There is no sales charge in connection with the purchase of shares of
any class of the Funds.
Share Certificates
Due to the desire of the Trustee's management to afford ease of
redemption, certificates will not be issued to indicate ownership in a Fund.
Share certificates now in a shareholder's possession may be sent to a Fund's
Transfer Agent for cancellation and credit to such shareholder's account.
Shareholders who prefer may hold the certificates in their possession until they
wish to exchange or redeem such shares.
Other Information
Each Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for its shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on a Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a Fund and the
broker, ordinarily orders will be priced at a Fund's net asset value next
computed after acceptance by such brokers or
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their authorized designees. Further, if purchases or redemptions of a Fund's
shares are arranged and settlement is made at an investor's election through any
other authorized NASD member, that member may, at its discretion, charge a fee
for that service. The Board of Trustees and the Distributor, also a Fund's
principal underwriter, each has the right to limit the amount of purchases by,
and to refuse to sell to, any person. The Trustees and the Distributor may
suspend or terminate the offering of shares of a Fund at any time for any
reason.
The "Tax Identification Number" section of the Application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations a certification of exempt status), will be
returned to the investor. The Funds reserve the right, following 30 days'
notice, to redeem all shares in accounts without a correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
redemption by providing the Fund with a tax identification number during the
30-day notice period.
The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder Fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500 for Class S and
$1,000 for Class AARP. When an exchange represents an additional investment into
an existing account, the account receiving the exchange proceeds must have
identical registration, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more for Class S.
If the account receiving the exchange proceeds is to be different in any
respect, the exchange request must be in writing and must contain an original
signature guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
An exchange into another Scudder fund is a redemption of shares and therefore
may result in tax consequences (gain or loss) to the shareholder, and the
proceeds of such an exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Funds employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that a Fund does not follow such
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<PAGE>
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. A Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Funds
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder Funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated. The exchange
privilege may not be available for certain Scudder Funds or classes of Scudder
Funds. For more information, please call 1-800-SCUDDER (for Class S) or
1-800-253-2277 (Class AARP).
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption By Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may also request by telephone to have
the proceeds mailed or wired to their predesignated bank account. In order to
request wire redemptions by telephone, shareholders must have completed and
returned to the Transfer Agent the application, including the designation of a
bank account to which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish the telephone redemption
privilege must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder pension and profit-sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form
(available upon request), or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for a redemption to a shareholder's bank account is made
by telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Funds employs procedure, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A Fund will not be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
Redemption requests by telephone (technically a repurchase agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
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Redemption By Quicksell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of a Fund by telephone. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4 p.m. Eastern time, Shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing the following business day. QuickSell
transactions are not available for Scudder IRA accounts and most other
retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A Fund will not be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
Redemption By Mail Or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays of more
than seven (7) days of payment for shares tendered for repurchase or redemption
may result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information call 1-800-SCUDDER.
Redemption-in-Kind
The Funds reserve the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
each Fund and valued as they are for purposes of computing each Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. The
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Funds are obligated to redeem shares, with respect to any
one shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of that Fund at the beginning of the
period.
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Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. A wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including redemptions undertaken to effect an exchange for
shares of another Scudder fund, may result in tax consequences (gain or loss) to
the shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefore may be
suspended at times during which (a) the Exchange is closed, other than customary
weekend and holiday closings, (b) trading on the Exchange is restricted for any
reason, (c) an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
the SEC has by order permitted such a suspension for the protection of the
Trust's shareholders, provided that applicable rules and regulations of the SEC
(or any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b) or (c) exist.
FEATURES AND SERVICES OFFERED BY THE FUND
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish Scudder funds and classes from other no-load funds. Scudder
pioneered the no-load concept when it created the nation's first no-load fund in
1928, and later developed the nation's first family of no-load mutual funds.
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Internet Access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for Class AARP of shares is aarp.scudder.com. These sites offer
guidance on global investing and developing strategies to help meet financial
goals and provide access to the Scudder investor relations department via
e-mail. The sites also enable users to access or view fund prospectuses and
profiles with links between summary information in Profiles and details in the
Prospectus. Users can fill out new account forms on-line, order free software,
and request literature on funds.
Account Access -- The Adviser is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web sites. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional Shares of a Fund. A change of instructions for the method of
payment may be given to the Transfer Agent in writing at least five days prior
to a dividend record date. Shareholders may change their dividend option by
calling 1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP or by
sending written instructions to the Transfer Agent. Please include your account
number with your written request.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the same class of the Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's Direct
Distributions Program. Shareholders who elect to participate in the Direct
Distributions Program, and whose predesignated checking account of record is
with a member bank of Automated Clearing House Network (ACH) can have income and
capital gain distributions automatically deposited to their personal bank
account usually within three business days after a Fund pays its distribution. A
Direct Distributions request form can be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277 for Class AARP. Confirmation Statements will be
mailed to shareholders as notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-SCUDDER for
Class S and 1-800-253-2277 for Class AARP.
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THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds; a list of Scudder's
family of funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
TAX FREE
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Limited Term Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
--------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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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 S&P 500 Index 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
--------
** Only the Scudder Shares are part of the Scudder Family of Funds.
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GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund***
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Fund
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890 for Class S shares or 1-800-253-2277 for Class
AARP shares.
Certain Scudder funds or classes thereof may not be available for
purchase or exchange. For more information, please call 1-800-SCUDDER.
--------
*** Only the International Shares are part of the Scudder Family of Funds.
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SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of a Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by a Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Shares of a Fund may be purchased as the investment medium under a plan
in the form of a Scudder Profit-Sharing Plan (including a version of the Plan
which includes a cash-or-deferred feature) or a Scudder Money Purchase Pension
Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and
Self-Employed Individuals
Shares of a Fund may be purchased as the investment medium under a plan
in the form of a Scudder 401(k) Plan adopted by a corporation, a self-employed
individual or a group of self-employed individuals (including sole proprietors
and partnerships), or other qualifying organization. This plan has been approved
as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of a Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
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<PAGE>
Scudder Roth IRA: Individual Retirement Account
Shares of a Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of a Fund may also be purchased as the underlying investment for
tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional Shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s). Any
such requests must be received by a Fund's transfer agent ten days prior to the
date of the first automatic withdrawal. An Automatic Withdrawal Plan may be
terminated at any time by the shareholder, the Trust or its agent on written
notice, and will be terminated when all Shares of a Fund under the Plan have
been liquidated or upon receipt by the Trust of notice of death of the
shareholder.
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An Automatic Withdrawal Plan request form can be obtained by calling
1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments in all classes
through automatic deductions from checking accounts by completing the
appropriate form and providing the necessary documentation to establish this
service. The minimum investment is $50 for Class R and Class S shares.
Shareholders may arrange to make periodic investments in Class AARP of
each Fund through automatic deductions from checking accounts. The minimum
pre-authorized investment amount is $50. New shareholders who open a Gift to
Minors Account pursuant to the Uniform Gift to Minors Act (UGMA) and the Uniform
Transfer to Minors Act (UTMA) and who sign up for the Automatic Investment Plan
will be able to open a Fund account for less than $500 if they agree to increase
their investment to $500 within a 10 month period. Investors may also invest in
any Class AARP for $500 a month if they establish a plan with a minimum
automatic investment of at least $100 per month. This feature is only available
to Gifts to Minors Account investors. The Automatic Investment Plan may be
discontinued at any time without prior notice to a shareholder if any debit from
their bank is not paid, or by written notice to the shareholder at least thirty
days prior to the next scheduled payment to the Automatic Investment Plan.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
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.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each Fund intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Funds
may
34
<PAGE>
follow the practice of distributing the entire excess of net realized long-term
capital gains over net realized short-term capital losses. However, a Fund may
retain all or part of such gain for reinvestment after paying the related
federal income taxes for which the shareholders may then be asked to claim a
credit against their federal income tax liability. (See "TAXES.") If a Fund does
not distribute 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.")
Earnings and profits distributed to shareholders on redemptions of Fund
shares may be utilized by the Fund, to the extent permissible, as part of the
Fund's dividends paid deduction on its federal tax return.
The Funds intend to distribute dividends from their net investment
income annually in December. The Funds intend to distribute net realized capital
gains after utilization of capital loss carryforwards, if any, in November or
December to prevent application of a federal excise tax. An additional
distribution may be made, if necessary.
Both types of distributions will be made in shares of a Fund and
confirmations will be mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check will be sent. Distributions of
investment company taxable income and net realized capital gains are taxable
(See "TAXES"), whether made in shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year a Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
From time to time, quotations of each Fund's performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures will be calculated in the
following manner for each Fund:
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of
return for the periods of one year and the life of a Fund, ended on the last day
of a recent calendar quarter. Average annual total return quotations reflect
changes in the price of a Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment over such periods,
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the
value, at the end of the applicable
period, of a hypothetical $1,000
investment made at the beginning of the
applicable period.
Average Annual Total Returns for the Period Ended March 31, 2000
35
<PAGE>
<TABLE>
<CAPTION>
Total Return
------------
Six Months One Year Five Years Ten Years
Ended Ended Ended Ended
03/31/00 03/31/00 03/31/00 03/31/00
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Class AARP of Scudder Capital Growth Fund * 28.25 33.74 28.12 17.80
Class AARP of Scudder Small Company Stock Fund *+ -0.22 9.04 N/A N/A
</TABLE>
* On July 17, 2000, the funds were reorganized from AARP Growth Trust
into two newly created series of Investment Trust. The performance of
Class AARP in the bar chart and table reflects performance from when
the funds were AARP Capital Growth Fund and AARP Small Company Stock
Fund, each a series of AARP Growth Trust.
+ AARP Small Company Stock Fund commenced operations on February 1, 1997
and, as of March 31, 2000, had life of fund annual total returns of
9.04%.
Note: If the Adviser had not maintained expenses, the total returns
would have been lower.
As described above, average annual total return is based on historical
earnings and is not intended to indicate future performance. Average annual
total return for a Fund will vary based on changes in market conditions and the
level of the Fund's and class' expenses.
In connection with communicating its average annual total return to
current or prospective shareholders, a Fund also may compare these figures to
the performance of other mutual funds tracked by mutual fund rating services or
to unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative Total Return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
Total Return quotations reflect changes in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative Total Return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (Cumulative Total Return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the
value, at the end of the applicable
period, of a hypothetical $1,000
investment made at the beginning of the
applicable period.
Cumulative Total Returns for the Period Ended March 31, 2000
36
<PAGE>
<TABLE>
<CAPTION>
Total Return
------------
Six Months One Year Five Years Ten Years
Ended Ended Ended Ended
03/31/00 03/31/00 03/31/00 03/31/00
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Class AARP of Scudder Capital Growth Fund* 28.25 33.74 245.16 414.67
Class AARP of Scudder Small Company Stock Fund *+ -0.22 9.04 N/A N/A
</TABLE>
* On July 17, 2000, the funds were reorganized from AARP Growth Trust
into two newly created series of Investment Trust. The performance of
Class AARP in the bar chart and table reflects performance from when
the funds were AARP Capital Growth Fund and AARP Small Company Stock
Fund, each a series of AARP Growth Trust.
+ AARP Small Company Stock Fund commenced operations on February 1, 1997
and, as of March 31, 2000, had life of fund cumulative total returns of
19.83%.
Note: If the Adviser had not maintained expenses, the total returns
would have been lower.
Total Return
Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total Return.
Comparison of Fund Performance
In connection with communicating its performance to current or
prospective shareholders, the Funds also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of a Fund, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
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 Funds 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 a Fund. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time
37
<PAGE>
period. The risks/returns associated with an investment in bond or equity funds
depend upon many factors. For bond funds these factors include, but are not
limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning a Fund, including reprints of, or selections from, editorials or
articles about a Fund.
FUND ORGANIZATION
Each Fund is a diversified series of Investment Trust, a Massachusetts
business trust established under a Declaration of Trust dated September 20,
1984, as amended. The name of the Trust was changed, effective May 15, 1991,
from Scudder Growth and Income Fund, and on June 10, 1998 from Scudder
Investment Trust. The Trust's authorized capital consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share. The Trust's shares
are currently divided into nine series, Scudder Growth and Income Fund, Scudder
Large Company Growth Fund, Classic Growth Fund, Scudder S&P 500 Index Fund,
Scudder Dividend & Growth Fund, Scudder Tax Managed Growth Fund, Scudder Tax
Managed Small Company Fund, Scudder Capital Growth Fund and Scudder Small
Company Stock Fund.
The Trustees have the authority to issue additional series of shares
and to designate the relative rights and preferences as between the different
series. Each share of a Fund has equal rights with each other share of a Fund as
to voting, dividends and liquidation. All shares issued and outstanding will be
fully paid and nonassessable by the Trust and redeemable as described in this
combined Statement of Additional Information and in the Funds' prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting 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 other series.
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<PAGE>
The Trustees, in their discretion, may authorize the division of shares
of a Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution.
The Declaration of Trust provides that obligations of a Fund are not
binding upon the Trustees individually but only upon the property of a Fund,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law and that a Fund will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in which
they may be involved because of their offices with a Fund, except if it is
determined in the manner provided in the Declaration of Trust that they have not
acted in good faith in the reasonable belief that their actions were in the best
interests of a Fund. Nothing in the Declaration of Trust, however, protects or
indemnifies a Trustee or officer against any liability to which that person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of that
person's office.
INVESTMENT ADVISER
Investment Adviser
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Funds. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On December 31, 1997, Zurich Insurance Company ("Zurich") acquired a
majority interest in the Adviser, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of the Adviser. The Adviser's name changed to Scudder
Kemper Investments, Inc. On September 7, 1998, the businesses of Zurich
(including Zurich's 70% interest in Scudder Kemper) and the financial services
businesses of B.A.T Industries p.l.c. ("B.A.T") were combined to form a new
global insurance and financial services company known as Zurich Financial
Services Group. By way of a dual holding company structure, former Zurich
shareholders initially owned approximately 57% of Zurich Financial Services
Group, with the balance initially owned by former B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over 280 open and
closed-end mutual funds.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser's international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which the Funds may invest, the conclusions and
investment decisions of the Adviser with respect to the Funds are based
primarily on the analyses of its own research department.
39
<PAGE>
Certain investments may be appropriate for a fund and also for other
clients advised by the Adviser. Investment decisions for a fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a fund. Purchase and sale orders for a fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to that fund.
In certain cases, the investments for a fund are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser,
that have similar names, objectives and investment styles. You should be aware
that the Funds are likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of the
Funds can be expected to vary from those of these other mutual funds.
The present investment management agreements (the "Agreements") were
approved by the Trustees on February 7, 2000. The Agreements will continue in
effect until September 30, 2001and from year to year thereafter only if their
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreements or interested persons of the Adviser or the
Trust, cast in person at a meeting called for the purpose of voting on such
approval, and either by a vote of the Trust's Trustees or of a majority of the
outstanding voting securities of the respective Fund. The Agreements may be
terminated at any time without payment of penalty by either party on sixty days'
written notice and automatically terminate in the event of their assignment.
Under each agreement, the Adviser regularly provides each Fund with
continuing investment management for each Fund's portfolio consistent with that
Fund's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of each Fund's
assets shall be held uninvested, subject to the Trust's Declaration of Trust,
By-Laws, the 1940 Act, the Code and to each Fund's investment objective,
policies and restrictions, and subject, further, to such policies and
instructions as the Board of Trustees of the Trust may from time to time
establish. The Adviser also advises and assists the officers of the Trust in
taking such steps as are necessary or appropriate to carry out the decisions of
its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of the Funds.
Under the Agreements, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for each Fund's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Funds (such as the Funds' transfer agent, pricing
agents, custodian, accountants and others); preparing and making filings with
the Securities and Exchange Commission (the "Commission" or "SEC") and other
regulatory agencies; assisting in the preparation and filing of the Funds'
federal, state and local tax returns; preparing and filing the Funds' federal
excise tax returns; assisting with investor and public relations matters;
monitoring the valuation of securities and the calculation of net asset value;
monitoring the registration of shares of each Fund under applicable federal and
state securities laws; maintaining each Fund's books and records to the extent
not otherwise maintained by a third party; assisting in establishing accounting
policies of each Fund; assisting in the resolution of accounting and legal
issues; establishing and monitoring each Fund's operating budget; processing the
payment of each Fund's bills; assisting each 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 of
attending Board and committee meetings outside New York, New York or Boston,
Massachusetts) of all Trustees, officers and executive employees of the Trust
affiliated with the Adviser and makes available, without expense to the Fund,
the services of such Trustees, officers and
40
<PAGE>
employees of the Adviser as may duly be elected officers of the Trust, subject
to their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities.
For these services Scudder Capital Growth Fund pays the Adviser 0.58%
of the first $3 billion of average daily net assets, 0.555% of the next $1
billion and 0.530% thereafter , payable monthly, provided the Fund will make
such interim payments as may be requested by the Adviser not to exceed 75% of
the amount of the fee then accrued on the books of the Fund and unpaid.
For these services Scudder Small Company Stock Fund pays the Adviser
0.750% of average daily net assets of the first $500 million, then 0.700% of the
net assets for the next $500 million and 0.650% thereafter, payable monthly,
provided the Fund will make such interim payments as may be requested by the
Adviser not to exceed 75% of the amount of the fee then accrued on the books of
the Fund and unpaid.
Prior to July 17, 2000 each Fund was considered an "AARP Fund", and for
investment management services each Fund paid the Adviser a monthly fee
consisting of a base fee and an individual fund fee. The base fee was based on
average daily net assets of all AARP Funds, as follows:
Program Assets Annual Rate at Each
(Billions) Asset Level
---------- -----------
First $2 0.35%
$2-$4 0.33
$4-$6 0.30
$6-$8 0.28
$8-$11 0.26
$11-$14 0.25
Over $14 0.24
All AARP Funds paid a flat individual fund fee monthly based on the
average daily net assets of that Fund. The individual Fund fees for AARP Capital
Growth Fund and AARP Small Company Stock Fund were 0.32% and 0.55%,
respectively.
The advisory fees from the Management Agreement for the three fiscal
years ended September 30, 1997, 1998 and 1999 were as follows for Class AARP
(formerly AARP Capital Growth Fund) of Scudder Capital Growth Fund: $6,053,108,
$7,953,203 and $9,574,273, respectively. The advisory fees from the Management
Agreement for the three fiscal years ended September 30, 1997, 1998 and 1999
were as follows for Class AARP (formerly AARP Small Company Stock Fund) of
Scudder Small Company Stock Fund: $111,376, $718,086 and $721,832, respectively.
Under the Agreements each Fund is responsible for all of its other
expenses including: fees and expenses incurred in connection with membership in
investment company organizations; brokers' commissions; legal, auditing and
accounting expenses; the calculation of net asset value; taxes and governmental
fees; the fees and expenses of the Transfer Agent; the cost of preparing share
certificates or any other expenses of issue, sale, underwriting, distribution,
redemption or repurchase of shares; the expenses of and the fees for registering
or qualifying securities for sale; the fees and expenses of Trustees, officers
and employees of the Fund who are not affiliated with the Adviser; the cost of
printing and distributing reports and notices to stockholders; and the fees and
disbursements of custodians. Each Fund may arrange to have third parties assume
all or part of the expenses of sale, underwriting and distribution of shares of
the Fund. Each Fund is also responsible for its expenses of shareholders'
meetings, the cost of responding to shareholders' inquiries, and its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees of the Trust with
respect thereto.
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 Corporation, with respect to the Fund, has the
non-exclusive right to use and sublicense
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<PAGE>
the Scudder name and marks as part of its name, and to use the Scudder Marks in
the Trusts' investment products and services.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning such Agreement, the Trustees of each Fund who are not
"interested persons" of the Adviser are represented by independent counsel at
the Fund's expense.
Each Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by each 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 each Agreement.
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.
Code of Ethics
The Funds, the Adviser and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Funds and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Funds, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Funds. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C>
Henry P. Becton, Jr. (56) Trustee President and General Manager, WGBH --
WGBH Educational Foundation
125 Western Avenue
Allston, MA 02134
Linda C. Coughlin (48)+* Trustee Managing Director of Scudder Kemper Senior Vice President
Investments, Inc.
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<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board, Inc.
Chapel Hill, NC
Keith R. Fox (45) Trustee Private Equity Investor, President, --
10 East 53rd Street Exeter Capital Management Corporation
New York, NY 10022
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation Foundation; Department of State -
650 Fifth Avenue Undersecretary of State for Economic,
New York, NY 10128 Business and Agricultural Affairs
(March 1993 to January 1997)
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski Law
Firm (1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place 23rd Floor Capital
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
(address)
Ann M. McCreary (43) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
John R. Hebble (42)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
John Millette (37)+ Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
</TABLE>
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<PAGE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Funds and
their counsel to be persons who are "interested persons" of the
Adviser or of the Trust, within the meaning of the Investment
Company Act of 1940, as amended.
** Unless otherwise stated, all of the Trustees and officers have
been associated with their respective companies for more than five
years, but not necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
The Trustees and officers of the Fund also serve in similar capacities
with respect to other Scudder funds.
As of June 15, 2000, all Trustees and Officers of Scudder Capital
Growth Fund and Scudder Small Company Stock Fund, as a group, owned beneficially
(as that term is defined in Section 13 (d) of The Securities and Exchange Act of
1934) less than 1% of the outstanding shares.
As of June 15, 2000, 393,046 shares in the aggregate, or 13.62% of the
outstanding shares of Scudder Small Company Stock Fund were held in the name of
State Street Bank and Trust, Custodian for AARP Managed Investment Portfolio:
Diversified Growth, One Heritage Drive, Quincy, MA 02171, who may be deemed to
be beneficial owner of such shares.
To the knowledge of the Fund, as of June 15, 2000, no person owned
beneficially more than 5% of the outstanding shares of Scudder Small Company
Stock Fund, except as stated above.
To the knowledge of the Fund, as of June 15, 2000, no person owned
beneficially more than 5% of the outstanding shares of Scudder Capital Growth
Fund.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that each Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by each Fund's independent public accountants and
by independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
Each Independent Trustee receives compensation for his or her services,
which includes an annual retainer and an attendance fee for each meeting
attended. The Independent Trustee who serves as Lead Trustee receives additional
compensation for his or her services.
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<PAGE>
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 newly-constituted Board may determine to change its
compensation structure.
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.
On or about July 17, 2000, each fund was reorganized from a series of
AARP Growth Trust into Class AARP of a newly created series of Investment Trust.
The following table shows the aggregate compensation received by each
Independent Trustee of Investment Trust (the new Trust for each fund) during
1999 and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
------------------------------------------ --------------------------------------- ----------------------------------------
Name Investment Trust** All Scudder Funds
------------------------------------------ --------------------------------------- ----------------------------------------
<S> <C> <C> <C>
Henry P. Becton, Jr.* $31,155 $140,000 (30 funds)
------------------------------------------ --------------------------------------- ----------------------------------------
Dawn-Marie Driscoll* $33,218 $150,000 (30 funds)
------------------------------------------ --------------------------------------- ----------------------------------------
Edgar R. Fiedler $0 $73,230 (29 funds)+
------------------------------------------ --------------------------------------- ----------------------------------------
Keith R. Fox* $0 $160,325 (23 funds)
------------------------------------------ --------------------------------------- ----------------------------------------
Joan E. Spero* $0 $175,275 (23 funds)
------------------------------------------ --------------------------------------- ----------------------------------------
Jean Gleason Stromberg $0 $40,935 (16 funds)
------------------------------------------ --------------------------------------- ----------------------------------------
Jean C. Tempel* $31,025 $140,000 (30 funds)
------------------------------------------ --------------------------------------- ----------------------------------------
</TABLE>
* Newly-elected Trustee. On July 11, 2000, shareholders of each fund
elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly-constituted Board of Trustees.
** In 1999, Investment Trust consisted of eight funds: Scudder Growth and
Income Fund, Scudder Large Company Growth Fund, Classic Growth Fund,
Scudder S&P 500 Index Fund, Scudder Real Estate Investment Fund,
Scudder Dividend and Growth Fund, Scudder Tax Managed Growth Fund and
Scudder Tax Managed Small Company Fund.
+ Mr. Fiedler's total compensation includes the $9,900 accrued, but not
received, through the deferred compensation program.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
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<PAGE>
DISTRIBUTOR
The Trust, on behalf of each Fund, has an underwriting agreement
Scudder Investor Services, Inc., Two International Place, Boston, MA 02110 (the
"Distributor"), a Massachusetts corporation, which is a subsidiary of the
Adviser, a Delaware corporation. The Trust's underwriting agreement dated May 8,
2000 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
members of the Board of 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 underwriting agreement was last approved by the Trustees on February
7, 2000.
Under the underwriting agreement, each Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the Commission of its registration statement and prospectus and any
amendments and supplements thereto; the registration and qualification of shares
for sale in the various states, including registering a Fund 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 a Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of a Fund's shares
to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of a Fund to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
service representatives, a portion of the cost of computer terminals and
expenses of any activity which is primarily intended to result in the sale of
shares issued by the Fund, unless a Rule 12b-1 plan is in effect which provides
that each Fund shall bear some or all of such expenses.
Note: Although the Trust currently has no 12b-1 Plan with respect to
the Funds and the Trustees have no current intention of
adopting one, 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.
As agent, the Distributor currently offers a 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 as no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of a Fund.
Administrative Fee
Each Fund has entered into administrative services agreements with
Scudder Kemper (the "Administration Agreements"), pursuant to which Scudder
Kemper will provide or pay others to provide substantially all of the
administrative services required by the Funds (other than those provided by
Scudder Kemper under its investment management agreements with the Funds, as
described above) in exchange for the payment by each Fund of an administrative
services fee (the "Administrative Fee") of 0.30% of average daily net assets for
Scudder Capital Growth Fund and 0.45% of average daily net assets for Scudder
Small Company Stock Fund. One effect of these arrangements is to make each
Fund's future expense ratio more predictable. The details of the proposal
(including expenses that are not covered) are set out below.
Various third-party service providers (the "Service Providers"), some
of which are affiliated with Scudder Kemper, provide certain services to the
Funds pursuant to separate agreements with the Funds. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Funds and maintains their
46
<PAGE>
accounting records. Scudder Service Corporation, also a subsidiary of Scudder
Kemper, is the transfer, shareholder servicing and dividend-paying agent for the
shares of the Funds. Scudder Trust Company, an affiliate of Scudder Kemper,
provides subaccounting and recordkeeping services for shareholders in certain
retirement and employee benefit plans. As custodian, State Street Bank and Trust
Company holds the portfolio securities of the Funds, pursuant to a custodian
agreement. PricewaterhouseCoopers LLP audits the financial statements of the
Funds and provides other audit, tax, and related services. Dechert Price &
Rhoads acts as general counsel for each Fund. In addition to the fees they pay
under the investment management agreements with Scudder Kemper, the Funds pay
the fees and expenses associated with these service arrangements, as well as
each Fund's insurance, registration, printing, postage and other costs.
Scudder Kemper will pay the Service Providers for the provision of
their services to the Funds and will pay other Funds' expenses, including
insurance, registration, printing and postage fees. In return, each Fund will
pay Scudder Kemper an Administrative Fee.
The Administration Agreement has an initial term of three years,
subject to earlier termination by the Funds' Board. The fee payable by the Funds
to Scudder Kemper pursuant to the Administration Agreements is reduced by the
amount of any credit received from the Funds' custodian for cash balances.
Certain expenses of the Funds will not be borne by Scudder Kemper under
the Administration Agreements, such as taxes, brokerage, interest and
extraordinary expenses; and the fees and expenses of the Independent Trustees
(including the fees and expenses of their independent counsel). In addition,
each Fund will continue to pay the fees required by its investment management
agreement with Scudder Kemper.
TAXES
Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute, and has qualified as
such since its inception. Such qualification does not involve governmental
supervision or management of investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.
If for any taxable year a Fund does not qualify for the special federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of a Fund's
earnings and profits, and would be eligible for the dividends-received deduction
in the case of corporate shareholders.
Each Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses) realized during the one-year period ending October
31 during such year, and all ordinary income and capital gains for prior years
that were not previously distributed.
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of a Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by that Fund, that Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains,
47
<PAGE>
will be able to claim a relative share of federal income taxes paid by that Fund
on such gains as a credit against personal federal income tax liability, and
will be entitled to increase the adjusted tax basis on Fund shares by the
difference between such reported gains and the individual tax credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are expected to comprise a
substantial part of a Fund's gross income. To the extent that such dividends
constitute a portion of that Fund's gross income, a portion of the income
distributions of that Fund may be eligible for the deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares of that 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 that Fund are deemed to have been held by
that Fund or the shareholder, as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of a Fund
have been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution for any
taxable year only if (i) neither the individual nor his or her spouse (unless
filing separate returns) is an active participant in an employer's retirement
plan, or (ii) the individual (and his or her spouse, if applicable) has an
adjusted gross income below a certain level ($52,000 for married individuals
filing a joint return, with a phase-out of the deduction for adjusted gross
income between $52,000 and $62,000; $32,000 for a single individual, with a
phase-out for adjusted gross income between $32,000 and $42,000). However, an
individual not permitted to make a deductible contribution to an IRA for any
such taxable year may nonetheless make nondeductible contributions up to $2,000
to an IRA (up to $2,000 per individual for married couples if only one spouse
has earned income) for that year. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable. Also, annual contributions may
be made to a spousal IRA even if the spouse has earnings in a given year if the
spouse elects to be treated as having no earnings (for IRA contribution
purposes) for the year.
Distributions by a Fund result in a reduction in the net asset value of
that 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.
48
<PAGE>
The price of shares purchased at that time includes the amount of the
forthcoming distribution. Those purchasing just prior to a distribution will
then receive a partial return of capital upon the distribution, which will
nevertheless be taxable to them.
Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by a Fund will
be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by a Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on that Fund's holding period for the option, and in the case of
an exercise of a put option, on that Fund's holding period for the underlying
stock. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying stock or substantially identical stock in that Fund's portfolio. If
that Fund writes a put or call option, no gain is recognized upon its receipt of
a premium. If the option lapses or is closed out, any gain or loss is treated as
a short-term capital gain or loss. If a call option is exercised, any resulting
gain or loss is a short-term or long-term capital gain or loss depending on the
holding period of the underlying stock. The exercise of a put option written by
a Fund is not a taxable transaction for that Fund.
Many futures contracts entered into by a Fund and all listed non-equity
options written or purchased by a Fund (including options on futures contracts
and options on broad-based stock indices) will be governed by Section 1256 of
the Code. Absent a tax election to the contrary, gain or loss attributable to
the lapse, exercise or closing out of any such position generally will be
treated as 60% long-term and 40% short-term capital gain or loss, and on the
last trading day of that Fund's fiscal year, all outstanding Section 1256
positions will be marked to market (i.e. treated as if such positions were
closed out at their closing price on such day), with any resulting gain or loss
recognized as 60% long-term and 40% short-term. Under certain circumstances,
entry into a futures contract to sell a security may constitute a short sale for
federal income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in a Fund's portfolio.
Under Section 988 of the Code, discussed below, foreign currency gain or loss
from foreign currency-related forward contracts, certain futures and options and
similar financial instruments entered into or acquired by the Fund will be
treated as ordinary income or loss.
Positions of a Fund which consist of at least one stock and at least
one other position with respect to a related security which substantially
diminishes that Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by that Fund.
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures contract or non-equity option governed
by Section 1256 which substantially diminishes that Fund's risk of loss with
respect to such other position will be treated as a "mixed straddle." Although
mixed straddles are subject to the straddle rules of Section 1092 of the Code,
certain tax elections exist for them which reduce or eliminate the operation of
these rules. Each Fund intends to monitor its transactions in options and
futures and may make certain tax elections in connection with these investments.
Notwithstanding any of the foregoing, recent tax law changes may
require a Fund to recognize gain (but not loss) from a constructive sale of
certain "appreciated financial positions" if that 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 that Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, that 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.
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Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain options, futures
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 a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
If a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
Each Fund may make an election to mark to market its shares of these
foreign investment companies in lieu of being subject to U.S. federal income
taxation. At the end of each taxable year to which the election applies, the
Fund would report as ordinary income the amount by which the fair market value
of the foreign company's stock exceeds the Fund's adjusted basis in these
shares; any mark-to-market losses and any loss from an actual disposition of
shares would be reported as ordinary loss to the extent of any net
mark-to-market gains included in income in prior years. The effect of the
election would be to treat excess distributions and gain on dispositions as
ordinary income which is not subject to a fund level tax when distributed to
shareholders as a dividend. Alternatively, the Fund may elect to include as
income and gain its share of the ordinary earnings and net capital gain of
certain foreign investment companies in lieu of being taxed in the manner
described above.
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 that 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 that Fund which
must be distributed to shareholders in order to maintain the qualification of
that Fund as a regulated investment company and to avoid federal income tax at
the level of that Fund. Shareholders will be subject to income tax on such
original issue discount, whether or not they elect to receive their
distributions in cash.
Each Fund will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. Under the backup withholding provisions of Section 3406 of
the Code, distributions of taxable income and capital gains and proceeds from
the redemption or exchange of the shares of a regulated investment company may
be subject to withholding of federal income tax at the rate of 31% in the case
of non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if a
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Dividend and interest income received by a Fund from sources outside
the U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
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Shareholders of a Fund may be subject to state and local taxes on
distributions received from that Fund and on redemptions of that Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year each Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
Each Fund is organized as a series of a Massachusetts business trust
and is not liable for any income or franchise tax in the Commonwealth of
Massachusetts, provided that it qualifies as a regulated investment company for
federal income tax purposes.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of a Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by a Fund to reported commissions paid by others.
The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Funds' purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by a Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or a
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for a
Fund to pay a brokerage commission in excess of that which another broker might
charge for executing the same transaction on account of execution services and
the receipt of research services. The Adviser has negotiated arrangements, which
are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or a Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of a Fund. In effecting transactions in
over-the-counter securities, orders are placed with the principal market makers
for the security being traded unless, after exercising care, it appears that
more favorable results are available elsewhere.
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To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.
Although certain research services from broker/dealers may be useful to
a Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than a Fund, and not all such information is used by the Adviser
in connection with a Fund. Conversely, such information provided to the Adviser
by broker/dealers through whom other clients of the Adviser effect securities
transactions may be useful to the Adviser in providing services to a Fund.
The Trustees review, from time to time, whether the recapture for the
benefit of the Funds of some portion of the brokerage commissions or similar
fees paid by the Funds on portfolio transactions is legally permissible and
advisable.
For each year of the fiscal years ended September 30, 1997, 1998 and
1999, Class AARP of Scudder Capital Growth Fund (formerly AARP Capital Growth
Fund) paid total brokerage commissions of $734,958, $1,239,270 and $1,895,753,
respectively. For the fiscal year ended September 30, 1999, $1,529,053 (80.66%)
of the total brokerage commissions paid by AARP Capital Growth Fund resulted
from orders for transactions placed, consistent with the policy of obtaining the
most favorable net results, with brokers and dealers who provided supplementary
research information to the Fund or the Adviser. The amount of such transactions
aggregated $2,157,351,250, of which $1,721,527,653 (79.80% of all brokerage
transactions) were transactions which included research commissions. The balance
of such brokerage was not allocated to a particular broker or dealer with regard
to the above-mentioned or other special factors.
For the fiscal period February 1, 1997 (commencement of operations)
until September 30, 1997, Class AARP of Scudder Small Company Stock Fund
(formerly AARP Small Company Stock Fund) paid total brokerage commissions of
$37, and for the fiscal years ended September 30, 1998 and 1999 paid brokerage
commissions of $106,149 and $78,436, respectively. For the fiscal year ended
September 30, 1999, $73,784 (94%) of the total brokerage commissions paid by
AARP Small Company Stock Fund resulted from orders for transactions placed,
consistent with the policy of obtaining the most favorable net results, with
brokers and dealers who provided supplementary research information to the Fund
or the Adviser. The amount of such transactions aggregated $67,964,040, of which
$60,424,485 (88.91% of all brokerage transactions) were transactions which
included research commissions. The balance of such brokerage was not allocated
to a particular broker or dealer with regard to the above-mentioned or other
special factors.
Portfolio Turnover
Scudder Capital Growth Fund's (formerly AARP Capital Growth) average
annual portfolio turnover rate, i.e. the ratio of the lesser of sales or
purchases to the monthly average value of the portfolio (excluding from both the
numerator and the denominator all securities with maturities at the time of
acquisition of one year or less), for the fiscal years ended September 30, 1997,
1998 and 1999 was 39.04%, 53.18% and 68.10%. For the period February 1, 1997
(commencement of operations) to September 30, 1997 and the fiscal years ended
September 30, 1998 and 1999, Scudder Small Company Stock Fund (formerly AARP
Small Company Stock Fund) had an annualized portfolio turnover rate of 5.01%,
12.4% and 17.4%, respectively. Higher levels of activity by the Funds result in
higher transaction costs and may also result in taxes on realized capital gains
to be borne by the Funds' shareholders. Purchases and sales are made for a Fund
whenever necessary, in management's opinion, to meet the Fund's objective.
NET ASSET VALUE
The net asset value of shares of each Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New
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Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas and on the
preceding Friday or subsequent Monday when one of these holidays falls on
Saturday or Sunday, respectively. Net asset value per share is determined
separately for each class of shares by dividing the value of the total assets of
the Fund, less all liabilities attributable to that class, by the total number
of shares of that class outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An equity
security which is traded on the Nasdaq Stock Market, Inc. ("Nasdaq") system will
be valued at its most recent sale price on such system as of the Value Time.
Lacking any sales, the security will be valued at the most recent bid quotation
as of the Value Time. The value of an equity security not quoted on the Nasdaq
system, but traded in another over-the-counter market, is its most recent sale
price if there are any sales of such security on such market as of the Value
Time. Lacking any sales, the security is valued at the Calculated Mean quotation
for such security as of the Value Time. Lacking a Calculated Mean quotation the
security is valued at the most recent bid quotation as of the Value Time.
Debt securities, other than money-market instruments, are valued at
prices supplied by the 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.
If, in the opinion of the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee, most fairly
reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The financial highlights of each Fund included in the Funds' prospectus
and the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by
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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 accounting and auditing.
PricewaterhouseCoopers LLP audits the financial statements of each Fund and
provides other audit, tax, and related services.
Other Information
Many of the investment changes in the Funds will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Funds. These transactions will reflect investment
decisions made by the Adviser in the light of its other portfolio holdings and
tax considerations and should not be construed as recommendations for similar
action by other investors.
The CUSIP number of Scudder Capital Growth Fund Class S is 460965-825.
The CUSIP number of Scudder Capital Growth Fund Class AARP is
460965-833.
The CUSIP number of Scudder Small Company Stock Fund Class S is
460965-791.
The CUSIP number of Scudder Small Company Stock Fund Class AARP is
460965-817.
Each Fund has a fiscal year end of September 30.
Each Fund employs State Street Bank and Trust Company as Custodian.
The law firm of Dechert Price & Rhoads acts as general counsel to the
Funds.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net
asset value for each Fund. Prior to the implementation of the Administration
Agreements, each Fund paid Scudder Fund Accounting an annual fee equal to 0.025%
on the first $150 million of average daily net assets, 0.0075% of such assets in
excess of $150 million up to and including $1 billion, and 0.0045% of such
assets in excess of $1 billion, plus holding and transaction charges. For the
fiscal year ended September 30, 1999, SFAC charged Class AARP of Scudder Capital
Growth Fund $144,450, of which $12,214 remained unpaid as of September 30, 1999.
For the years ended September 30, 1998 and 1997, SFAC charged Class AARP of
Scudder Capital Growth Fund $129,318 and $110,317, respectively. For the fiscal
year ended September 30, 1999, SFAC charged Class AARP of Scudder Small Company
Stock Fund $42,175, of which $2,861 remained unpaid as of September 30, 1999.
For the years ended September 30, 1998 and 1997, SFAC charged Class AARP of
Scudder Small Company Stock Fund $50,709 and $25,445, respectively.
Scudder Service Corporation ("Service Corporation", or "SSC"), P.O.
Box 2291, Boston, Massachusetts, 02107-2291, a subsidiary of the Adviser, is the
transfer and dividend disbursing agent for each Fund. Service Corporation also
serves as shareholder service agent and provides subaccounting and recordkeeping
services for shareholder accounts in certain retirement and employee benefit
plans. Prior to the implementation of the Administration Agreements, each Fund
paid Service Corporation an annual fee of $26.00 for each account maintained for
a participant. For the year ended September 30, 1999, Class AARP of Scudder
Capital Growth Fund was charged $2,823,393, of which $211,407 remained unpaid as
of September 30, 1999. For the years ended September 30, 1998 and 1997, Class
AARP of Scudder Capital Growth Fund was charged $2,369,216 and $1,889,072,
respectively, by SSC. For the year ended September 30, 1999, Class AARP of
Scudder Small Company Stock Fund was charged $327,749 by SSC, of which $12,364
remained unpaid as of September 30, 1999. For the years ended September 30, 1998
and 1997, Class AARP of Scudder Small Company Stock Fund was charged $435,353
and $93,491, respectively, by SSC.
Scudder Trust Company ("STC"), an affiliate of the Adviser, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Each Fund pays Scudder Trust
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Company an annual fee of $23.50 per shareholder account. For the fiscal years
ended September 30, 1999 and September 30, 1998, the Funds did not incur any
fees.
The Funds or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests generally are
held in an omnibus account.
The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which each Fund has
filed with the Commission under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further information with respect
to the Fund and the securities offered hereby. This Registration Statement and
its amendments are available for inspection by the public at the Commission in
Washington, D.C.
This Statement of Additional Information combines the information of
both Scudder Capital Growth Fund and Scudder Small Company Stock Fund. Each
Fund, through its individual prospectus, offers only its own shares, yet it is
possible that one Fund might become liable for a misstatement regarding the
other Fund. The Trustees of the Trust have considered this, and have approved
the use of a combined Statement of Additional Information.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio, of Class
AARP of AARP Capital Growth Fund and Class AARP of AARP Small Company Stock
Fund, together with the Report of Independent Accountants, and Financial
Highlights, are incorporated by reference in the Annual Report to the
Shareholders of the AARP Funds dated 09/30/1999 as filed with the Securities and
Exchange Commission for AARP Growth Trust on Form N-30D on December 3, 1999, and
the unaudited Semi-Annual Report to the Shareholders of the AARP Funds dated
03/31/00 as filed with the Securities and Exchange Commission for AARP Growth
Trust on Form N-30D on May 26, 2000 and are hereby deemed to be a part of this
Statement of Additional Information.
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