Filed with the Securities and Exchange Commission on
December 29, 2000.
File No. 2-13628
File No. 811-43
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
------------
Post-Effective Amendment No. 124
---------
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 75
--
INVESTMENT TRUST
------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (6l7) 295-2572
--------------
John Millette
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
-----------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/___/ Immediately upon filing pursuant to paragraph (b)
/___/ 60 days after filing pursuant to paragraph (a) (1)
/___/ 75 days after filing pursuant to paragraph (a) (2)
/_X_/ On December 29, 2000 pursuant to paragraph (b)
/___/ On December 29, 2000 pursuant to paragraph (a) (3)
/___/ On ______________ pursuant to paragraph (a) (3) of Rule 485.
If Appropriate, check the following box:
/___/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Scudder Capital Growth Fund
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 29, 2000
------------------------
CLASS I SHARES
-------------------------
The above Fund currently offers six classes of shares to provide investors with
different purchasing options. These are Class AARP, Class S, Class A, Class B
and Class C shares, which are described in the Fund's prospectus, and Class I
shares, which are described in the prospectus as supplemented hereby. When
placing purchase orders, investors must specify whether the order is for Class
AARP, Class S, Class A, Class B, Class C or Class I shares.
Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Zurich
Scudder Investments, Inc. ("Zurich Scudder") and its affiliates and rollover
accounts from those plans; (2) the following investment advisory clients of
Zurich Scudder and its investment advisory affiliates that invest at least $1
million in a Fund: unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); unaffiliated banks and insurance companies purchasing for their own
accounts; and endowment funds of unaffiliated non-profit organizations; (3)
investment-only accounts for large qualified plans, with at least $50 million in
total plan assets or at least 1000 participants; (4) trust and fiduciary
accounts of trust companies and bank trust departments providing fee-based
advisory services that invest at least $1 million in a Fund on behalf of each
trust; (5) policy holders under Zurich-American Insurance Group's collateral
investment program investing at least $200,000 in a Fund; and (6) investment
companies managed by Zurich Scudder that invest primarily in other investment
companies.
Class I shares currently are available for purchase only from Kemper
Distributors, Inc. ("KDI"), principal underwriter for the Fund, and, in the case
of category 4 above, selected dealers authorized by KDI. Share certificates are
not available for Class I shares.
The following information supplements the indicated sections of the prospectus.
THE FUND'S TRACK RECORD
The table shows how these performance figures for the Fund's Class AARP shares
compare with a broad based market index (which, unlike the Fund, has no fees or
expenses). The performance of both the Fund and the index vary over time. Class
I shares do not have a full calendar year of performance, therefore their
performance data is not provided. Class AARP shares are invested in the same
portfolio. Class AARP shares' annual returns differ only to the extent that the
classes have different fees and expenses. All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns - Class AARP shares
---------------------------- -------------------------- -------------------------- --------------------------
For Periods ended December One Year Five Years Ten Years
31, 1999
---------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Class AARP shares 35.44% 28.94% 16.51%
---------------------------- -------------------------- -------------------------- --------------------------
Index 21.04% 28.54% 18.20%
---------------------------- -------------------------- -------------------------- --------------------------
</TABLE>
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged, capitalization-weighted index that includes 500 large-cap stocks.
HOW MUCH INVESTORS PAY
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Class I shares.
Shareholder fees: Fees paid directly from your investment. None
Annual operating expenses: Expenses that are deducted from fund assets.
<TABLE>
<CAPTION>
--------------------------- -------------------- ----------------------- -------------------------
Investment management fee Distribution Other expenses* Total annual fund
(12b-1) fees operating expenses
--------------------------- -------------------- ----------------------- -------------------------
<S> <C> <C> <C>
0.58% None 0.10% 0.68%
--------------------------- -------------------- ----------------------- -------------------------
--------------------------- -------------------- ----------------------- -------------------------
</TABLE>
* Includes a fixed rate administrative fee of 0.10%
Expense Example
Based on the costs above, this example helps you compare the expenses of each
share class to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
Expenses, assuming you sold your shares at the end of each period:
--------------- ---------------- --------------- ----------------
1 Year 3 Years 5 Years 10 Years
--------------- ---------------- --------------- ----------------
$69 $218 $379 $847
--------------- ---------------- --------------- ----------------
--------------- ---------------- --------------- ----------------
FINANCIAL HIGHLIGHTS
No financial information is presented for Class I shares of Scudder Capital
Growth Fund since no Class I shares were issued as of the fiscal year end of the
Fund.
<PAGE>
SPECIAL FEATURES
Shareholders of the Fund's Class I shares may exchange their shares for (i)
shares of Zurich Money Funds -- Zurich Money Market Fund if the shareholders of
Class I shares have purchased shares because they are participants in tax-exempt
retirement plans of Zurich Scudder and its affiliates and (ii) Class I shares of
any other "Scudder Mutual Fund" listed in the Statement of Additional
Information. Conversely, shareholders of Zurich Money Funds -- Zurich Money
Market Fund who have purchased shares because they are participants in
tax-exempt retirement plans of Zurich Scudder and its affiliates may exchange
their shares for Class I shares of "Kemper Mutual Funds" to the extent that they
are available through their plan. Exchanges will be made at the relative net
asset values of the shares. Exchanges are subject to the limitations set forth
in the prospectus. As a result of the relatively lower expenses for Class I
shares, the level of income dividends per share (as a percentage of net asset
value) and, therefore, the overall investment return, typically will be higher
for Class I shares than for Class AARP, Class S, Class A, Class B and Class C
shares.
<PAGE>
Scudder Large Company Growth Fund
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 29, 2000
------------------------
CLASS I SHARES
-------------------------
The above Fund currently offers six classes of shares to provide investors with
different purchasing options. These are Class AARP, Class S, Class A, Class B
and Class C shares, which are described in the Fund's prospectus, and Class I
shares, which are described in the prospectus as supplemented hereby. When
placing purchase orders, investors must specify whether the order is for Class
AARP, Class S, Class A, Class B, Class C or Class I shares.
Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Zurich
Scudder Investments, Inc. ("Zurich Scudder") and its affiliates and rollover
accounts from those plans; (2) the following investment advisory clients of
Zurich Scudder and its investment advisory affiliates that invest at least $1
million in a Fund: unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); unaffiliated banks and insurance companies purchasing for their own
accounts; and endowment funds of unaffiliated non-profit organizations; (3)
investment-only accounts for large qualified plans, with at least $50 million in
total plan assets or at least 1000 participants; (4) trust and fiduciary
accounts of trust companies and bank trust departments providing fee-based
advisory services that invest at least $1 million in a Fund on behalf of each
trust; (5) policy holders under Zurich-American Insurance Group's collateral
investment program investing at least $200,000 in a Fund; and (6) investment
companies managed by Zurich Scudder that invest primarily in other investment
companies.
Class I shares currently are available for purchase only from Kemper
Distributors, Inc. ("KDI"), principal underwriter for the Fund, and, in the case
of category 4 above, selected dealers authorized by KDI. Share certificates are
not available for Class I shares.
The following information supplements the indicated sections of the prospectus.
THE FUND'S TRACK RECORD
The table shows how these performance figures for the Fund's Class S shares
compare with a broad based market index (which, unlike the Fund, has no fees or
expenses). The performance of both the Fund and the index vary over time. Class
I shares do not have a full calendar year of performance, therefore their
performance data is not provided. Class S shares are invested in the same
portfolio. Class S shares' annual returns differ only to the extent that the
classes have different fees and expenses. All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
<PAGE>
Average Annual Total Returns - Class S shares
<TABLE>
<CAPTION>
---------------------------- -------------------------- -------------------------- --------------------------
For Periods ended December One Year Five Years Since Inception*
31, 1999
---------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Class S shares 35.05% 30.21% 20.54%
---------------------------- -------------------------- -------------------------- --------------------------
Index 33.16% 32.41% 21.16%**
---------------------------- -------------------------- -------------------------- --------------------------
</TABLE>
Index: The Russell 1000 Growth Index, which consists of those stocks in the
Russell 1000 Index that have a greater-than-average growth orientation.
* Since 5/15/91
** Index comparison begins 5/31/91
Total returns from the date of inception to 1992 would have been lower if
operating expenses had not been reduced.
HOW MUCH INVESTORS PAY
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Class I shares.
Shareholder fees: Fees paid directly from your investment. None
Annual operating expenses: Expenses that are deducted from fund assets.
<TABLE>
<CAPTION>
--------------------------- -------------------- ----------------------- -------------------------
Investment management fee Distribution Other expenses* Total annual fund
(12b-1) fees operating expenses
--------------------------- -------------------- ----------------------- -------------------------
<S> <C> <C> <C>
0.70% None 0.10% 0.80%
--------------------------- -------------------- ----------------------- -------------------------
--------------------------- -------------------- ----------------------- -------------------------
</TABLE>
* Includes a fixed rate administrative fee of 0.10%
Expense Example
Based on the costs above, this example helps you compare the expenses of each
share class to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
Expenses, assuming you sold your shares at the end of each period:
-------------------- ------------------ ---------------- -------------------
1 Year 3 Years 5 Years 10 Years
-------------------- ------------------ ---------------- -------------------
$82 $255 $444 $990
-------------------- ------------------ ---------------- -------------------
<PAGE>
FINANCIAL HIGHLIGHTS
No financial information is presented for Class I shares of Scudder Large
Company Growth Fund since no Class I shares were issued as of the fiscal year
end of the Fund.
SPECIAL FEATURES
Shareholders of the Fund's Class I shares may exchange their shares for (i)
shares of Zurich Money Funds -- Zurich Money Market Fund if the shareholders of
Class I shares have purchased shares because they are participants in tax-exempt
retirement plans of Zurich Scudder and its affiliates and (ii) Class I shares of
any other "Scudder Mutual Fund" listed in the Statement of Additional
Information. Conversely, shareholders of Zurich Money Funds -- Zurich Money
Market Fund who have purchased shares because they are participants in
tax-exempt retirement plans of Zurich Scudder and its affiliates may exchange
their shares for Class I shares of "Kemper Mutual Funds" to the extent that they
are available through their plan. Exchanges will be made at the relative net
asset values of the shares. Exchanges are subject to the limitations set forth
in the prospectus. As a result of the relatively lower expenses for Class I
shares, the level of income dividends per share (as a percentage of net asset
value) and, therefore, the overall investment return, typically will be higher
for Class I shares than for Class AARP, Class S, Class A, Class B and Class C
shares.
<PAGE>
Scudder
Investments (SM)
[LOGO]
--------------------------------------------------------------------------------
RISK MANAGED
--------------------------------------------------------------------------------
Class AARP and Class S Shares
Scudder GNMA Fund
December 29, 2000
Scudder Managed Municipal
Bonds October 1, 2000
As revised October 30, 2000, as further
revised December 29, 2000
Scudder Growth and Income
Fund December 29, 2000
Scudder Capital Growth Fund
December 29, 2000
Scudder Small Company
Stock Fund December 29, 2000
Scudder Global Fund
December 29, 2000
Prospectus
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Contents
--------------------------------------------------------------------------------
How the Funds Work How to Invest in the Funds
4 Scudder GNMA Fund 43 How to Buy, Sell and Exchange
Class AARP Shares
8 Scudder Managed Municipal
Bonds 45 How to Buy, Sell and Exchange
Class S Shares
12 Scudder Growth and
Income Fund 47 Policies You Should Know About
16 Scudder Capital Growth Fund 51 Understanding Distributions
and Taxes
20 Scudder Small Company
Stock Fund
24 Scudder Global Fund
28 Other Policies and Risks
29 Who Manages and Oversees
the Funds
32 Financial Highlights
<PAGE>
How the Funds Work
On the next few pages, you'll find information about each fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in a fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
This prospectus offers two classes of shares for each of the funds described.
Class AARP shares have been created especially for AARP members. Class S shares
are generally not available to new investors. Unless otherwise noted, all
information in this prospectus applies to both classes.
You can find prospectuses on the Internet for Class AARP shares at
aarp.scudder.com and for Class S shares at www.scudder.com.
<PAGE>
--------------------------------------------------------------------------------
Class AARP Class S
ticker symbol AGNMX SGINX
fund number 193 393
Scudder GNMA Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks to produce a high level of income while actively seeking to
reduce downside risk compared with other GNMA mutual funds. It does this by
investing at least 65% of net assets in "Ginnie Maes": mortgage-backed
securities that are issued or guaranteed by the Government National Mortgage
Association (GNMA). The fund also invests in U.S. Treasury securities. With both
types of securities, the timely payment of interest and principal is guaranteed
by the full faith and credit of the U.S. government. In addition, the fund does
not invest in securities issued by tobacco-producing companies.
In deciding which types of securities to buy and sell, the portfolio managers
first consider the relative attractiveness of Ginnie Maes compared to Treasuries
and decide on allocations for each. Their decisions are generally based on a
number of factors, including changes in supply and demand within the bond
market.
In choosing individual bonds, the managers review each fund's bond
characteristics and compare the yields of shorter maturity bonds to those of
longer maturity bonds.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. In seeking to reduce downside risk, the managers will generally maintain
a shorter duration than other GNMA funds (duration is a measure of sensitivity
to interest rate movements).
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES This fund normally invests at least 65% of total assets
in Ginnie Maes (and typically more than that). To the extent that it does buy
other securities, they generally carry the same "full faith and credit"
guarantee of the U.S. Government. This guarantee doesn't protect the fund
against market-driven declines in the prices or yields of these securities, nor
does it apply to shares of the fund itself. But it does guard against the risk
of payment default of principal or interest with respect to securities that are
guaranteed.
4
<PAGE>
While the fund is permitted to use various types of derivatives (contracts whose
value is based on, for example, indices, currencies or securities), the managers
don't intend to use them as principal investments, and may not use them at all.
Main Risks of Investing in the Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices -- and, in turn, a
fall in the value of your investment. (As a general rule, a 1% rise in interest
rates means a 1% fall in value for every year of duration.) An increase in its
duration would make the fund more sensitive to this risk.
Ginnie Maes carry additional risks and may be more volatile than many other
types of debt securities. Any unexpected behavior in interest rates could hurt
the performance of these securities. For example, a large fall in interest rates
could cause these securities to be paid off earlier than expected, forcing the
fund to reinvest the money at a lower rate. Another example: if interest rates
rise or stay high, these securities could be paid off later than expected,
forcing the fund to endure low yields. In both of these examples, changes in
interest rates may involve the risk of capital losses. The result for the fund
could be an increase in the volatility of its share price and yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers or other matters
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund is designed for investors who can accept moderate volatility and are
interested in higher yield than Treasuries, yet don't want to sacrifice credit
quality.
5
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.
The bar chart shows how the returns of the fund's Class AARP shares have varied
from year to year, which may give some idea of risk. The table shows average
annual total returns of the fund's Class AARP shares and a broad-based market
index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions. On July 17, 2000, the
fund changed its name from AARP GNMA and U.S. Treasury Fund to Scudder GNMA
Fund. At the same time, the fund changed its strategy to eliminate investment
requirements in U.S. Treasury securities. Consequently, the fund's past
performance may have been different if the current strategy had been in place.
Also at this time, shares of AARP GNMA and U.S. Treasury Fund were redesignated
Class AARP of Scudder GNMA Fund. The performance of Class AARP in the bar chart
and performance table reflects the performance of AARP GNMA and U.S. Treasury
Fund.
Scudder GNMA Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class AARP
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1990 9.72
1991 14.38
1992 6.56
1993 5.96
1994 -1.68
1995 12.83
1996 4.44
1997 8.00
1998 6.79
1999 0.59
2000 Total Return as of September 30: 6.50%
Best Quarter: 4.88%, Q3 1991 Worst Quarter: -2.44%, Q1 1994
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Fund -- Class AARP* 0.59 6.45 6.65
--------------------------------------------------------------------------------
Index 1.93 8.08 7.87
--------------------------------------------------------------------------------
Index: Lehman Brothers GNMA Index, an unmanaged
market-weighted measure of all fixed-rate securities backed
by mortgage pools of GNMA.
* Performance for Class S shares is not provided because this class does
not have a full calendar year of performance.
6
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.40%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.30%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 0.70%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on July 17, 2000.
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class AARP/S shares $72 $224 $390 $871
--------------------------------------------------------------------------------
7
<PAGE>
--------------------------------------------------------------------------------
Class AARP Class S
ticker symbol AMUBX SCMBX
fund number 166 066
Scudder Managed Municipal Bonds
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks income exempt from regular federal income tax while actively
seeking to reduce downside risk as compared with other tax-free income funds. It
does this by investing at least 80% of net assets in securities of
municipalities across the United States and in other securities whose income is
free from regular federal income tax. The fund does not invest in securities
issued by tobacco-producing companies.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes), as well as municipal lease obligations and investments
representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential, and normally prefer those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. The managers use several strategies in seeking to reduce downside risk,
including (i) typically maintaining a high level of portfolio quality, (ii)
keeping the fund's duration generally shorter than comparable mutual funds, and
(iii) primarily focusing on premium coupon bonds, which have lower volatility in
down markets than bonds selling at a discount.
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES This fund normally invests at least 65% of net assets in
municipal securities of the top three grades of credit quality. The fund could
put up to 10% of total assets in junk bonds of the fifth and sixth credit grades
(i.e., as low as grade B). Compared to investment-grade bonds, junk bonds
generally pay higher yields and have higher volatility and higher risk of
default on payments of interest or principal.
8
<PAGE>
Although the managers may adjust the fund's dollar-weighted average maturity
(the maturity of the fund's portfolio), they generally intend to keep it similar
to that of the Lehman Brothers Municipal Bond Index (13.43 years as of
5/31/2000). Also, while they're permitted to use various types of derivatives
(contracts whose value is based on, for example, indices or securities), the
managers don't intend to use them as principal investments and may not use them
at all.
Main Risks of Investing in the Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's dollar-weighted
average maturity could make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yield or share price. The
fact that the fund may emphasize investments in certain geographic regions or
sectors of the municipal market increases this risk, because any factors
affecting these regions or sectors could affect a large portion of the fund's
securities. For example, the fund could invest in illiquid municipal lease
obligations, which are more likely to default or to become difficult to sell
because they carry limited credit backing.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them; this risk may be
greater for junk bonds than for investment-grade bonds
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o political or legal actions could change the way the fund's dividends
are taxed
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund is designed for taxpayers who are in a moderate to high tax bracket
and who are interested in current income.
9
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.
The bar chart shows how the returns of the fund's Class S shares have varied
from year to year, which may give some idea of risk. The table shows average
annual total returns of the fund's Class S shares and a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
Scudder Managed Municipal Bonds
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1990 6.77
1991 12.23
1992 8.98
1993 13.32
1994 -6.04
1995 17.12
1996 4.15
1997 9.29
1998 6.23
1999 -1.96
2000 Total Return as of September 30: 6.07%
Best Quarter: 6.69%, Q1 1995 Worst Quarter: -6.17%, Q1 1994
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Fund -- Class S* -1.96 6.78 6.80
--------------------------------------------------------------------------------
Index -2.06 6.91 6.89
--------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
* Performance for Class AARP shares is not provided because this class
does not have a full calendar year of performance.
10
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.49%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.15%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 0.64%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.15%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on July 31, 2000.
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class AARP/S shares $65 $205 $357 $798
--------------------------------------------------------------------------------
11
<PAGE>
--------------------------------------------------------------------------------
Class AARP Class S
ticker symbol ACDGX SCDGX
fund number 164 064
Scudder Growth and Income Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks long-term growth of capital, current income and growth of income
while actively seeking to reduce downside risk as compared with other growth and
income funds. The fund invests at least 65% of total assets in equities, mainly
common stocks. Although the fund can invest in companies of any size and from
any country, it invests primarily in large U.S. companies. The fund does not
invest in securities issued by tobacco-producing companies.
In choosing stocks for the fund, the portfolio managers consider both yield and
other valuation and growth factors, meaning that they focus the fund's
investments on securities of U.S. companies whose dividend and earnings
prospects are believed to be attractive relative to the fund's benchmark index,
the S&P 500. The fund may invest in dividend paying and non-dividend paying
stocks.
The managers use bottom-up analysis, looking for companies with strong prospects
for continued growth of capital and earnings.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented in the fund's portfolio.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups.
--------------------------------------------------------------------------------
OTHER INVESTMENTS While most of the fund's investments are common stocks, some
may be other types of equities, such as convertible securities and preferred
stocks. Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies, or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
12
<PAGE>
The managers use several strategies in seeking to reduce risk, including: (i)
managing risk associated with investment in specific companies by using
fundamental analysis, valuation, and by adjusting position sizes; (ii) portfolio
construction emphasizing diversification, blending stocks with a variety of
different attributes, including value and growth stocks; and (iii) diversifying
across many sectors and industries.
The fund normally will, but is not obligated to, sell a stock if its yield or
growth prospects are expected to be below the benchmark average. It may also
sell a stock when it reaches a target price or when the managers believe other
investments offer better opportunities.
Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform. When stock prices fall, you should expect the value of your
investment to fall as well. Because a stock represents ownership in its issuer,
stock prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
To the extent that the fund focuses on a given industry or a particular size of
a company, factors affecting that industry or size of a company could affect the
value of portfolio securities. For example, a rise in unemployment could hurt
manufacturers of consumer goods, and large company stocks at times may not
perform as well as stocks of smaller companies.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies or other matters
o to the extent that the fund invests for income, it may miss
opportunities in faster-growing stocks
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, it could be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund is designed for investors interested in a relatively conservative fund
to provide growth and some current income.
13
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.
The bar chart shows how the total returns for the fund's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns for the fund's Class S shares and a broad based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index vary over time. All figures on this
page assume reinvestment of dividends and distributions.
Scudder Growth and Income Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1990 -2.33
1991 28.16
1992 9.57
1993 15.59
1994 2.60
1995 31.18
1996 22.18
1997 30.31
1998 6.07
1999 6.15
2000 Total Return as of September 30: 2.32%
Best Quarter: 15.26%, Q2 1997 Worst Quarter: -13.39%, Q3 1998
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Fund -- Class S* 6.15 18.65 14.36
--------------------------------------------------------------------------------
Index 21.04 28.54 18.20
--------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Total returns for 1992 would have been lower if operating expenses hadn't been
reduced.
* Performance for Class AARP shares is not provided because this class does not
have a full calendar year of performance.
14
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.45%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.30%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 0.75%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on August 14, 2000.
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class AARP/S shares $77 $240 $417 $930
--------------------------------------------------------------------------------
15
<PAGE>
--------------------------------------------------------------------------------
Class AARP Class S
ticker symbol ACGFX SCPGX
fund number 198 398
Scudder Capital Growth Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks to provide long-term capital growth while actively seeking to
reduce downside risk compared with other growth mutual funds. The fund invests
at least 65% of total assets in equities, mainly common stocks of U.S.
companies. Although the fund can invest in companies of any size, it generally
focuses on established companies with market values of $3 billion or more. The
fund does not invest in securities issued by tobacco-producing companies.
In choosing stocks, the portfolio managers look for individual companies that
have displayed above-average earnings growth compared to other growth companies
and that have strong product lines, effective management and leadership
positions within core markets. The managers also analyze each company's
valuation, stock price movements and other factors.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. The managers use several strategies in seeking to reduce downside risk,
including:
o focusing on high quality companies with reasonable valuations
o diversifying broadly among companies, industries and sectors
o limiting the majority of the portfolio to 3.5% in any one issuer (other
funds may invest 5% or more)
--------------------------------------------------------------------------------
OTHER INVESTMENTS While most of the fund's investments are common stocks, some
may be other types of equities, such as convertible securities and preferred
stocks. Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
16
<PAGE>
Depending on their outlook, the managers may increase or reduce the fund's
exposure to a given industry or company. The fund will normally sell a stock
when the managers believe it is too highly valued, its fundamental qualities
have deteriorated or its potential risks have increased.
Main Risks of Investing in the Fund
There are several risk factors that could hurt fund performance, cause you to
lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the medium and large growth company portions of
the U.S. stock market. When prices of these stocks fall, you should expect the
value of your investment to fall as well. At times, large or medium company
stocks may not perform as well as stocks of smaller companies. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect the value of portfolio securities. For example, a
rise in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
risk factors or other matters
o growth stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund is designed for investors interested in a long-term investment that
seeks to lower its share price volatility compared with other growth mutual
funds.
17
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.
The bar chart shows how the total returns of the fund's Class AARP shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns of the fund's Class AARP shares and a broad-based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions. On July 17, 2000, the
fund was reorganized from AARP Capital Growth Fund, a series of AARP Growth
Trust, into Class AARP of Scudder Capital Growth Fund, a newly created series of
Investment Trust. The performance of Class AARP in the bar chart and performance
table reflects the performance of AARP Capital Growth Fund.
Scudder Capital Growth Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class AARP
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1990 -15.78
1991 40.53
1992 4.72
1993 15.98
1994 -10.04
1995 30.54
1996 20.62
1997 35.08
1998 23.73
1999 35.44
2000 Total Return as of September 30: 26.01%
Best Quarter: 25.83%, Q4 1998 Worst Quarter: -21.27%, Q3 1990
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Fund -- Class AARP* 35.44 28.94 16.51
--------------------------------------------------------------------------------
Index 21.04 28.54 18.20
--------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged, capitalization-weighted index that includes 500 large-cap stocks.
* Performance for Class S shares is not provided because this class does
not have a full calendar year of performance.
18
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.58%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.30%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 0.88%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.30%.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on July 17, 2000.
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class AARP/S shares $90 $281 $488 $1,048
--------------------------------------------------------------------------------
19
<PAGE>
--------------------------------------------------------------------------------
Class AARP Class S
ticker symbol ASCSX SSLCX
fund number 139 339
Scudder Small Company Stock Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks to provide long-term capital growth while actively seeking to
reduce downside risk as compared with other small company stock funds. It does
this by investing at least 65% of total assets in common stocks of small U.S.
companies with potential for above-average long-term capital growth. The fund
normally focuses on companies whose market capitalizations are below $2 billion.
The fund does not invest in securities issued by tobacco-producing companies.
The managers use a multi-step process to manage the fund:
Stock Evaluation. The managers rely on a proprietary, quantitative screening
process to identify stocks with above-average capital appreciation potential.
Four primary factors are considered: valuation, trends in fundamentals, price
momentum, and risk. Valuation helps the managers measure how expensive a
security is relative to its peers. Trends in fundamentals such as sales and
earnings suggest whether the company's business is stable, improving, or
deteriorating. Price momentum provides an indicator of how the market is
responding to these fundamentals. Risk measures help the managers understand the
degree of financial uncertainty for a given company. Each stock is then ranked
based on its relative attractiveness.
Portfolio Construction. The managers build a diversified portfolio of
attractively rated companies using analytical tools to actively monitor the risk
profile of the portfolio compared to appropriate benchmarks and peer groups. The
managers use several strategies in seeking to reduce downside risk, including:
o focusing on companies with reasonable valuations
--------------------------------------------------------------------------------
OTHER INVESTMENTS While the fund invests primarily in common stocks, it may
invest up to 20% of total assets in U.S. Government securities. Although the
managers are permitted to use various types of derivatives (contracts whose
value is based on, for example, indices, currencies or securities), the managers
don't intend to use them as principal investments, and may not use them at all.
20
<PAGE>
o diversifying broadly among industries and companies (typically over
200)
o limiting the majority of the portfolio to 2% in any one issuer (other
funds may invest 5% or more)
The fund will normally sell a stock when the managers believe it is too highly
valued, its fundamental qualities have deteriorated, its potential risks have
increased, or it no longer qualifies as a small company.
Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the small company portion of the U.S. market.
When small company stock prices fall, you should expect the value of your
investment to fall as well. Small company stocks tend to be more volatile than
stocks of larger companies, in part because small companies tend to be less
established than larger companies and more vulnerable to competitive challenges
and bad economic news. Because a stock represents ownership in its issuer, stock
prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
To the extent that the fund focuses on a given industry, factors affecting that
industry could affect the value of portfolio securities. For example, a rise in
unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o small stocks may be out of favor for certain periods
o the managers could be wrong in their analysis of companies
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, it might be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund is designed for long-term investors looking for broad exposure to
small company stocks.
21
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.
The bar chart shows how the total returns of the fund's Class AARP shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns of the fund's Class AARP shares and a broad-based
market index (which, unlike the fund, does not have any fees or expenses). The
performance of both the fund and the index varies over time. All figures on this
page assume reinvestment of dividends and distributions. On July 17, 2000, the
fund was reorganized from AARP Small Company Stock Fund, a series of AARP Growth
Trust, into Class AARP of Scudder Small Company Stock Fund, a newly created
series of Investment Trust. The performance of Class AARP in the bar chart and
performance table reflects the performance of AARP Small Company Stock Fund.
Scudder Small Company Stock Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class AARP
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1998 -6.24
1999 -3.53
2000 Total Return as of September 30: 1.72%
Best Quarter: 19.49%, Q2 1999 Worst Quarter: -17.20%, Q3 1998
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year Since Inception*
--------------------------------------------------------------------------------
Fund -- Class AARP** -3.53 6.74
--------------------------------------------------------------------------------
Index 21.26 12.71
--------------------------------------------------------------------------------
Index: Russell 2000 Index, an unmanaged capitalization-weighted measure of
approximately 2,000 small U.S. stocks.
* Inception of Fund: 2/1/1997. Index comparison begins 1/31/1997.
** Performance for Class S shares is not provided because this class does
not have a full calendar year of performance. In the chart, total
returns for 1998 would have been lower if operating expenses hadn't
been reduced.
In the table, total returns from inception through 1998 would have been lower if
operating expenses hadn't been reduced.
22
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares, you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.75%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.45%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 1.20%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.45%.
Information in the table has been restated to reflect a new fixed rate
administrative fee which became effective on July 17, 2000.
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class AARP/S shares $122 $381 $660 $1,455
--------------------------------------------------------------------------------
23
<PAGE>
--------------------------------------------------------------------------------
Class AARP Class S
ticker symbol ACOBX SCOBX
fund number 107 007
Scudder Global Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks long-term growth of capital while actively seeking to reduce
downside risk as compared with other global growth funds. The fund invests at
least 65% of its total assets in U.S. and foreign equities (equities issued by
U.S. and foreign-based companies). Most of the fund's equities are common
stocks. Although the fund can invest in companies of any size and from any
country, it generally focuses on established companies in countries with
developed economies. The fund does not invest in securities issued by
tobacco-producing companies.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for companies that are industry leaders,
have strong finances and management, and appear able to make the most of local,
regional and global opportunities.
Growth orientation. The managers primarily invest in companies that offer the
potential for sustainable above-average earnings growth and whose market value
appears reasonable in light of their business prospects.
Analysis of global themes. The managers consider global economic outlooks,
seeking to identify industries and companies that are likely to benefit from
social, political and economic changes.
The managers intend to keep the fund's holdings diversified across industries
and geographical areas, although, depending on their outlook, they may increase
or reduce the fund's exposure to a given industry or area.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups.
--------------------------------------------------------------------------------
OTHER INVESTMENTS Although the managers are permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities, currencies, or securities), the managers don't intend to use them
as principal investments, and may not use them at all.
24
<PAGE>
The managers use several strategies in seeking to reduce downside risk,
including: (i) diversifying broadly among companies, industries, countries and
regions; (ii) focusing on high quality companies with reasonable valuations; and
(iii) generally focusing on countries with developed economies.
The fund will normally sell a stock when the managers believe its price is
unlikely to go much higher, its fundamentals have deteriorated, other
investments offer better opportunities or in the course of adjusting its
emphasis on a given country.
Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform, both in the U.S. and abroad. When stock prices fall, you should
expect the value of your investment to fall as well. Foreign stocks tend to be
more volatile than their U.S. counterparts, for reasons ranging from political
and economic uncertainties to a higher risk that essential information may be
incomplete or wrong. These risks tend to be greater in emerging markets, so to
the extent that the fund invests in emerging markets (such as Latin America and
most Pacific Basin countries), it takes on greater risks. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand, and other business risks. These may affect single
companies as well as groups of companies.
A second major factor is currency exchange rates. When the dollar value of a
foreign currency falls, so does the value of any investments the fund owns that
are denominated in that currency. This is separate from market risk, and may add
to market losses or reduce market gains.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
themes, geographical areas or other matters
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund is designed for long-term investors interested in a broadly
diversified approach to global investing.
25
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.
The bar chart shows how returns for the fund have varied from year to year,
which may give some idea of risk. The table shows average annual total returns
for the fund and a broad-based market index (which, unlike the fund, does not
have any fees or expenses). The performance of both the fund and the index
varies over time. All figures on this page assume reinvestment of dividends and
distributions.
Scudder Global Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1990 -6.40
1991 17.07
1992 4.54
1993 31.10
1994 -4.20
1995 20.53
1996 13.65
1997 17.24
1998 12.59
1999 23.47
2000 Total Return as of September 30: 4.32%
Best Quarter: 15.20%, Q4 1999 Worst Quarter: -13.99%, Q3 1990
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Fund -- Class S* 23.47 17.42 12.38
--------------------------------------------------------------------------------
Index 24.93 19.76 11.42
--------------------------------------------------------------------------------
Index: MSCI World Index, an unmanaged capitalization-weighted measure of global
stock markets including the U.S., Canada, Europe, Australasia and the Far East.
* Performance for Class AARP is not provided because this class does not
have a full calendar year of performance.
26
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder of either Class AARP or Class S
shares you pay them indirectly.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.95%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses* 0.38%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 1.33%
--------------------------------------------------------------------------------
* Includes a fixed rate administrative fee of 0.375%.
Information in the table has been restated to reflect a new fixed rate
administrative fee which became effective on September 11, 2000.
Based on the costs above, this example helps you compare this fund's expenses to
those of other mutual funds. The example assumes the expenses remain the same.
It also assumes that you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions, and sold your shares at the end of each period.
This is only an example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class AARP/S shares $135 $421 $729 $1,601
--------------------------------------------------------------------------------
27
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could
change that fund's investment goal without seeking shareholder
approval. However, Scudder Managed Municipal Bonds' policy for
investing at least 80% of its net assets in municipal securities cannot
be changed without shareholder approval.
o As a temporary defensive measure, each fund could shift up to 100% of
its assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
o Scudder GNMA Fund may trade securities actively. This could raise
transaction costs (thus lowering performance) and could mean higher
taxable distributions.
o The advisor establishes a security's credit grade when it buys the
security, using independent ratings or, for unrated securities, its own
credit ratings. When ratings don't agree, the fund may use the higher
rating. If a security's credit rating falls, the advisor will determine
whether selling it would be in the shareholders' best interests.
Euro conversion
Funds that invest in foreign securities could be affected by accounting
differences, changes in tax treatment or other issues related to the conversion
of certain European currencies into the euro, which is well underway. The
investment advisor is working to address euro-related issues as they occur and
has been notified that other key service providers are taking similar steps.
Still, there's some risk that this problem could materially affect a fund's
operation (including its ability to calculate net asset value and to handle
purchases and redemptions), its investments or securities markets in general.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the funds' allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
28
<PAGE>
Who Manages and Oversees the Funds
The investment advisor
The funds' investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds, and currently has more than $290 billion in assets under
management.
The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
The advisor receives a management fee from each fund. Below are the actual rates
paid by each fund for the 12 months through the most recent fiscal year end, as
a percentage of each fund's average daily net assets.
Fund Name Fee Paid
---------------------------------------------------------------------
Scudder GNMA Fund 0.40%
---------------------------------------------------------------------
Scudder Managed Municipal Bonds 0.52%
---------------------------------------------------------------------
Scudder Growth and Income Fund 0.46%*
---------------------------------------------------------------------
Scudder Capital Growth Fund 0.60%
---------------------------------------------------------------------
Scudder Small Company Stock Fund 0.70%
---------------------------------------------------------------------
Scudder Global Fund 0.95%
---------------------------------------------------------------------
* Annualized
Each fund has entered into a new investment management agreement with the
advisor. The table below describes the fee rates for each fund and the effective
date of these agreements.
Average Daily Net Assets Fee Rate
---------------------------------------------------------------------
Scudder GNMA Fund
---------------------------------------------------------------------
Investment Management Fee effective July 17, 2000
---------------------------------------------------------------------
first $5 billion 0.400%
---------------------------------------------------------------------
next $1 billion 0.385%
---------------------------------------------------------------------
more than $6 billion 0.370%
---------------------------------------------------------------------
---------------------------------------------------------------------
Scudder Managed Municipal Bonds
---------------------------------------------------------------------
Investment Management Fee effective July 31, 2000
---------------------------------------------------------------------
first $2 billion 0.490%
---------------------------------------------------------------------
next $1 billion 0.465%
---------------------------------------------------------------------
over $3 billion 0.440%
---------------------------------------------------------------------
29
<PAGE>
Average Daily Net Assets Fee Rate
---------------------------------------------------------------------
Scudder Growth and Income Fund
---------------------------------------------------------------------
Investment Management Fee effective August 14, 2000
---------------------------------------------------------------------
first $14 billion 0.450%
---------------------------------------------------------------------
next $2 billion 0.425%
---------------------------------------------------------------------
next $2 billion 0.400%
---------------------------------------------------------------------
over $18 billion 0.385%
---------------------------------------------------------------------
---------------------------------------------------------------------
Scudder Capital Growth Fund
---------------------------------------------------------------------
Investment Management Fee effective July 17, 2000
---------------------------------------------------------------------
first $3 billion 0.580%
---------------------------------------------------------------------
next $1 billion 0.555%
---------------------------------------------------------------------
more than $4 billion 0.530%
---------------------------------------------------------------------
---------------------------------------------------------------------
Scudder Small Company Stock Fund
---------------------------------------------------------------------
Investment Management Fee effective July 17, 2000
---------------------------------------------------------------------
first $500 million 0.75%
---------------------------------------------------------------------
next $500 million 0.70%
---------------------------------------------------------------------
more than $1 billion 0.65%
---------------------------------------------------------------------
---------------------------------------------------------------------
Scudder Global Fund
---------------------------------------------------------------------
Investment Management Fee effective September 11, 2000
---------------------------------------------------------------------
first $500 million 1.000%
---------------------------------------------------------------------
next $500 million 0.950%
---------------------------------------------------------------------
next $500 million 0.900%
---------------------------------------------------------------------
next $500 million 0.850%
---------------------------------------------------------------------
over $2 billion 0.800%
---------------------------------------------------------------------
The advisor has agreed to pay a fee to AARP and/or its affiliates in return for
services relating to investments by AARP members in AARP Class shares of each
fund. This fee is calculated on a daily basis as a percentage of the combined
net assets of the AARP Classes of all funds managed by the advisor. The fee
rates, which decrease as the aggregate net assets of the AARP Classes become
larger, are as follows: 0.07% for the first $6 billion in net assets, 0.06% for
the next $10 billion and 0.05% thereafter.
30
<PAGE>
The portfolio managers
The following people handle the day-to-day management of each fund in this
prospectus.
Scudder GNMA Fund Scudder Capital Growth Fund
Richard L. Vandenberg William F. Gadsen
Lead Portfolio Manager Lead Portfolio Manager
o Began investment career in 1975 o Began investment career in 1981
o Joined the advisor in 1993 o Joined the advisor in 1983
o Joined the fund team in 1998 o Joined the fund team in 1989
Scott E. Dolan Scudder Small Company Stock Fund
o Began investment career in 1989
o Joined the advisor in 1989 James M. Eysenbach
o Joined the fund team in 1997 Lead Portfolio Manager
o Began investment career in 1984
John E. Dugenske o Joined the advisor in 1991
o Began investment career in 1990 o Joined the fund team in 1997
o Joined the advisor in 1998
o Joined the fund team in 2000 Calvin S. Young
o Began investment career in 1988
Scudder Managed Municipal Bonds o Joined the advisor in 1990
o Joined the fund team in 1999
Philip G. Condon
Co-lead Portfolio Manager Jennifer P. Carter
o Began investment career in 1978 o Began investment career in 1988
o Joined the advisor in 1983 o Joined the advisor in 1992
o Joined the fund team in 1998 o Joined the fund team in 2000
Ashton P. Goodfield Scudder Global Fund
Co-lead Portfolio Manager
o Began investment career in 1986 William E. Holzer
o Joined the advisor in 1986 Lead Portfolio Manager
o Joined the fund team in 1998 o Began investment career in 1977
o Joined the advisor in 1980
Scudder Growth and Income Fund o Joined the fund team in 1986
Kathleen T. Millard Nicholas Bratt
Lead Portfolio Manager o Began investment career in 1976
o Began investment career in 1983 o Joined the advisor in 1976
o Joined the advisor in 1991 o Joined the fund team in 1993
o Joined the fund team in 1991
Gregory S. Adams
Portfolio Manager
o Began investment career in 1987
o Joined the advisor in 1999
o Joined the fund team in 1999
31
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance. The figures in the first part of each table are for a single share.
The total return figures represent the percentage that an investor in a
particular fund would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover). On July 17, 2000, Scudder Capital Growth Fund and Scudder
Small Company Stock Fund were reorganized from AARP Growth Trust into two newly
created series of Investment Trust. On July 17, 2000, Scudder GNMA Fund changed
its name from AARP GNMA and U.S. Treasury Fund, a series of AARP Income Trust.
Scudder GNMA Fund -- Class AARP (a)
--------------------------------------------------------------------------------
Years Ended September 30, 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
Net asset value, beginning of period $14.61 $15.40 $15.16 $14.91 $15.19
------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment operations:
--------------------------------------------------------------------------------
Net investment income (loss) .94 .94 .99 .98 .99
--------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.01) (.79) .24 .25 (.28)
------------------------------------------
--------------------------------------------------------------------------------
Total from investment operations .93 .15 1.23 1.23 .71
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
Net investment income (.94) (.94) (.99) (.98) (.99)
--------------------------------------------------------------------------------
Net asset value, end of period $14.60 $14.61 $15.40 $15.16 $14.91
------------------------------------------
--------------------------------------------------------------------------------
Total Return (%) 6.62 .99 8.40 8.49 4.79
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions) 3,703 4,216 4,593 4,584 4,904
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) .74(c) .65 .61 .65 .64
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) .73(c) .65 .61 .65 .64
--------------------------------------------------------------------------------
Ratio of net investment income (loss)
(%) 6.52 6.25 6.52 6.51 6.55
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 264(b) 245(b) 160 87 83
--------------------------------------------------------------------------------
(a) On July 17, 2000, existing shares of the Fund were redesignated as
Class AARP shares.
(b) The portfolio turnover rates including mortgage dollar roll
transactions were 337% and 258% for the periods ended September 30,
2000 and 1999, respectively.
(c) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were .73%
and .73%, respectively (see Notes to Financial Statements).
32
<PAGE>
Scudder GNMA Fund -- Class S
--------------------------------------------------------------------------------
2000(a)
--------------------------------------------------------------------------------
Net asset value, beginning of period $14.45
--------
--------------------------------------------------------------------------------
Income (loss) from investment operations:
--------------------------------------------------------------------------------
Net investment income (loss) .19
--------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .16
--------
--------------------------------------------------------------------------------
Total from investment operations .35 Less distributions from:
--------------------------------------------------------------------------------
Net investment income (.19)
--------------------------------------------------------------------------------
Net asset value, end of period $14.61
--------
--------------------------------------------------------------------------------
Total Return (%) 2.72**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions) 306
--------------------------------------------------------------------------------
Ratio of expenses (%) .68(c)*
--------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 6.64*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 264(b)
--------------------------------------------------------------------------------
(a) For the period from July 17, 2000 (commencement of sale of Class S) to
September 30, 2000.
(b) The portfolio turnover rate including mortgage dollar roll transactions
was 337% for the period ended September 30, 2000.
(c) The ratio of operating expenses includes a one-time reduction in
reorganization expenses. The ratio without this reduction was .71%.
* Annualized
** Not annualized
33
<PAGE>
Scudder Managed Municipal Bonds -- Class S
--------------------------------------------------------------------------------
2000(a) 1999(b) 1998(c) 1997(c) 1996(c) 1995(c)
--------------------------------------------------------------------------------
Net asset value, beginning
of period $8.98 $9.18 $9.13 $8.84 $8.94 $8.07
--------------------------------------------------------------------------------
Income (loss) from investment operations:
--------------------------------------------------------------------------------
Net investment income .46 .19 .45 .46 .45 .48
--------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investment transactions (.51) (.20) .10 .34 (.10) .87
---------------------------------------------------
--------------------------------------------------------------------------------
Total from investment
operations (.05) (.01) .55 .80 .35 1.35
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
Net investment income (.46) (.19) (.45) (.46) (.45) (.48)
--------------------------------------------------------------------------------
Net realized gains on
investment transactions (.04) -- (.05) (.05) -- --
---------------------------------------------------
--------------------------------------------------------------------------------
Total distributions (.50) (.19) (.50) (.51) (.45) (.48)
--------------------------------------------------------------------------------
Net asset value, end
of period $8.43 $8.98 $9.18 $9.13 $8.84 $8.94
---------------------------------------------------
--------------------------------------------------------------------------------
Total Return (%) (.62) (.17)** 6.23 9.29 4.15 17.12
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
($ millions) 664 713 737 728 737 775
--------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) .66(d) .64* .62 .64 .63 .63
--------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) .65(d) .64* .62 .64 .63 .63
--------------------------------------------------------------------------------
Ratio of net investment
income (%) 5.27 4.92* 4.96 5.12 5.20 5.59
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 47 14* 9 10 12 18
--------------------------------------------------------------------------------
(a) For the year ended May 31, 2000.
(b) For the five months ended May 31, 1999. On August 10, 1998 the Board of
Trustees of the Trust changed the fiscal year end of the Fund from
December 31 to May 31.
(c) Years ended December 31.
(d) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were .65%
and .64%, respectively (see Financial Statements).
* Annualized
** Not annualized
34
<PAGE>
Scudder Growth and Income Fund -- Class AARP
--------------------------------------------------------------------------------
2000(a)
--------------------------------------------------------------------------------
Net asset value, beginning of period $27.09
--------
--------------------------------------------------------------------------------
Income (loss) from investment operations:
--------------------------------------------------------------------------------
Net investment income (loss) (b) .01
--------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.06)
--------
--------------------------------------------------------------------------------
Total from investment operations (.05) Less distributions from:
--------------------------------------------------------------------------------
Net investment income (.03)
--------------------------------------------------------------------------------
Net asset value, end of period $27.01
--------
--------------------------------------------------------------------------------
Total Return (%) (.18)**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions) 5,353
--------------------------------------------------------------------------------
Ratio of expenses (%) .75*
--------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .04**
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 55*
--------------------------------------------------------------------------------
(a) From August 14, 2000 (commencement of sale of Class AARP) to September
30, 2000.
(b) Based on monthly average shares outstanding during the period.
* Annualized
** Not annualized
35
<PAGE>
Scudder Growth and Income Fund -- Class S (a)
--------------------------------------------------------------------------------
2000(b) 1999(c) 1998(c) 1997(c) 1996(c) 1995(c)
--------------------------------------------------------------------------------
Net asset value, beginning
of period $26.69 $26.31 $27.33 $23.23 $20.23 $16.26
---------------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from
investment operations:
--------------------------------------------------------------------------------
Net investment income
(loss) .13(d) .48(d) .62(d) .62(d) .60(d) .55
--------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investment transactions .51 1.11 1.06 6.26 3.84 4.46
---------------------------------------------------
--------------------------------------------------------------------------------
Total from investment
operations .64 1.59 1.68 6.88 4.44 5.01
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
Net investment income (.11) (.51) (.61) (.58) (.57) (.56)
--------------------------------------------------------------------------------
Net realized gains on
investment transactions (.20) (.70) (2.09) (2.20) (.87) (.48)
---------------------------------------------------
--------------------------------------------------------------------------------
Total distributions (.31) (1.21) (2.70) (2.78) (1.44) (1.04)
--------------------------------------------------------------------------------
Net asset value, end
of period $27.02 $26.69 $26.31 $27.33 $23.23 $20.23
---------------------------------------------------
--------------------------------------------------------------------------------
Total Return (%) 2.32** 6.15 6.07 30.31 22.18 31.18
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
($ millions) 5,834 6,765 7,582 6,834 4,186 3,061
--------------------------------------------------------------------------------
Ratio of expenses (%) .86(e)* .80 .74 .76 .78 .80
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) .64* 1.76 2.20 2.31 2.77 3.10
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 55* 70 41 22 27 27
--------------------------------------------------------------------------------
(a) On August 11, 2000, the Scudder Shares of the Fund were redesignated as
Class S.
(b) For the nine months ended September 30, 2000. On February 7, 2000, the
Fund changed the fiscal year end from December 31 to September 30.
(c) For the year ended December 31.
(d) Based on monthly average shares outstanding during the period.
(e) The ratio of operating expenses excluding costs incurred in connection
with the reorganization was .84%.
* Annualized
** Not annualized
36
<PAGE>
Scudder Capital Growth Fund -- Class AARP (a)
--------------------------------------------------------------------------------
Years Ended September 30, 2000(b) 1999(b) 1998(b) 1997(b) 1996
--------------------------------------------------------------------------------
Net asset value, beginning of period $62.68 $51.24 $57.84 $43.47 $38.36
------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
Net investment income (loss) (.10) .04 .28 .34 .42
--------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions 16.27 18.19 (2.26) 18.43 5.59
------------------------------------------
--------------------------------------------------------------------------------
Total from investment operations 16.17 18.23 (1.98) 18.77 6.01
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
Net investment income (.04) (.24) (.31) (.41) (.39)
--------------------------------------------------------------------------------
Net realized gains on investment
transactions (5.40) (6.55) (4.31) (3.99) (.51)
------------------------------------------
--------------------------------------------------------------------------------
Total distributions (5.44) (6.79) (4.62) (4.40) (.90)
--------------------------------------------------------------------------------
Net asset value, end of period $73.41 $62.68 $51.24 $57.84 $43.47
------------------------------------------
--------------------------------------------------------------------------------
Total Return (%) 26.01 36.83 (3.39) 46.72 15.97
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions) 2,450 1,735 1,247 1,228 826
--------------------------------------------------------------------------------
Ratio of expenses before expense .91(c) .91 .87 .92 .90
reductions (%)
--------------------------------------------------------------------------------
Ratio of expenses after expense .90(c) .91 .87 .92 .90
reductions (%)
--------------------------------------------------------------------------------
Ratio of net investment income (loss) (.13) .07 .50 .70 1.05
(%)
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 66 68 53 39 65
--------------------------------------------------------------------------------
(a) On July 17, 2000, existing shares of the Fund were redesignated as
Class AARP shares.
(b) Based on monthly average shares outstanding during the period.
(c) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 0.90%
and 0.90%, respectively (see Notes to Financial Statements).
37
<PAGE>
Scudder Capital Growth Fund -- Class S
--------------------------------------------------------------------------------
2000(a)
--------------------------------------------------------------------------------
Net asset value, beginning of period $76.71
--------
--------------------------------------------------------------------------------
Income (loss) from investment operations:
--------------------------------------------------------------------------------
Net investment income (loss) (.02)
--------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (3.28)
--------
--------------------------------------------------------------------------------
Total from investment operations (3.30) Less distributions from:
--------------------------------------------------------------------------------
Net investment income --
--------------------------------------------------------------------------------
Net asset value, end of period $73.41
--------
--------------------------------------------------------------------------------
Total Return (%) (4.30)**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions) 7
--------------------------------------------------------------------------------
Ratio of expenses (%) .89*
--------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.15)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 66
--------------------------------------------------------------------------------
(a) For the period from July 17, 2000 (commencement of sale of Class S) to
September 30, 2000.
* Annualized
** Not annualized
38
<PAGE>
Scudder Small Company Stock Fund -- Class AARP (a)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Years Ended September 30, 2000 1999 1998 1997(b)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $17.89 $16.93 $20.02 $15.00
-------------------------------------
----------------------------------------------------------------------------------
Income (loss) from investment operations:
----------------------------------------------------------------------------------
Net investment income (loss) (c) (.08) .02 .01 .04
----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions .51 .96 (2.98) 4.98
-------------------------------------
----------------------------------------------------------------------------------
Total from investment operations .43 .98 (2.97) 5.02
----------------------------------------------------------------------------------
Less distributions from:
----------------------------------------------------------------------------------
Net investment income (.02) (.02) (.04) --
----------------------------------------------------------------------------------
Net realized gains on investment
transactions -- -- (.08) --
-------------------------------------
----------------------------------------------------------------------------------
Total distributions (.02) (.02) (.12) --
----------------------------------------------------------------------------------
Net asset value, end of period $18.32 $17.89 $16.93 $20.02
-------------------------------------
----------------------------------------------------------------------------------
Total Return (%) 2.41(d) 5.70 (14.91)(d) 33.53(d)
----------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
----------------------------------------------------------------------------------
Net assets, end of period ($ millions) 48 66 97 50
----------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 1.86(e) 1.70 1.80 2.79*
----------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 1.73(e) 1.70 1.75 1.75*
----------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.46) .13 .07 .40*
----------------------------------------------------------------------------------
Portfolio turnover rate (%) 48 17 12 5*
----------------------------------------------------------------------------------
</TABLE>
(a) On July 17, 2000, existing shares of the Fund were redesignated as
Class AARP shares.
(b) For the period February 1, 1997 (commencement of operations of Class
AARP) to September 30, 1997.
(c) Based on monthly average shares outstanding during the period.
(d) Total return would have been lower had certain expenses not been
reduced.
(e) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.78%
and 1.65%, respectively (see Notes to Financial Statements).
* Annualized
** Not annualized
39
<PAGE>
Scudder Small Company Stock Fund -- Class S
--------------------------------------------------------------------------------
2000(a)
--------------------------------------------------------------------------------
Net asset value, beginning of period $18.50
---------
--------------------------------------------------------------------------------
Income (loss) from investment operations:
--------------------------------------------------------------------------------
Net investment income (loss) (--)(b)
--------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.20)
---------
--------------------------------------------------------------------------------
Total from investment operations (.20) Less distributions from:
--------------------------------------------------------------------------------
Net investment income --
--------------------------------------------------------------------------------
Net asset value, end of period $18.30
---------
--------------------------------------------------------------------------------
Total Return (%) (1.14)**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions) 46
--------------------------------------------------------------------------------
Ratio of expenses (%) 1.19*(c)
--------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.21)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 48
--------------------------------------------------------------------------------
(a) For the period from July 17, 2000 (commencement of sale of Class S) to
September 30, 2000.
(b) Amount shown is less than $.005.
(c) The ratio of operating expenses includes a one-time reduction in
reorganization expenses. The ratio without this reduction was 1.24%.
* Annualized
** Not annualized
40
<PAGE>
Scudder Global Fund -- Class S
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
2000(b) 1999(c) 1999(d) 1998(d) 1997(d) 1996(d)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $31.25 $31.30 $32.41 $33.67 $28.73 $25.64
------------------------------------------------------
----------------------------------------------------------------------------------
Income (loss) from
investment operations:
----------------------------------------------------------------------------------
Net investment income
(loss) .53(a)(f) .02(a) .23(a) .38(a) .17(a) .24
----------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investment transactions 3.69 (.07) 1.82 3.82 6.58 3.94
------------------------------------------------------
----------------------------------------------------------------------------------
Total from investment
operations 4.22 (.05) 2.05 4.20 6.75 4.18
----------------------------------------------------------------------------------
Less distributions from:
----------------------------------------------------------------------------------
Net investment income (.20) -- (.55) (.88) (.28) (.25)
----------------------------------------------------------------------------------
Net realized gains on
investment transactions (3.91) -- (2.61) (4.58) (1.53) (.84)
------------------------------------------------------
----------------------------------------------------------------------------------
Total distributions (4.11) -- (3.16) (5.46) (1.81) (1.09)
----------------------------------------------------------------------------------
Net asset value, end
of period $31.36 $31.25 $31.30 $32.41 $33.67 $28.73
------------------------------------------------------
----------------------------------------------------------------------------------
Total Return (%) 13.83 (.16)** 7.18 14.93 24.91 16.65
----------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
----------------------------------------------------------------------------------
Net assets, end of period 1,552 1,553 1,610 1,766 1,604 1,368
($ millions)
----------------------------------------------------------------------------------
Ratio of expenses (%) 1.33(e) 1.36* 1.35 1.34 1.37 1.34
----------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 1.71(f) .44* .79 1.19 .59 .84
----------------------------------------------------------------------------------
Portfolio turnover rate (%) 60 29* 70 51 41 29
----------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the year ended August 31, 2000.
(c) For the two months ended August 31, 1999. On June 7, 1999, the Fund
changed its fiscal year end from June 30 to August 31.
(d) For the years ended June 30.
(e) The ratio of operating expenses excluding costs incurred in connection
with the reorganization was 1.32% (see Notes to Financial Statements).
(f) Net investment income per share includes non-recurring dividend income
amounting to $0.29 per share; the ratio of net investment income
excluding the non-recurring dividend is 0.77%.
* Annualized
** Not annualized
41
<PAGE>
How to Invest in the Funds
The following pages tell you how to invest in these funds and what to expect
as a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a
workplace retirement plan, financial supermarket or financial advisor -- your
provider may have its own policies or instructions, and you should follow
those.
As noted earlier, there are two classes of shares of each fund available
through this prospectus. The instructions for buying and selling each class
are slightly different.
Instructions for buying and selling Class AARP shares, which have been created
especially for AARP members, are found on the next two pages. These are
followed by instructions for buying and selling Class S shares, which are
generally not available to new investors. Be sure to use the appropriate table
when placing any orders to buy, exchange or sell shares in your account.
<PAGE>
How to Buy, Sell and Exchange Class AARP Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The AARP Investment Program."
--------------------------------------------------------------------------------
First investment Additional investments
--------------------------------------------------------------------------------
$1,000 or more for regular accounts $50 minimum with an Automatic
$500 or more for IRAs Investment Plan, Payroll Deduction or
Direct Deposit
--------------------------------------------------------------------------------
By mail
o For enrollment forms, call Send a personalized investment slip or
1-800-253-2277 short note that includes:
o Fill out and sign an enrollment form o fund and class name
o Send it to us at the appropriate o account number
address, along with an investment
check o check payable to "The AARP Investment
Program"
--------------------------------------------------------------------------------
By wire
o Call 1-800-253-2277 for instructions o Call 1-800-253-2277 for instructions
--------------------------------------------------------------------------------
By phone
--
o Call 1-800-253-2277 for instructions
--------------------------------------------------------------------------------
With an automatic investment plan
o Fill in the information required on o To set up regular investments from a
your enrollment form and include a bank checking account, call
voided check 1-800-253-2277 (minimum $50)
--------------------------------------------------------------------------------
Payroll Deduction or Direct Deposit
o Select either of these options on o Once you specify a dollar amount
your enrollment form and submit it. (minimum $50), investments are
You will receive further instructions automatic.
by mail.
--------------------------------------------------------------------------------
Using QuickBuy
-- o Call 1-800-253-2277
--------------------------------------------------------------------------------
On the Internet
o Go to "services and forms -- how to o Call 1-800-253-2277 to ensure you
open an account" at aarp.scudder.com have electronic services
o Print out a prospectus and an o Register at aarp.scudder.com
enrollment form
o Follow the instructions for buying
o Complete and return the enrollment shares with money from your bank
form with your check account
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Regular mail: The AARP Investment Program,
First investment: PO Box 219735, Kansas City, MO 64121-9735
Additional investments: PO Box 219743, Kansas City, MO 64121-9743
Express, registered or certified mail:
The AARP Investment Program, 811 Main Street, Kansas City, MO 64105-2005
Fax number: 1-800-821-6234 (for exchanging and selling only)
43
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Exchanging into another fund Selling shares
----------------------------------------------------------------------------------
<S> <C>
$1,000 or more to open a new account Some transactions, including most for
($500 or more for IRAs) over $100,000, can only be ordered in
writing; if you're in doubt, see page 49
----------------------------------------------------------------------------------
By phone
o Call 1-800-253-2277 for instructions o Call 1-800-253-2277 for instructions
----------------------------------------------------------------------------------
Using Easy-Access Line
o Call 1-800-631-4636 and follow the o Call 1-800-631-4636 and follow the
instructions instructions
----------------------------------------------------------------------------------
By mail or fax (see previous page)
Your instructions should include: Your instructions should include:
o your account number o your account number
o names of the funds, class and number o name of the fund, class and number of
of shares or dollar amount you want shares or dollar amount you want to
to exchange redeem
----------------------------------------------------------------------------------
With an automatic withdrawal plan
-- o To set up regular cash payments from
an account, call 1-800-253-2277
----------------------------------------------------------------------------------
Using QuickSell
-- o Call 1-800-253-2277
----------------------------------------------------------------------------------
On the Internet
o Register at aarp.scudder.com --
o Go to "services and forms"
o Follow the instructions for making
on-line exchanges
----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
To reach us: o Web site aarp.scudder.com
o Program representatives 1-800-253-2277, M-F, 8 a.m. - 8 p.m.
EST
o Confidential fax line 1-800-821-6234, always open
o TDD line 1-800-634-9454, M-F, 9 a.m. - 5 p.m. EST
Class AARP o AARP Lump Sum Service For planning and setting up a lump
Services sum distribution.
o AARP Legacy Service For organizing financial documents and
planning the orderly transfer of assets to heirs
o AARP Goal Setting and Asset Allocation Service For allocating
assets and measuring investment progress
o For more information, please call 1-800-253-2277.
44
<PAGE>
How to Buy, Sell and Exchange Class S Shares Buying Shares Use these
instructions to invest directly. Make out your check to "The Scudder Funds."
--------------------------------------------------------------------------------
First investment Additional investments
--------------------------------------------------------------------------------
$2,500 or more for regular accounts $100 or more for regular accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
--------------------------------------------------------------------------------
By mail or express (see below)
o Fill out and sign an application Send a Scudder investment slip or short
note that includes:
o Send it to us at the appropriate
address, along with an investment o fund and class name
check
o account number
o check payable to "The Scudder Funds"
--------------------------------------------------------------------------------
By wire
o Call 1-800-SCUDDER for instructions o Call 1-800-SCUDDER for instructions
--------------------------------------------------------------------------------
By phone
-- o Call 1-800-SCUDDER for instructions
--------------------------------------------------------------------------------
With an automatic investment plan
o Fill in the information on your o To set up regular investments from a
application and include a voided check bank checking account, call
1-800-SCUDDER
--------------------------------------------------------------------------------
Using QuickBuy
-- o Call 1-800-SCUDDER
--------------------------------------------------------------------------------
On the Internet
o Go to "funds and prices" at o Call 1-800-SCUDDER to ensure you have
www.scudder.com electronic services
o Print out a prospectus and a new o Register at www.scudder.com
account application
o Follow the instructions for buying
o Complete and return the application shares with money from your bank
with your check account
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Regular mail:
First investment: The Scudder Funds, PO Box 219669, Kansas City, MO 64121-9669
Additional investments: The Scudder Funds, PO Box 219664, Kansas City,
MO 64121-9664
Express, registered or certified mail:
The Scudder Funds, 811 Main Street, Kansas City, MO 64105-2005
Fax number: 1-800-821-6234 (for exchanging and selling only)
45
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Exchanging into another fund Selling shares
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
<S> <C>
$2,500 or more to open a new account Some transactions, including most for
($1,000 or more for IRAs) over $100,000, can only be ordered in
$100 or more for exchanges between writing; if you're in doubt, see page 49
existing accounts
----------------------------------------------------------------------------------
By phone or wire
o Call 1-800-SCUDDER for instructions o Call 1-800-SCUDDER for instructions
----------------------------------------------------------------------------------
Using SAIL(TM)
o Call 1-800-343-2890 and follow the o Call 1-800-343-2890 and follow the
instructions instructions
----------------------------------------------------------------------------------
By mail, express or fax
(see previous page)
Your instructions should include: Your instructions should include:
o the fund, class and account number o the fund, class and account number
you're exchanging out of from which you want to sell shares
o the dollar amount or number of shares o the dollar amount or number of shares
you want to exchange you want to sell
o the name and class of the fund you o your name(s), signature(s) and
want to exchange into address, as they appear on your
account
o your name(s), signature(s) and
address, as they appear on your o a daytime telephone number
account
o a daytime telephone number
----------------------------------------------------------------------------------
With an automatic withdrawal plan
-- o To set up regular cash payments from
a Scudder account, call 1-800-SCUDDER
----------------------------------------------------------------------------------
Using QuickSell
-- o Call 1-800-SCUDDER
----------------------------------------------------------------------------------
On the Internet
o Register at www.scudder.com --
o Follow the instructions for making
on-line exchanges
----------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to each fund's Class AARP and Class S shares. Each fund does have other
share classes, which are described in a separate prospectus and which have
different fees, requirements and services
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
--------------------------------------------------------------------------------
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Questions? You can speak to a Scudder representative between 8 a.m. and 8 p.m.
Eastern time on any fund business day by calling 1-800-253-2277 (Class AARP) or
1-800-SCUDDER (Class S).
--------------------------------------------------------------------------------
47
<PAGE>
Ordinarily, your investment in Scudder GNMA Fund and Scudder Managed Municipal
Bonds will start to accrue dividends the next business day after your purchase
is processed.
When selling shares, you'll generally receive the dividend for the day on which
your shares were sold.
Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.
For Class AARP Shares
--------------------------------------------------------------------------
Call Easy-Access Line, the AARP Program Automated Information Line, at
1-800-631-4636
--------------------------------------------------------------------------
For Class S Shares
--------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).
Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The fund
can only accept wires of $100 or more.
--------------------------------------------------------------------------------
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The Scudder Web site can be a valuable resource for shareholders with Internet
access. To get up-to-date information, review balances or even place orders for
exchanges, go to aarp.scudder.com (Class AARP) or www.scudder.com (Class S).
--------------------------------------------------------------------------------
48
<PAGE>
Exchanges among Scudder funds are an option for shareholders who bought their
fund shares directly from Scudder and many other investors as well. Exchanges
are a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
How the funds calculate share price
For each share class of each fund, the share price is the net asset value per
share, or NAV. To calculate NAV, each share class of each fund uses the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, a fund's value for a security is likely to be different from quoted market
prices.
49
<PAGE>
To the extent that a fund invests in securities that are traded primarily in
foreign markets, the value of their holdings could change at a time when you
aren't able to buy or sell fund shares. This is because some foreign markets are
open on days when the funds don't price their shares.
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if
you have been notified by the IRS that you are subject to
backup withholding, or if you fail to provide us with a
correct taxpayer ID number or certification that you are
exempt from backup withholding
o for Class AARP and Class S shareholders, close your account
and send you the proceeds if your balance falls below $1,000;
for Class S shareholders, charge you $10 a year if your
account balance falls below $2,500; in either case, we will
give you 60 days' notice so you can either increase your
balance or close your account (these policies don't apply to
retirement accounts, to investors with $100,000 or more in
Scudder fund shares or in any case where a fall in share price
created the low balance)
o reject a new account application if you don't provide a
correct Social Security or other tax ID number; if the account
has already been opened, we may give you 30 days' notice to
provide the correct number
o pay you for shares you sell by "redeeming in kind," that is,
by giving you marketable securities (which typically will
involve brokerage costs for you to liquidate) rather than
cash; generally, the fund won't make a redemption in kind
unless your requests over a 90-day period total more than
$250,000 or 1% of the value of the fund's net assets,
whichever is less
o change, add or withdraw various services, fees and account
policies (for example, we may change or terminate the exchange
privilege at any time)
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
--------------------------------------------------------------------------------
50
<PAGE>
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The funds intend to pay dividends and distributions on the following schedule,
and if necessary, may do so at other times as well:
Scudder GNMA Fund monthly
---------------------------------------------------------------------
Scudder Managed Municipal Bonds monthly
---------------------------------------------------------------------
Scudder Growth and Income Fund quarterly*
---------------------------------------------------------------------
Scudder Capital Growth Fund annually, December
---------------------------------------------------------------------
Scudder Small Company Stock Fund annually, December
---------------------------------------------------------------------
Scudder Global Fund annually, November or December
---------------------------------------------------------------------
* March, June, September and December
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
--------------------------------------------------------------------------------
51
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
----------------------------------------------------------------------
o short-term capital gains from selling fund shares
----------------------------------------------------------------------
o taxable income dividends you receive from a fund
----------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
----------------------------------------------------------------------
Generally taxed at capital gains rates
----------------------------------------------------------------------
o long-term capital gains from selling fund shares
----------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
----------------------------------------------------------------------
Dividends from Scudder Managed Municipal Bonds are generally free from federal
income tax for most shareholders. However, there are a few exceptions:
o a portion of the fund's dividends may be taxable as ordinary income if
it came from investments in taxable securities
o because the fund can invest up to 20% of net assets in securities whose
income is subject to the federal alternative minimum tax (AMT), you may
owe taxes on a portion of your dividends if you are among those
investors who must pay AMT
You may be able to claim a tax credit or deduction for your share of any foreign
taxes Scudder Global Fund pays.
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive (except from Scudder GNMA Fund and Scudder Managed
Municipal Bonds).
52
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call 1-800-253-2277 (Class
AARP) or 1-800-SCUDDER (Class S).
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, please contact Scudder or
the SEC (see below). If you're a shareholder and have questions, please contact
Scudder. Materials you get from Scudder are free; those from the SEC involve a
copying fee. If you like, you can look over these materials at the SEC's Public
Reference Room in Washington, DC or request them electronically at
[email protected].
AARP Investment
Program from Scudder Scudder Funds SEC
---------------------------------------------------------------------
PO Box 219735 PO Box 219669 450 Fifth Street, N.W.
Kansas City, MO Kansas City, MO Washington, D.C.
64121-9735 64121-9669 20549-6009
---------------------------------------------------------------------
1-800-253-2277 1-800-SCUDDER 1-202-942-8090
---------------------------------------------------------------------
aarp.scudder.com www.scudder.com www.sec.gov
---------------------------------------------------------------------
Fund Name SEC File #
---------------------------------------------------------------------
Scudder GNMA Fund 811-4049
---------------------------------------------------------------------
Scudder Managed Municipal Bonds 811-2671
---------------------------------------------------------------------
Scudder Growth and Income Fund 811-43
---------------------------------------------------------------------
Scudder Capital Growth Fund 811-43
---------------------------------------------------------------------
Scudder Small Company Stock Fund 811-43
---------------------------------------------------------------------
Scudder Global Fund 811-4670
---------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
SCUDDER
INVESTMENTS (SM)
[LOGO]
December 29, 2000
Prospectus
Scudder Capital Growth Fund
Advisor Classes A, B and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
--------------------------------------------------------------------------------
<PAGE>
Contents
--------------------------------------------------------------------------------
How the Fund Works How to Invest in the Fund
4 The Fund's Investment Strategy 11 Choosing a Share Class
5 The Main Risks of Investing 16 How to Buy Shares
in the Fund
17 How to Exchange or Sell
6 The Fund's Performance History Shares
7 How Much Investors Pay 18 Policies You Should Know
About
8 Other Policies and Risks
25 Understanding Distributions
9 Who Manages and Oversees and Taxes
the Fund
<PAGE>
How the Fund Works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
--------------------------------------------------------------------------------
Class A Class B Class C
ticker symbol XXXXX XXXXX XXXXX
fund number 000 000 000
Scudder Capital Growth Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks to provide long-term capital growth while actively seeking to
reduce downside risk compared with other growth mutual funds. The fund invests
at least 65% of total assets in equities, mainly common stocks of U.S.
companies. Although the fund can invest in companies of any size, it generally
focuses on established companies with market values of $3 billion or more. The
fund does not invest in securities issued by tobacco-producing companies.
In choosing stocks, the portfolio managers look for individual companies that
have displayed above-average earnings growth compared to other growth companies
and that have strong product lines, effective management and leadership
positions within core markets. The managers also analyze each company's
valuation, stock price movements and other factors.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups. The managers use several strategies in seeking to reduce downside risk,
including:
o focusing on high quality companies with reasonable valuations
o diversifying broadly among companies, industries and sectors
o limiting the majority of the portfolio to 3.5% in any one issuer (other
funds may invest 5% or more)
--------------------------------------------------------------------------------
OTHER INVESTMENTS While most of the fund's investments are common stocks, some
may be other types of equities, such as convertible securities and preferred
stocks. Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
4
<PAGE>
Depending on their outlook, the managers may increase or reduce the fund's
exposure to a given industry or company. The fund will normally sell a stock
when the managers believe it is too highly valued, its fundamental qualities
have deteriorated or its potential risks have increased.
The Main Risks of Investing in the Fund
There are several risk factors that could hurt fund performance, cause you to
lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the medium and large growth company portions of
the U.S. stock market. When prices of these stocks fall, you should expect the
value of your investment to fall as well. At times, large or medium company
stocks may not perform as well as stocks of smaller companies. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect the value of portfolio securities. For example, a
rise in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
risk factors or other matters
o growth stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, market conditions might make it hard to value some investments
or to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
This fund is designed for investors interested in a long-term investment that
seeks to lower its share price volatility compared with other growth mutual
funds.
5
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. The bar chart shows how
fund performance has varied from year to year, which may give some idea of risk.
The table shows how fund performance compares with a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
The share classes offered in this prospectus -- Classes A, B and C -- are newly
offered. In the bar chart, the performance figures for Class A are based on the
historical performance of the fund's original share class (Class AARP), adjusted
to reflect the higher gross total annual operating expenses of Class A. The bar
chart does not reflect sales loads; if it did, returns would be lower. In the
table, the performance figures for each share class are based on the historical
performance of Class AARP, adjusted to reflect both the higher gross total
annual operating expenses of Class A, B or C and the current applicable sales
charge of that class. Class AARP shares are offered in a different prospectus.
Scudder Capital Growth Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1990 -16.01
1991 40.14
1992 4.43
1993 15.66
1994 -10.29
1995 30.19
1996 20.29
1997 34.70
1998 23.39
1999 35.07
2000 Total Return as of September 30: 0.96%
Best Quarter: 25.74%, Q4 1998 Worst Quarter: -21.32%, Q3 1990
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Class A 27.30 27.07 15.50
--------------------------------------------------------------------------------
Class B 29.97 27.31 15.26
--------------------------------------------------------------------------------
Class C 34.02 27.59 15.29
--------------------------------------------------------------------------------
Index 21.04 28.54 18.20
--------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged, capitalization-weighted index that includes 500 large-cap stocks.
6
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
fund shares.
--------------------------------------------------------------------------------
Fee Table Class A Class B Class C
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Purchases (% of offering price) 5.75% None None
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge
(Load) (% of redemption proceeds) None* 4.00% 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.58% 0.58% 0.58%
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee 0.25% 1.00% 1.00%
--------------------------------------------------------------------------------
Other Expenses** 0.33% 0.38% 0.35%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 1.16% 1.96% 1.93%
--------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
** Includes a fixed rate administrative fee of 0.325%, 0.375% and 0.350% for
Class A, Class B and Class C shares, respectively.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on July 17, 2000.
Based on the costs above, this example helps you compare the expenses of each
share class to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares $686 $922 $1,177 $1,903
--------------------------------------------------------------------------------
Class B shares 599 915 1,257 1,888
--------------------------------------------------------------------------------
Class C shares 296 606 1,042 2,254
--------------------------------------------------------------------------------
Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares $686 $922 $1,177 $1,903
--------------------------------------------------------------------------------
Class B shares 199 615 1,057 1,888
--------------------------------------------------------------------------------
Class C shares 196 606 1,042 2,254
--------------------------------------------------------------------------------
7
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could
change the fund's investment goal without seeking shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of its
assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
8
<PAGE>
Who Manages and Oversees the Fund
The investment advisor
The fund's investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds, and currently has more than $290 billion in assets under
management.
The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
The advisor receives a management fee from the fund. For the 12 months through
the most recent fiscal year end, the actual amount the fund paid in management
fees was 0.60% of its average daily net assets.
The fund has entered into a new investment management agreement with the
advisor. The table below describes the new fee rates for the fund.
--------------------------------------------------------------------------------
Investment Management Fee effective July 17, 2000
--------------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------------
first $3 billion 0.580%
--------------------------------------------------------------------------------
next $1 billion 0.555%
--------------------------------------------------------------------------------
more than $4 billion 0.530%
--------------------------------------------------------------------------------
The portfolio manager
The following person handles the day-to-day management of the fund.
William F. Gadsen
Lead Portfolio Manager
o Began investment career in 1981
o Joined the advisor in 1983
o Joined the fund team in 1989
9
<PAGE>
How to Invest in the Fund
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
10
<PAGE>
Choosing a Share Class
Offered in this prospectus are three share classes for the fund. The fund offers
other classes of shares separately. Each class has its own fees and expenses,
offering you a choice of cost structures. Class A, Class B and Class C shares
are intended for investors seeking the advice and assistance of a financial
representative, who may receive compensation for those services through sales
commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
--------------------------------------------------------------------------------
Classes and features Points to help you compare
--------------------------------------------------------------------------------
Class A
o Sales charges of up to 5.75%, charged o Some investors may be able to
when you buy shares reduce or eliminate their sales
charges; see next page
o In most cases, no charges when you
sell shares o Total annual operating expenses
are lower than those for Class B
o 0.25% service fee or Class C
--------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate
falls to zero after six years
o Deferred sales charge declining from
4.00%, charged when you sell shares o Shares automatically convert to
you bought within the last six years Class A after six years, which
means lower annual expenses going
o 1.00% distribution/service fee forward
--------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never
o Deferred sales charge of 1.00%, convert to Class A, so annual
charged when you sell shares you expenses remain higher
bought within the last year
o 1.00% distribution/service fee
--------------------------------------------------------------------------------
11
<PAGE>
Class A shares
Class A shares do have a 12b-1 plan, under which a service fee of 0.25% is
deducted from fund assets each year. Class A shares have a sales charge that
varies with the amount you invest:
Sales charge as a Sales charge as % of
Your investment % of offering price your net investment
--------------------------------------------------------------------------------
Up to $50,000 5.75% 6.10%
--------------------------------------------------------------------------------
$50,000-$99,999 4.50 4.71
--------------------------------------------------------------------------------
$100,000-$249,999 3.50 3.63
--------------------------------------------------------------------------------
$250,000-$499,999 2.60 2.67
--------------------------------------------------------------------------------
$500,000-$999,999 2.00 2.04
--------------------------------------------------------------------------------
$1 million or more See below and next page
--------------------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $50,000
("cumulative discount")
o you are investing a total of $50,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
12
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a fee
to an investment advisor or other firm for portfolio management services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper Service
Company can answer your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Kemper Service Company can answer your questions and help you
determine if you're eligible.
13
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% and a
service fee of 0.25% are deducted from fund assets each year. This means the
annual expenses for Class B shares are somewhat higher (and their performance
correspondingly lower) compared to Class A shares. After six years, Class B
shares automatically convert to Class A, which has the net effect of lowering
the annual expenses from the seventh year on. However, unlike Class A shares,
your entire investment goes to work immediately.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 4.00%
--------------------------------------------------------------------------------
Second or third year 3.00
--------------------------------------------------------------------------------
Fourth or fifth year 2.00
--------------------------------------------------------------------------------
Sixth year 1.00
--------------------------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses.
14
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges. However,
Class C shares do have a 12b-1 plan under which a distribution fee of 0.75% and
a service fee of 0.25% are deducted from fund assets each year. Because of these
fees, the annual expenses for Class C shares are similar to those of Class B
shares, but higher than those for Class A shares (and the performance of Class C
shares is correspondingly lower than that of Class A). However, unlike Class A
shares, your entire investment goes to work immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 1.00%
--------------------------------------------------------------------------------
Second year and later None
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
15
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
--------------------------------------------------------------------------------
First investment Additional investments
--------------------------------------------------------------------------------
$1,000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using the o Contact your representative using
method that's most convenient for you the method that's most convenient
for you
--------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check made out to "Kemper
Funds" and an investment slip to
o Send it to us at the appropriate us at the appropriate address
address, along with an investment below
check
o If you don't have an investment
slip, simply include a letter
with your name, account number,
the full name of the fund and the
share class and your investment
instructions
--------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for
instructions
--------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for
instructions
--------------------------------------------------------------------------------
With an automatic investment plan
-- o To set up regular investments
from a bank checking account,
call (800) 621-1048 (minimum $50)
--------------------------------------------------------------------------------
On the Internet
-- o Go to www.kemper.com and register
o Follow the instructions for
buying shares with money from
your bank account
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
16
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
--------------------------------------------------------------------------------
Exchanging into another fund Selling shares
--------------------------------------------------------------------------------
$1,000 or more to open a new account Some transactions, including most
($250 for IRAs) for over $50,000, can only be
ordered in writing with a
$100 or more for exchanges between signature guarantee; if you're in
existing accounts doubt, see page 20
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by o Contact your representative by
the method that's most the method that's most
convenient for you convenient for you
--------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for o Call (800) 621-1048 for
instructions instructions
--------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account o the fund, class and account
number you're exchanging out of number from which you want to
sell shares
o the dollar amount or number of
shares you want to exchange o the dollar amount or number of
shares you want to sell
o the name and class of the fund
you want to exchange into o your name(s), signature(s) and
address, as they appear on your
o your name(s), signature(s) and account
address, as they appear on your
account o a daytime telephone number
o a daytime telephone number
--------------------------------------------------------------------------------
With a systematic exchange plan
o To set up regular exchanges --
from a fund account, call (800)
621-1048
--------------------------------------------------------------------------------
With a systematic withdrawal plan o To set up regular cash payments
from a fund account, call (800)
-- 621-1048
--------------------------------------------------------------------------------
On the Internet
o Go to www.kemper.com and register --
o Follow the instructions for making
on-line exchanges
--------------------------------------------------------------------------------
17
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you
received from them. As a general rule, you should follow the information in
those materials wherever it contradicts the information given here. Please note
that an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class A, Class B and Class C shares. The fund does have other
share classes, which are described in a separate prospectus and which have
different fees, requirements and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
18
<PAGE>
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. Eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Scudder or Kemper funds generally and on accounts held directly at Kemper. You
can also use it to make exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Scudder or Kemper account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www.kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
19
<PAGE>
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $100 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject or limit purchase orders,
for these or other reasons.
When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
20
<PAGE>
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns of
excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege, redemption of shares whose dealer of record at the time of the
investment notifies Kemper Distributors that the dealer waives the
applicable commission
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper Service Company can answer your questions and help you determine if you
are eligible.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
21
<PAGE>
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Scudder or Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Kemper Service Company or your
financial representative.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
22
<PAGE>
How the fund calculates share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing a Share Class")
Class B and Class C shares-- net asset value per share, or NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each share class, the price at which you sell shares is also the NAV,
although for Class B and Class C investors a contingent deferred sales charge
may be taken out of the proceeds (see "Choosing a Share Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
To the extent that the fund invests in securities that are traded primarily in
foreign markets, the value of its holdings could change at a time when you
aren't able to buy or sell fund shares. This is because some foreign markets are
open on days when the fund doesn't price its shares.
23
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened,
we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for
you to liquidate) rather than cash; the fund generally won't make a
redemption in kind unless your requests over a 90-day period total more
than $250,000 or 1% of the value of the fund's net assets, whichever is
less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
24
<PAGE>
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund intends to pay dividends and distributions to its shareholders annually
in December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
25
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o taxable income dividends you receive from a fund
--------------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
26
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get the reports
automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus). If you'd like to ask for copies of these documents, please
contact Kemper or the SEC (see below). If you're a shareholder and have
questions, please contact Kemper. Materials you get from Kemper are free; those
from the SEC involve a copying fee. If you like, you can look over these
materials at the SEC's Public Reference Room in Washington, DC or request them
electronically at [email protected].
SEC Scudder Funds c/o
450 Fifth Street, N.W. Kemper Distributors, Inc.
Washington, DC 20549-0102 222 South Riverside Plaza
www.sec.gov Chicago, IL 60606-5808
Tel (202) 942-8090 www.kemper.com
Tel (800) 621-1048
SEC File Number
Scudder Capital Growth Fund 811-43
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[RECYCLE LOGO] Printed on recycled paper. XXXX-X (0/0/00) XXXXX
<PAGE>
SCUDDER
INVESTMENTS (SM)
[LOGO]
December 29, 2000
Prospectus
Scudder Dividend & Growth Fund
Advisor Classes A, B and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Contents
--------------------------------------------------------------------------------
How the Fund Works How to Invest in the Fund
4 The Fund's Investment Strategy 11 Choosing a Share Class
5 The Main Risks of Investing 16 How to Buy Shares
in the Fund
17 How to Exchange or Sell
6 The Fund's Performance History Shares
7 How Much Investors Pay 18 Policies You Should Know
About
8 Other Policies and Risks
24 Understanding Distributions
9 Who Manages and Oversees and Taxes
the Fund
<PAGE>
How the Fund Works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
--------------------------------------------------------------------------------
Class A Class B Class C
ticker symbol XXXXX XXXXX XXXXX
fund number 000 000 000
Scudder Dividend & Growth Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks high current income and long-term growth of capital by investing
primarily in common stocks, convertible securities and real estate investment
trusts. The fund may invest up to 80% of net assets in common stocks, up to 30%
of net assets in convertible securities and up to 25% of net assets in
securities of real estate investment trusts (REITs).
In choosing securities, the portfolio managers begin by determining the relative
attractiveness of each type of allowable security, based on their analysis of
outlooks for interest rates and the economy among other factors.
In choosing stocks, the managers seek medium- and large-sized companies whose
dividend and earning prospects are attractive relative to the S&P 500 Index. The
fund may invest in dividend paying and non-dividend paying stocks.
In choosing convertible securities (which are often below investment-grade debt
securities, commonly referred to as junk bonds), the managers favor those issued
by undervalued companies, examining securities with many different types of
structures. In choosing REITs, the managers seek those issued by companies with
strengths in acquisition, development and property management.
The fund will typically sell a security when it reaches a target price or when
the managers believe other investments offer better opportunities.
--------------------------------------------------------------------------------
OTHER INVESTMENTS While most of the fund's investments are equities, the fund
may also invest up to 20% of net assets in bonds, including those rated below
investment-grade (i.e., grade BB and below). Although the fund is permitted to
use various types of derivatives (contracts whose value is based on, for
example, indices, currencies, or securities), the managers don't intend to use
them as principal investments, and may not use them at all.
4
<PAGE>
The Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform. When stock prices fall, you should expect the value of your
investment to fall as well. Because a stock represents ownership in its issuer,
stock prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies. The value of any convertible securities the fund owns will probably
be affected by the issuer's stock price. To the extent that the fund focuses on
income, it may end up missing opportunities in faster-growing industries or
companies.
REITs carry additional risks and may be more volatile than other types of
income-paying equity securities. Rising interest rates, for example, tend to
lower the yields of existing REITs and may discourage real estate companies from
developing new projects.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies, types of securities or other matters
o prices of bonds or convertible securities could be hurt by rising interest
rates or declines in credit quality
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments
or to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
This fund is designed for long-term investors interested in participating in the
stock market while keeping a focus on income.
5
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. The bar chart shows how
fund performance has varied from year to year, which may give some idea of risk.
The table shows how fund performance compares with a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
The share classes offered in this prospectus -- Classes A, B and C -- are newly
offered. In the bar chart, the performance figures for Class A are based on the
historical performance of the fund's original share class (Class S), adjusted to
reflect the higher gross total annual operating expenses of Class A. The bar
chart does not reflect sales loads; if it did, returns would be lower. In the
table, the performance figures for each share class are based on the historical
performance of Class S, adjusted to reflect both the higher gross total annual
operating expenses of Class A, B or C and the current applicable sales charge of
that class. Class S shares are offered in a different prospectus.
Scudder Dividend & Growth Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1999 15.88
2000 Total Return as of September 30: 13.73%
Best Quarter: 10.50%, Q4 1999 Worst Quarter: -7.66%, Q3 1999
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year Since Inception*
--------------------------------------------------------------------------------
Class A 9.21 3.11
--------------------------------------------------------------------------------
Class B 11.51 4.27
--------------------------------------------------------------------------------
Class C 14.98 6.43
--------------------------------------------------------------------------------
Index 21.04 18.20
--------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged, capitalization-weighted index that includes 500 large-cap stocks.
* Fund inception: 07/17/1998. Index comparison begins 7/31/1998.
In the chart, the total return for 1999 would have been lower if operating
expenses hadn't been reduced.
In the table, total returns from inception through 1999 would have been lower if
operating expenses hadn't been reduced.
6
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
fund shares.
--------------------------------------------------------------------------------
Fee Table Class A Class B Class C
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Purchases (% of offering price) 5.75% None None
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge (Load)
(% of redemption proceeds) None* 4.00% 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.75% 0.75% 0.75%
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee 0.25% 1.00% 1.00%
--------------------------------------------------------------------------------
Other Expenses** 0.34% 0.39% 0.37%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 1.34% 2.14% 2.12%
--------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
** Includes a fixed rate administrative fee of 0.325%, 0.375% and 0.350% for
Class A, Class B and Class C shares, respectively.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on October 2, 2000.
Based on the costs above, this example helps you compare the expenses of each
share class to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
--------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares $704 $975 $1,267 $2,095
--------------------------------------------------------------------------------
Class B shares 617 970 1,349 2,082
--------------------------------------------------------------------------------
Class C shares 315 664 1,139 2,452
--------------------------------------------------------------------------------
Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares $704 $975 $1,267 $2,095
--------------------------------------------------------------------------------
Class B shares 217 670 1,149 2,082
--------------------------------------------------------------------------------
Class C shares 215 664 1,139 2,452
--------------------------------------------------------------------------------
7
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could
change the fund's investment goal without seeking shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of its
assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
8
<PAGE>
Who Manages and Oversees the Fund
The investment advisor
The fund's investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds, and currently has more than $290 billion in assets under
management.
The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
The advisor receives a management fee from the fund. For the 12 months through
the most recent fiscal year end, the actual amount the fund paid in management
fees was 0.00%* of its average daily net assets.
* Reflecting the effect of expense limitations and/or fee waivers then in
effect.
The fund has entered into a new investment management agreement with the
advisor. The table below describes the new fee rates for the fund.
--------------------------------------------------------------------------------
Investment Management Fee effective October 2, 2000
--------------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------------
first $500 million 0.75%
--------------------------------------------------------------------------------
more than $500 million 0.70%
--------------------------------------------------------------------------------
The portfolio managers
The following people handle the day-to-day management of the fund.
Kathleen T. Millard Nicholas Anisimov
Lead Portfolio Manager o Began investment
o Began investment career career in 1987
in 1983 o Joined the advisor in
o Joined the advisor in 1987
1991 o Joined the fund team
o Joined the fund team in 1998
in 1999
David I. Hoffman
Gregory S. Adams o Began investment
o Began investment career career in 1994
in 1987 o Joined the advisor in
o Joined the advisor in 1999
1999 o Joined the fund team
o Joined the fund team in in 2000
1999
9
<PAGE>
How to Invest in the Fund
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
<PAGE>
Choosing a Share Class
Offered in this prospectus are three share classes for the fund. The fund offers
other classes of shares separately. Each class has its own fees and expenses,
offering you a choice of cost structures. Class A, Class B and Class C shares
are intended for investors seeking the advice and assistance of a financial
representative, who may receive compensation for those services through sales
commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
--------------------------------------------------------------------------------
Classes and features Points to help you compare
--------------------------------------------------------------------------------
Class A
o Sales charges of up to 5.75%, o Some investors may be able
charged when you buy shares to reduce or eliminate their
sales charges; see next page
o In most cases, no charges when
you sell shares o Total annual operating
expenses are lower than
o 0.25% service fee those for Class B or Class C
--------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate
falls to zero after six years
o Deferred sales charge declining
from 4.00%, charged when you o Shares automatically convert
sell shares you bought within to Class A after six years,
the last six years which means lower annual
expenses going forward
o 1.00% distribution/service fee
--------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate
is lower, but your shares never
o Deferred sales charge of 1.00%, convert to Class A, so annual
charged when you sell shares expenses remain higher
you bought within the last year
o 1.00% distribution/service fee
--------------------------------------------------------------------------------
11
<PAGE>
Class A shares
Class A shares do have a 12b-1 plan, under which a service fee of 0.25% is
deducted from fund assets each year. Class A shares have a sales charge that
varies with the amount you invest:
Sales charge as a % of Sales charge as % of
Your investment offering price your net investment
--------------------------------------------------------------------------------
Up to $50,000 5.75% 6.10%
--------------------------------------------------------------------------------
$50,000-$99,999 4.50 4.71
--------------------------------------------------------------------------------
$100,000-$249,999 3.50 3.63
--------------------------------------------------------------------------------
$250,000-$499,999 2.60 2.67
--------------------------------------------------------------------------------
$500,000-$999,999 2.00 2.04
--------------------------------------------------------------------------------
$1 million or more See below and next page
--------------------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $50,000
("cumulative discount")
o you are investing a total of $50,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
12
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a fee
to an investment advisor or other firm for portfolio management services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper Service
Company can answer your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Kemper Service Company can answer your questions and help you
determine if you're eligible.
13
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% and a
service fee of 0.25% are deducted from fund assets each year. This means the
annual expenses for Class B shares are somewhat higher (and their performance
correspondingly lower) compared to Class A shares. After six years, Class B
shares automatically convert to Class A, which has the net effect of lowering
the annual expenses from the seventh year on. However, unlike Class A shares,
your entire investment goes to work immediately.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 4.00%
--------------------------------------------------------------------------------
Second or third year 3.00
--------------------------------------------------------------------------------
Fourth or fifth year 2.00
--------------------------------------------------------------------------------
Sixth year 1.00
--------------------------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses.
14
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges. However,
Class C shares do have a 12b-1 plan under which a distribution fee of 0.75% and
a service fee of 0.25% are deducted from fund assets each year. Because of these
fees, the annual expenses for Class C shares are similar to those of Class B
shares, but higher than those for Class A shares (and the performance of Class C
shares is correspondingly lower than that of Class A). However, unlike Class A
shares, your entire investment goes to work immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 1.00%
--------------------------------------------------------------------------------
Second year and later None
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
15
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
--------------------------------------------------------------------------------
First investment Additional investments
--------------------------------------------------------------------------------
$1,000 or more for regular accounts $100 or more for regular accounts
$50 or more for IRAs
$250 or more for IRAs $50 or more with an Automatic
Investment Plan
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative o Contact your representative
using the method that's most using the method that's most
convenient for you convenient for you
--------------------------------------------------------------------------------
By mail or express mail (see
below)
o Fill out and sign an application o Send a check made out to
"Kemper Funds" and an
o Send it to us at the investment slip to us at the
appropriate address, along with appropriate address below
an investment check
o If you don't have an
investment slip, simply include a letter
with your name, account number, the full
name of the fund and the share class and
your investment instructions
--------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for o Call (800) 621-1048 for instructions
instructions
--------------------------------------------------------------------------------
By phone
--
o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
With an automatic investment plan
--
o To set up regular investments from a bank
checking account, call (800) 621-1048
(minimum $50)
--------------------------------------------------------------------------------
On the Internet
--
o Go to www.kemper.com and
register
o Follow the instructions for
buying shares with money
from your bank account
--------------------------------------------------------------------------------
Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
16
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
--------------------------------------------------------------------------------
Exchanging into another fund Selling shares
--------------------------------------------------------------------------------
$1,000 or more to open a new Some transactions, including
account ($250 for IRAs) most for over $50,000, can
only be ordered in writing
$100 or more for exchanges with a signature guarantee; if
between existing accounts you're in doubt, see page 27
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by o Contact your representative
the method that's most by the method that's most
convenient for you convenient for you
--------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for o Call (800) 621-1048 for instructions
instructions
--------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account o the fund, class and account
number you're exchanging out of number from which you want
to sell shares
o the dollar amount or number of
shares you want to exchange o the dollar amount or number
of shares you want to sell
o the name and class of the fund
you want to exchange into o your name(s), signature(s)
and address, as they appear
o your name(s), signature(s) and on your account
address, as they appear on your
account o a daytime telephone number
o a daytime telephone number
--------------------------------------------------------------------------------
With a systematic exchange plan
o To set up regular exchanges --
from a fund account, call
(800) 621-1048
--------------------------------------------------------------------------------
With a systematic withdrawal plan
-- o To set up regular cash
payments from a fund
account, call (800) 621-1048
--------------------------------------------------------------------------------
On the Internet
o Go to www.kemper.com and --
register
o Follow the instructions for
making on-line exchanges
--------------------------------------------------------------------------------
17
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you
received from them. As a general rule, you should follow the information in
those materials wherever it contradicts the information given here. Please note
that an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class A, Class B and Class C shares. The fund does have other
share classes, which are described in a separate prospectus and which have
different fees, requirements and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. Eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
18
<PAGE>
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Scudder or Kemper funds generally and on accounts held directly at Kemper. You
can also use it to make exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Scudder or Kemper account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $100 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject or limit purchase orders,
for these or other reasons.
When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www.kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
19
<PAGE>
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns of
excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege, redemption of shares whose dealer of record at the time of the
investment notifies Kemper Distributors that the dealer waives the
applicable commission
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper Service Company can answer your questions and help you determine if you
are eligible.
20
<PAGE>
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Scudder or Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Kemper Service Company or your
financial representative.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
21
<PAGE>
How the fund calculates share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing a Share Class")
Class B and Class C shares -- net asset value per share, or NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each share class, the price at which you sell shares is also the NAV,
although for Class B and Class C investors a contingent deferred sales charge
may be taken out of the proceeds (see "Choosing a Share Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
To the extent that the fund invests in securities that are traded primarily in
foreign markets, the value of its holdings could change at a time when you
aren't able to buy or sell fund shares. This is because some foreign markets are
open on days when the fund doesn't price its shares.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
22
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened,
we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for
you to liquidate) rather than cash; the fund generally won't make a
redemption in kind unless your requests over a 90-day period total more
than $250,000 or 1% of the value of the fund's net assets, whichever is
less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
23
<PAGE>
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund has a regular schedule for paying out any earnings to shareholders:
o Income: declared and paid quarterly in March, June, September and December
o Long-term and short-term capital gains: November or December, or otherwise
as needed
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
24
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o taxable income dividends you receive from a fund
--------------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
25
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get the reports
automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus). If you'd like to ask for copies of these documents, please
contact Kemper or the SEC (see below). If you're a shareholder and have
questions, please contact Kemper. Materials you get from Kemper are free; those
from the SEC involve a copying fee. If you like, you can look over these
materials at the SEC's Public Reference Room in Washington, DC or request them
electronically at [email protected].
SEC Scudder Funds c/o
450 Fifth Street, N.W. Kemper Distributors, Inc.
Washington, DC 20549-0102 222 South Riverside Plaza
www.sec.gov Chicago, IL 60606-5808
Tel (202) 942-8090 www.kemper.com
Tel (800) 621-1048
SEC File Number 811-43
Scudder Dividend & Growth Fund
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[RECYCLE LOGO] Printed on recycled paper. XXXX-X (0/0/00) XXXXXX
<PAGE>
SCUDDER
INVESTMENTS (SM)
[LOGO]
December 29, 2000
Prospectus
Scudder Growth and Income Fund
Advisor Classes A, B and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Contents
How the Fund Works
4 The Fund's Investment Strategy
5 The Main Risks of Investing
in the Fund
6 The Fund's Performance History
7 How Much Investors Pay
8 Other Policies and Risks
9 Who Manages and Oversees
the Fund
How to Invest in the Fund
12 Choosing a Share Class
17 How to Buy Shares
18 How to Exchange or Sell
Shares
19 Policies You Should Know
About
26 Understanding Distributions
and Taxes
<PAGE>
How the Fund Works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
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Class A Class B Class C
fund number 464 664 764
Scudder Growth and Income Fund
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The Fund's Investment Strategy
The fund seeks long-term growth of capital, current income and growth of income
while actively seeking to reduce downside risk as compared with other growth and
income funds. The fund invests at least 65% of total assets in equities, mainly
common stocks. Although the fund can invest in companies of any size and from
any country, it invests primarily in large U.S. companies. The fund does not
invest in securities issued by tobacco-producing companies.
In choosing stocks for the fund, the portfolio managers consider both yield and
other valuation and growth factors, meaning that they focus the fund's
investments on securities of U.S. companies whose dividend and earnings
prospects are believed to be attractive relative to the fund's benchmark index,
the S&P 500. The fund may invest in dividend paying and non-dividend paying
stocks.
The managers use bottom-up analysis, looking for companies with strong prospects
for continued growth of capital and earnings.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented in the fund's portfolio.
The managers use analytical tools to actively monitor the risk profile of the
portfolio as compared to comparable funds and appropriate benchmarks and peer
groups.
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OTHER INVESTMENTS While most of the fund's investments are common stocks, some
may be other types of equities, such as convertible securities and preferred
stocks. Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies, or
securities), the managers don't intend to use them as principal investments, and
may not use them at all.
4
<PAGE>
The managers use several strategies in seeking to reduce risk, including: (i)
managing risk associated with investment in specific companies by using
fundamental analysis, valuation, and by adjusting position sizes; (ii) portfolio
construction emphasizing diversification, blending stocks with a variety of
different attributes, including value and growth stocks; and (iii) diversifying
across many sectors and industries.
The fund normally will, but is not obligated to, sell a stock if its yield or
growth prospects are expected to be below the benchmark average. It may also
sell a stock when it reaches a target price or when the managers believe other
investments offer better opportunities.
The Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments. As with
most stock funds, the most important factor with this fund is how stock markets
perform. When stock prices fall, you should expect the value of your investment
to fall as well. Because a stock represents ownership in its issuer, stock
prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
To the extent that the fund focuses on a given industry or a particular size of
a company, factors affecting that industry or size of a company could affect the
value of portfolio securities. For example, a rise in unemployment could hurt
manufacturers of consumer goods, and large company stocks at times may not
perform as well as stocks of smaller companies.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies or other matters
o to the extent that the fund invests for income, it may miss opportunities
in faster-growing stocks
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, it could be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
This fund is designed for investors interested in a relatively conservative fund
to provide growth and some current income.
5
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. The bar chart shows how
fund performance has varied from year to year, which may give some idea of risk.
The table shows how fund performance compares with a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
The inception date for Class A (formerly Class R) was August 2, 1999. In the bar
chart, the performance figures for Class A shares for the period prior to its
inception are based on the historical performance of the fund's original share
class (Class S), adjusted to reflect the higher gross total annual operating
expenses of Class A. The bar chart does not reflect sales loads; if it did,
returns would be lower.
In the table, the performance figures for each share class for the periods prior
to their inception (August 2, 1999 for Class A and December 29, 2000 for Classes
B and C) are based on the historical performance of Class S, adjusted to reflect
both the higher gross total annual operating expenses of Class A, B or C and the
current applicable sales charge of that class. Class S shares are offered in a
different prospectus. In addition, the performance figures for Class A since its
inception have been adjusted to reflect the current applicable sales charge of
Class A.
Scudder Growth and Income Fund
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Annual Total Returns (%) as of 12/31 each year Class A
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1990 -2.60
1991 27.81
1992 9.27
1993 15.27
1994 2.32
1995 30.82
1996 21.84
1997 29.95
1998 5.78
1999 5.18
2000 Total Return as of September 30: 1.62%
Best Quarter: 15.19%, Q2 1997 Worst Quarter: -13.45%, Q3 1998
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Annual Total Returns (%) as of 12/31/1999
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1 Year 5 Years 10 Years
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Class A -0.87 16.78 13.30
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Class B 1.86 17.15 13.13
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Class C 5.04 17.41 13.16
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Index 21.04 28.54 18.20
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Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged, capitalization-weighted index that includes 500 large-cap U.S.
stocks.
Total returns for 1992 would have been lower if operating expenses hadn't been
reduced.
6
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
fund shares.
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Fee Table Class A Class B Class C
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Shareholder Fees (paid directly from your investment)
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Maximum Sales Charge (Load) Imposed on
Purchases (% of offering price) 5.75% None None
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Maximum Contingent Deferred Sales Charge
(Load) (% of redemption proceeds) None* 4.00% 1.00%
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Annual Operating Expenses (deducted from fund assets)
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Management Fee 0.45% 0.45% 0.45%
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Distribution/Service (12b-1) Fee 0.25% 1.00% 1.00%
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Other Expenses** 0.33% 0.38% 0.35%
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Total Annual Operating Expenses 1.03%*** 1.83% 1.80%
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* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
** Includes a fixed rate administrative fee of 0.325%, 0.375% and 0.350% for
Class A, Class B and Class C shares, respectively.
*** Zurich Scudder has agreed to cap operating expenses at 1.00% until
4/1/2001.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These fees became
effective on August 14, 2000.
Based on the costs above, this example helps you compare the expenses of each
share class to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
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Example 1 Year 3 Years 5 Years 10 Years
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Expenses, assuming you sold your shares at the end of each period
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Class A shares $674 $884 $1,111 $1,762
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Class B shares 586 876 1,190 1,745
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Class C shares 283 566 975 2,116
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Expenses, assuming you kept your shares
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Class A shares $674 $884 $1,111 $1,762
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Class B shares 186 576 990 1,745
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Class C shares 183 566 975 2,116
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7
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could
change the fund's investment goal without seeking shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of its
assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
8
<PAGE>
Who Manages and Oversees the Fund
The investment advisor
The fund's investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds, and currently has more than $290 billion in assets under
management.
The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
The advisor receives a management fee from the fund. For the 12 months through
the most recent fiscal year end, the actual amount the fund paid in management
fees was 0.46% of its average daily net assets.
The fund has entered into a new investment management agreement with the
advisor. The table below describes the new fee rates for the fund.
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Investment Management Fee effective August 14, 2000
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Average Daily Net Assets Fee Rate
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first $14 billion 0.450%
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next $2 billion 0.425%
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next $2 billion 0.400%
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over $18 billion 0.385%
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9
<PAGE>
The portfolio managers
The following people handle the day-to-day management of the fund.
Kathleen T. Millard Gregory S. Adams
Lead Portfolio Manager Portfolio Manager
o Began investment career in 1983 o Began investment career in 1987
o Joined the advisor in 1991 o Joined the advisor in 1999
o Joined the fund team in 1991 o Joined the fund team in 1999
10
<PAGE>
How to Invest in the Fund
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
11
<PAGE>
Choosing a Share Class
Offered in this prospectus are three share classes for the fund. The fund offers
other classes of shares separately. Each class has its own fees and expenses,
offering you a choice of cost structures. Class A, Class B and Class C shares
are intended for investors seeking the advice and assistance of a financial
representative, who may receive compensation for those services through sales
commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
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Classes and features Points to help you compare
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Class A
o Sales charges of up to 5.75%, o Some investors may be able to reduce
charged when you buy shares or eliminate their sales charges;
see next page
o In most cases, no charges when you
sell shares o Total annual operating expenses are
lower than those for Class B or
o 0.25% service fee Class C
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Class B
o No charges when you buy shares o The deferred sales charge rate
falls to zero after six years
o Deferred sales charge declining from
4.00%, charged when you sell shares o Shares automatically convert to
you bought within the last six years Class A after six years, which means
lower annual expenses going forward
o 1.00% distribution/service fee
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Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never
o Deferred sales charge of 1.00%, convert to Class A, so annual
charged when you sell shares you expenses remain higher
bought within the last year
o 1.00% distribution/service fee
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12
<PAGE>
Class A shares
Class A shares do have a 12b-1 plan, under which a service fee of 0.25% is
deducted from fund assets each year. Class A shares have a sales charge that
varies with the amount you invest:
Sales charge as a Sales charge as % of
Your investment % of offering price your net investment
----------------------------------------------------------------------
Up to $50,000 5.75% 6.10%
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$50,000-$99,999 4.50 4.71
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$100,000-$249,999 3.50 3.63
----------------------------------------------------------------------
$250,000-$499,999 2.60 2.67
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$500,000-$999,999 2.00 2.04
----------------------------------------------------------------------
$1 million or more See below and next page
----------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $50,000
("cumulative discount")
o you are investing a total of $50,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
13
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a fee
to an investment advisor or other firm for portfolio management services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper Service
Company can answer your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Kemper Service Company can answer your questions and help you
determine if you're eligible.
14
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% and a
service fee of 0.25% are deducted from fund assets each year. This means the
annual expenses for Class B shares are somewhat higher (and their performance
correspondingly lower) compared to Class A shares. After six years, Class B
shares automatically convert to Class A, which has the net effect of lowering
the annual expenses from the seventh year on. However, unlike Class A shares,
your entire investment goes to work immediately.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
---------------------------------------------------------------------
First year 4.00%
---------------------------------------------------------------------
Second or third year 3.00
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Fourth or fifth year 2.00
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Sixth year 1.00
---------------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
---------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses.
15
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges. However,
Class C shares do have a 12b-1 plan under which a distribution fee of 0.75% and
a service fee of 0.25% are deducted from fund assets each year. Because of these
fees, the annual expenses for Class C shares are similar to those of Class B
shares, but higher than those for Class A shares (and the performance of Class C
shares is correspondingly lower than that of Class A). However, unlike Class A
shares, your entire investment goes to work immediately.
Unlike Class B shares, Class C shares do not automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
---------------------------------------------------------------------
First year 1.00%
---------------------------------------------------------------------
Second year and later None
---------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
16
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
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First investment Additional investments
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$1,000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
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Through a financial representative
o Contact your representative using the o Contact your representative using
method that's most convenient for you the method that's most convenient
for you
--------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check made out to "Kemper
Funds" and an investment slip to us
o Send it to us at the appropriate at the appropriate address below
address, along with an investment
check o If you don't have an investment
slip, simply include a letter with
your name, account number, the
full name of the fund and the
share class and your investment
instructions
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By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
With an automatic investment plan
-- o To set up regular investments from
a bank checking account, call
(800) 621-1048 (minimum $50)
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On the Internet
-- o Go to www.kemper.com and register
o Follow the instructions for buying
shares with money from your bank
account
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Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
17
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
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Exchanging into another fund Selling shares
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$1,000 or more to open a new account Some transactions, including most for
($250 for IRAs) over $50,000, can only be ordered in
$100 or more for exchanges between writing with a signature guarantee; if
existing accounts you're in doubt, see page 21
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Through a financial representative
o Contact your representative by the o Contact your representative by the
method that's most convenient for you method that's most convenient for you
--------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number o the fund, class and account number
you're exchanging out of from which you want to sell shares
o the dollar amount or number of o the dollar amount or number of
shares you want to exchange shares you want to sell
o the name and class of the fund you o your name(s), signature(s) and
want to exchange into address, as they appear on your
account
o your name(s), signature(s) and
address, as they appear on your o a daytime telephone number
account
o a daytime telephone number
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With a systematic exchange plan
--
o To set up regular exchanges from a
fund account, call (800) 621-1048
--------------------------------------------------------------------------------
With a systematic withdrawal plan
-- o To set up regular cash payments from
a fund account, call (800) 621-1048
--------------------------------------------------------------------------------
On the Internet
--
o Go to www.kemper.com and register
o Follow the instructions for making
on-line exchanges
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18
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you
received from them. As a general rule, you should follow the information in
those materials wherever it contradicts the information given here. Please note
that an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class A, Class B and Class C shares. The fund does have other
share classes, which are described in a separate prospectus and which have
different fees, requirements and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
19
<PAGE>
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. Eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Scudder or Kemper funds generally and on accounts held directly at Kemper. You
can also use it to make exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Scudder or Kemper account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www.kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
20
<PAGE>
Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $100 or more.
Exchanges among funds are an option for most shareholders. Exchanges are a
shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject or limit purchase orders, for
these or other reasons.
When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
21
<PAGE>
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns of
excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege, redemption of shares whose dealer of record at the time of the
investment notifies Kemper Distributors that the dealer waives the
applicable commission
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
22
<PAGE>
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper Service Company can answer your questions and help you determine if you
are eligible.
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Scudder or Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Kemper Service Company or your
financial representative.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
23
<PAGE>
How the fund calculates share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing a Share Class")
Class B and Class C shares-- net asset value per share, or NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each share class, the price at which you sell shares is also the NAV,
although for Class B and Class C investors a contingent deferred sales charge
may be taken out of the proceeds (see "Choosing a Share Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
To the extent that the fund invests in securities that are traded primarily in
foreign markets, the value of its holdings could change at a time when you
aren't able to buy or sell fund shares. This is because some foreign markets are
open on days when the fund doesn't price its shares.
24
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened,
we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for
you to liquidate) rather than cash; the fund generally won't make a
redemption in kind unless your requests over a 90-day period total more
than $250,000 or 1% of the value of the fund's net assets, whichever is
less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
25
<PAGE>
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund has a regular schedule for paying out any earnings to shareholders:
o Income: declared and paid quarterly in March, June, September and December
o Long-term and short-term capital gains: December, or otherwise as needed
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
26
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
----------------------------------------------------------------------
o short-term capital gains from selling fund shares
----------------------------------------------------------------------
o taxable income dividends you receive from a fund
----------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
----------------------------------------------------------------------
Generally taxed at capital gains rates
----------------------------------------------------------------------
o long-term capital gains from selling fund shares
----------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
----------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
27
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get the reports
automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus). If you'd like to ask for copies of these documents, please
contact Kemper or the SEC (see below). If you're a shareholder and have
questions, please contact Kemper. Materials you get from Kemper are free; those
from the SEC involve a copying fee. If you like, you can look over these
materials at the SEC's Public Reference Room in Washington, DC or request them
electronically at [email protected].
SEC Scudder Funds c/o
450 Fifth Street, N.W. Kemper Distributors, Inc.
Washington, DC 20549-0102 222 South Riverside Plaza
www.sec.gov Chicago, IL 60606-5808
Tel (202) 942-8090 www.kemper.com
Tel (800) 621-1048
SEC File Number
Scudder Growth and Income Fund 811-43
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[RECYCLE LOGO] Printed on recycled paper. SGIF-1 (12/29/00) S16592
<PAGE>
SCUDDER
INVESTMENTS (SM)
[LOGO]
December 29, 2000
Prospectus
Scudder Large Company Growth Fund
Advisor Classes A, B and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Contents
--------------------------------------------------------------------------------
How the Fund Works How to Invest in the Fund
4 The Fund's Investment Strategy 11 Choosing a Share Class
5 The Main Risks of Investing 16 How to Buy Shares
in the Fund
17 How to Exchange or Sell
6 The Fund's Performance History Shares
7 How Much Investors Pay 18 Policies You Should Know
About
8 Other Policies and Risks
25 Understanding Distributions
9 Who Manages and Oversees and Taxes
the Fund
<PAGE>
How the Fund Works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
--------------------------------------------------------------------------------
Class A Class B Class C
fund number 469 669 769
Scudder Large Company Growth Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks long-term growth of capital by investing at least 65% of its
total assets in large U.S. companies (those with a market value of $1 billion or
more). These investments are primarily in common stocks, but may include
preferred stocks and securities convertible into common stocks.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with a history of
above-average growth, strong competitive positioning, attractive prices relative
to potential growth, sound financial strength and effective management, among
other factors.
Growth orientation. The managers generally look for companies with above-average
growth of revenue or earnings relative to the overall market.
Top-down analysis. The managers consider the economic outlooks for various
sectors and industries.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented.
The fund will normally sell a stock when its earnings growth appears less
promising, when the company no longer qualifies as a large company, when the
managers believe other investments offer better opportunities or in the course
of adjusting its exposure to a given industry.
--------------------------------------------------------------------------------
OTHER INVESTMENTS Although the managers are permitted to use various types of
derivatives (contracts whose value is based on, for example, indices, currencies
or securities), the managers don't intend to use them as principal investments,
and may not use them at all.
4
<PAGE>
The Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. market.
When large company stock prices fall, you should expect the value of your
investment to fall as well. Large company stocks at times may not perform as
well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect the value of portfolio securities. For example,
technology companies could be hurt by such factors as market saturation, price
competition, and rapid obsolescence. In addition, a rise in unemployment could
hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o derivatives could produce disproportionate losses
o growth stocks may be out of favor for certain periods
o at times, market conditions might make it hard to value some investments
or to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
This fund is designed for investors with long-term goals who are interested in a
fund with a growth-style approach to large-cap investing.
5
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. The bar chart shows how
fund performance has varied from year to year, which may give some idea of risk.
The table shows how fund performance compares with a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
The inception date for Class A (formerly Class R) was August 2, 1999. In the bar
chart, the performance figures for Class A shares for the period prior to its
inception are based on the historical performance of the fund's original share
class (Class S), adjusted to reflect the higher gross total annual operating
expenses of Class A. The bar chart does not reflect sales loads; if it did,
returns would be lower.
In the table, the performance figures for each share class for the periods prior
to their inception (August 2, 1999 for Class A and December 29, 2000 for Classes
B and C) are based on the historical performance of Class S, adjusted to reflect
both the higher gross total annual operating expenses of Class A, B or C and the
current applicable sales charge of that class. Class S shares are offered in a
different prospectus. In addition, the performance figures for Class A since its
inception have been adjusted to reflect the current applicable sales charge of
Class A.
Scudder Large Company Growth Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1992 6.37
1993 -0.28
1994 -1.61
1995 32.13
1996 17.89
1997 32.43
1998 32.86
1999 35.04
2000 Total Return as of September 30: -3.20%
Best Quarter: 28.00%, Q4 1999 Worst Quarter: -12.33%, Q3 1998
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
--------------------------------------------------------------------------------
Class A 27.27 28.39 19.34
--------------------------------------------------------------------------------
Class B 29.59 28.55 19.17
--------------------------------------------------------------------------------
Class C 33.63 28.84 19.20
--------------------------------------------------------------------------------
Index 33.16 32.41 21.17
--------------------------------------------------------------------------------
Index: The Russell 1000 Growth Index, which consists of those stocks in the
Russell 1000 Index that have a greater-than-average growth orientation.
* Fund inception: 5/15/1991. Index comparison begins 5/31/1991.
Total returns from the date of inception to 1992 would have been lower if
operating expenses hadn't been reduced.
6
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
fund shares.
--------------------------------------------------------------------------------
Fee Table Class A Class B Class C
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Purchases (% of offering price) 5.75% None None
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge
(Load) (% of redemption proceeds) None* 4.00% 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
--------------------------------------------------------------------------------
Management Fee 0.70% 0.70% 0.70%
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee 0.25% 1.00% 1.00%
--------------------------------------------------------------------------------
Other Expenses** 0.33% 0.38% 0.35%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 1.28%*** 2.08% 2.05%
--------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
** Includes a fixed rate administrative fee of 0.325%, 0.375% and 0.350% for
Class A, Class B and Class C shares, respectively.
*** Zurich Scudder has agreed to cap operating expenses at 1.25% until
4/1/2001.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on October 2, 2000.
Based on the costs above, this example helps you compare the expenses of each
share class to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares $698 $958 $1,237 $2,031
--------------------------------------------------------------------------------
Class B shares 611 952 1,319 2,018
--------------------------------------------------------------------------------
Class C shares 308 643 1,103 2,379
--------------------------------------------------------------------------------
Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares $698 $958 $1,237 $2,031
--------------------------------------------------------------------------------
Class B shares 211 652 1,119 2,018
--------------------------------------------------------------------------------
Class C shares 208 643 1,103 2,379
--------------------------------------------------------------------------------
7
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could
change the fund's investment goal without seeking shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of its
assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
8
<PAGE>
Who Manages and Oversees the Fund
The investment advisor
The fund's investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds, and currently has more than $290 billion in assets under
management.
The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
The advisor receives a management fee from the fund. For the 12 months through
the most recent fiscal year end, the actual amount the fund paid in management
fees was 0.70% of its average daily net assets.
The fund has entered into a new investment management agreement with the
advisor. The table below describes the new fee rates for the fund.
--------------------------------------------------------------------------------
Investment Management Fee effective October 2, 2000
--------------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------------
first $1.5 billion 0.70%
--------------------------------------------------------------------------------
next $500 million 0.65%
--------------------------------------------------------------------------------
more than $2 billion 0.60%
--------------------------------------------------------------------------------
The portfolio manager
The following person handles the day-to-day management of the fund.
Valerie F. Malter
Lead Portfolio Manager
o Began investment career in 1985
o Joined the advisor in 1995
o Joined the fund team in 1998
9
<PAGE>
How to Invest in the Fund
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
<PAGE>
Choosing a Share Class
Offered in this prospectus are three share classes for the fund. The fund offers
other classes of shares separately. Each class has its own fees and expenses,
offering you a choice of cost structures. Class A, Class B and Class C shares
are intended for investors seeking the advice and assistance of a financial
representative, who may receive compensation for those services through sales
commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
--------------------------------------------------------------------------------
Classes and features Points to help you compare
--------------------------------------------------------------------------------
Class A
o Sales charges of up to 5.75%, o Some investors may be able to
charged when you buy shares reduce or eliminate their sales
charges; see next page
o In most cases, no charges when you
sell shares o Total annual operating expenses are
lower than those for Class B or
o 0.25% service fee Class C
--------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate
falls to zero after six years
o Deferred sales charge declining
from 4.00%, charged when you sell o Shares automatically convert to
shares you bought within the last Class A after six years, which
six years means lower annual expenses going
forward
o 1.00% distribution/service fee
--------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never
o Deferred sales charge of 1.00%, convert to Class A, so annual
charged when you sell shares you expenses remain higher
bought within the last year
o 1.00% distribution/service fee
--------------------------------------------------------------------------------
11
<PAGE>
Class A shares
Class A shares do have a 12b-1 plan, under which a service fee of 0.25% is
deducted from fund assets each year. Class A shares have a sales charge that
varies with the amount you invest:
Sales charge as a Sales charge as % of
Your investment % of offering price your net investment
--------------------------------------------------------------------------------
Up to $50,000 5.75% 6.10%
--------------------------------------------------------------------------------
$50,000-$99,999 4.50 4.71
--------------------------------------------------------------------------------
$100,000-$249,999 3.50 3.63
--------------------------------------------------------------------------------
$250,000-$499,999 2.60 2.67
--------------------------------------------------------------------------------
$500,000-$999,999 2.00 2.04
--------------------------------------------------------------------------------
$1 million or more See below and next page
--------------------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $50,000
("cumulative discount")
o you are investing a total of $50,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
12
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a fee
to an investment advisor or other firm for portfolio management services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper Service
Company can answer your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Kemper Service Company can answer your questions and help you
determine if you're eligible.
13
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% and a
service fee of 0.25% are deducted from fund assets each year. This means the
annual expenses for Class B shares are somewhat higher (and their performance
correspondingly lower) compared to Class A shares. After six years, Class B
shares automatically convert to Class A, which has the net effect of lowering
the annual expenses from the seventh year on. However, unlike Class A shares,
your entire investment goes to work immediately.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 4.00%
--------------------------------------------------------------------------------
Second or third year 3.00
--------------------------------------------------------------------------------
Fourth or fifth year 2.00
--------------------------------------------------------------------------------
Sixth year 1.00
--------------------------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses in exchange.
14
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges. However,
Class C shares do have a 12b-1 plan under which a distribution fee of 0.75% and
a service fee of 0.25% are deducted from fund assets each year. Because of these
fees, the annual expenses for Class C shares are similar to those of Class B
shares, but higher than those for Class A shares (and the performance of Class C
shares is correspondingly lower than that of Class A). However, unlike Class A
shares, your entire investment goes to work immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 1.00%
--------------------------------------------------------------------------------
Second year and later None
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
15
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
--------------------------------------------------------------------------------
First investment Additional investments
--------------------------------------------------------------------------------
$1000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using the o Contact your representative using
method that's most convenient for you the method that's most convenient
for you
--------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check made out to "Kemper
Funds" and an investment slip to
us at the appropriate address
below
o Send it to us at the appropriate o If you don't have an investment
address, along with an investment check slip, simply include a letter with
your name, account number, the
full name of the fund and the
share class and your investment
instructions
--------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for
instructions
--------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for
instructions
--------------------------------------------------------------------------------
With an automatic investment plan
-- o To set up regular investments from
a bank checking account, call
(800) 621-1048 (minimum $50)
--------------------------------------------------------------------------------
On the Internet
-- o Go to www.kemper.com and register
o Follow the instructions for buying
shares with money from your bank
account
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
16
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
--------------------------------------------------------------------------------
Exchanging into another fund Selling shares
--------------------------------------------------------------------------------
$1,000 or more to open a new account Some transactions, including most
($250 for IRAs) for over $50,000, can only be
ordered in writing with a signature
$100 or more for exchanges between guarantee; if you're in doubt, see
existing accounts page 29
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the o Contact your representative by the
method that's most convenient for you method that's most convenient for
you
--------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for
instructions
--------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number o the fund, class and account number
you're exchanging out of from which you want to sell shares
o the dollar amount or number of shares o the dollar amount or number of
you want to exchange shares you want to sell
o the name and class of the fund you o your name(s), signature(s) and
want to exchange into address, as they appear on your
account
o your name(s), signature(s) and
address, as they appear on your account o a daytime telephone number
o a daytime telephone number
--------------------------------------------------------------------------------
With a systematic exchange plan
o To set up regular exchanges from a --
fund account, call (800) 621-1048
--------------------------------------------------------------------------------
With a systematic withdrawal plan
-- o To set up regular cash payments
from a fund account, call
(800) 621-1048
--------------------------------------------------------------------------------
On the Internet
o Go to www.kemper.com and register --
o Follow the instructions for making
on-line exchanges
--------------------------------------------------------------------------------
17
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you
received from them. As a general rule, you should follow the information in
those materials wherever it contradicts the information given here. Please note
that an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class A, Class B and Class C shares. The fund does have other
share classes, which are described in a separate prospectus and which have
different fees, requirements and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
18
<PAGE>
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. Eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Scudder or Kemper funds generally and on accounts held directly at Kemper. You
can also use it to make exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Scudder or Kemper account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www.kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
19
<PAGE>
Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $100 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject or limit purchase orders,
for these or other reasons.
When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
20
<PAGE>
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns of
excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege, redemption of shares whose dealer of record at the time of the
investment notifies Kemper Distributors that the dealer waives the
applicable commission
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper Service Company can answer your questions and help you determine if you
are eligible.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
21
<PAGE>
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Scudder or Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Kemper Service Company or your
financial representative.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
22
<PAGE>
How the fund calculates share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing a Share Class")
Class B and Class C shares-- net asset value per share, or NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES / TOTAL NUMBER OF SHARES OUTSTANDING = NAV
For each share class, the price at which you sell shares is also the NAV,
although for Class B and Class C investors a contingent deferred sales charge
may be taken out of the proceeds (see "Choosing a Share Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
To the extent that the fund invests in securities that are traded primarily in
foreign markets, the value of its holdings could change at a time when you
aren't able to buy or sell fund shares. This is because some foreign markets are
open on days when the fund doesn't price its shares.
23
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened,
we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for
you to liquidate) rather than cash; the fund generally won't make a
redemption in kind unless your requests over a 90-day period total more
than $250,000 or 1% of the value of the fund's net assets, whichever is
less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
24
<PAGE>
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund intends to pay dividends and distributions to its shareholders annually
in December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
25
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o taxable income dividends you receive from a fund
--------------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
26
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get the reports
automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus). If you'd like to ask for copies of these documents, please
contact Kemper or the SEC (see below). If you're a shareholder and have
questions, please contact Kemper. Materials you get from Kemper are free; those
from the SEC involve a copying fee. If you like, you can look over these
materials at the SEC's Public Reference Room in Washington, DC or request them
electronically at [email protected].
SEC Scudder Funds c/o
450 Fifth Street, N.W. Kemper Distributors, Inc.
Washington, DC 20549-0102 222 South Riverside Plaza
www.sec.gov Chicago, IL 60606-5808
Tel (202) 942-8090 www.kemper.com
Tel (800) 621-1048
SEC File Number
Scudder Large Company Growth Fund 811-43
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[RECYCLE LOGO] Printed on recycled paper. SLCGF-1 (12/29/00) 516595
<PAGE>
--------------------------------------------------------------------------------
SCUDDER
INVESTMENTS (SM)
[LOGO]
December 29, 2000
Prospectus
Scudder Small Company Stock Fund
Advisor Classes A, B and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
--------------------------------------------------------------------------------
<PAGE>
Contents
--------------------------------------------------------------------------------
How the Fund Works How to Invest in the Fund
4 The Fund's Investment Strategy 11 Choosing a Share Class
5 The Main Risks of Investing 16 How to Buy Shares
in the Fund
17 How to Exchange or Sell
6 The Fund's Performance History Shares
7 How Much Investors Pay 18 Policies You Should Know
About
8 Other Policies and Risks
24 Understanding Distributions
9 Who Manages and Oversees and Taxes
the Fund
<PAGE>
How the Fund Works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
--------------------------------------------------------------------------------
Class A Class B Class C
ticker symbol XXXXX XXXXX XXXXX
fund number 000 000 000
Scudder Small Company Stock Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks to provide long-term capital growth while actively seeking to
reduce downside risk as compared with other small company stock funds. It does
this by investing at least 65% of total assets in common stocks of small U.S.
companies with potential for above-average long-term capital growth. The fund
normally focuses on companies whose market capitalizations are below $2 billion.
The fund does not invest in securities issued by tobacco-producing companies.
The managers use a multi-step process to manage the fund:
Stock Evaluation. The managers rely on a proprietary, quantitative screening
process to identify stocks with above-average capital appreciation potential.
Four primary factors are considered: valuation, trends in fundamentals, price
momentum, and risk. Valuation helps the managers measure how expensive a
security is relative to its peers. Trends in fundamentals such as sales and
earnings suggest whether the company's business is stable, improving, or
deteriorating. Price momentum provides an indicator of how the market is
responding to these fundamentals. Risk measures help the managers understand the
degree of financial uncertainty for a given company. Each stock is then ranked
based on its relative attractiveness.
Portfolio Construction. The managers build a diversified portfolio of
attractively rated companies using analytical tools to actively monitor the risk
profile of the portfolio compared to appropriate benchmarks and peer groups. The
managers use several strategies in seeking to reduce downside risk, including:
o focusing on companies with reasonable valuations
--------------------------------------------------------------------------------
OTHER INVESTMENTS While the fund invests primarily in common stocks, it may
invest up to 20% of total assets in U.S. Government securities. Although the
managers are permitted to use various types of derivatives (contracts whose
value is based on, for example, indices, currencies or securities), the managers
don't intend to use them as principal investments, and may not use them at all.
4
<PAGE>
o diversifying broadly among industries and companies (typically over 200)
o limiting the majority of the portfolio to 2% in any one issuer (other
funds may invest 5% or more)
The fund will normally sell a stock when the managers believe it is too highly
valued, its fundamental qualities have deteriorated, its potential risks have
increased, or it no longer qualifies as a small company.
The Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the small company portion of the U.S. market.
When small company stock prices fall, you should expect the value of your
investment to fall as well. Small company stocks tend to be more volatile than
stocks of larger companies, in part because small companies tend to be less
established than larger companies and more vulnerable to competitive challenges
and bad economic news. Because a stock represents ownership in its issuer, stock
prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies.
To the extent that the fund focuses on a given industry, factors affecting that
industry could affect the value of portfolio securities. For example, a rise in
unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o small stocks may be out of favor for certain periods
o the managers could be wrong in their analysis of companies
o derivatives could produce disproportionate losses
o the fund's risk management strategies could make long-term performance
somewhat lower than it would have been without these strategies
o at times, it might be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
This fund is designed for long-term investors interested in a fund that seeks to
temper the risks of investing in small company stocks.
5
<PAGE>
The Fund's Performance History
While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. The bar chart shows how
fund performance has varied from year to year, which may give some idea of risk.
The table shows how fund performance compares with a broad-based market index
(which, unlike the fund, does not have any fees or expenses). The performance of
both the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
The share classes offered in this prospectus -- Classes A, B and C -- are newly
offered. In the bar chart, the performance figures for Class A are based on the
historical performance of the fund's original share class (Class AARP), adjusted
to reflect the higher gross total annual operating expenses of Class A. The bar
chart does not reflect sales loads; if it did, returns would be lower. In the
table, the performance figures for each share class are based on the historical
performance of Class AARP, adjusted to reflect both the higher gross total
annual operating expenses of Class A, B or C and the current applicable sales
charge of that class. Class AARP shares are offered in a different prospectus.
Scudder Small Company Stock Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1998 -6.50
1999 -3.80
2000 Total Return as of September 30: 1.51%
Best Quarter: 19.40%, Q2 1999 Worst Quarter: -17.26%, Q3 1998
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
1 Year Since Inception*
--------------------------------------------------------------------------------
Class A -9.33 4.29
--------------------------------------------------------------------------------
Class B -7.43 4.49
--------------------------------------------------------------------------------
Class C -4.54 5.61
--------------------------------------------------------------------------------
Index 21.26 12.71
--------------------------------------------------------------------------------
Index: Russell 2000 Index, an unmanaged capitalization-weighted measure of
approximately 2,000 small U.S. stocks.
* Fund inception: 2/1/1997. Index comparison begins 1/31/1997.
In the chart, total returns for 1998 would have been lower if operating expenses
hadn't been reduced.
In the table, total returns from inception through 1998 would have been lower if
operating expenses hadn't been reduced.
6
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
fund shares.
--------------------------------------------------------------------------------
Fee Table Class A Class B Class C
--------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Purchases (% of offering price) 5.75% None None
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge
(Load) (% of redemption proceeds) None* 4.00% 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses (deducted from portfolio assets)
--------------------------------------------------------------------------------
Management Fee 0.75% 0.75% 0.75%
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee 0.25% 1.00% 1.00%
--------------------------------------------------------------------------------
Other Expenses** 0.48% 0.53% 0.51%
--------------------------------------------------------------------------------
Total Annual Operating Expenses 1.48% 2.28% 2.26%
--------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
** Includes a fixed rate administrative fee of 0.475%, 0.525% and 0.500% for
Class A, Class B and Class C shares, respectively.
Information in the table has been restated to reflect a new fixed rate
administrative fee and a new investment management agreement. These new fees
became effective on July 17, 2000.
Based on the costs above, this example helps you compare the expenses of each
share class to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares $717 $1,016 $1,336 $2,242
--------------------------------------------------------------------------------
Class B shares 631 1,012 1,420 2,230
--------------------------------------------------------------------------------
Class C shares 329 706 1,210 2,595
--------------------------------------------------------------------------------
Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares $717 $1,016 $1,336 $2,242
--------------------------------------------------------------------------------
Class B shares 231 712 1,220 2,230
--------------------------------------------------------------------------------
Class C shares 229 706 1,210 2,595
--------------------------------------------------------------------------------
7
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could
change the fund's investment goal without seeking shareholder approval.
o As a temporary defensive measure, the fund could shift up to 100% of its
assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
8
<PAGE>
Who Manages and Oversees the Fund
The investment advisor
The fund's investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds, and currently has more than $290 billion in assets under
management.
The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
The advisor receives a management fee from the fund. For the 12 months through
the most recent fiscal year end, the actual amount the fund paid in management
fees was 0.70% of its average daily net assets.
The fund has entered into a new investment management agreement with the
advisor. The table below describes the new fee rates for the fund.
--------------------------------------------------------------------------------
Investment Management Fee effective July 17, 2000
--------------------------------------------------------------------------------
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------------
first $500 million 0.75%
--------------------------------------------------------------------------------
next $500 million 0.70%
--------------------------------------------------------------------------------
more than $1 billion 0.65%
--------------------------------------------------------------------------------
The portfolio managers
The following people handle the day-to-day management of the fund.
James M. Eysenbach Calvin S. Young
Lead Portfolio Manager o Began investment career
o Began investment career in 1984 in 1988
o Joined the advisor in 1991 o Joined the advisor in 1990
o Joined the fund team in 1997 o Joined the fund team in 1999
9
<PAGE>
How to Invest in the Fund
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
10
<PAGE>
Choosing a Share Class
Offered in this prospectus are three share classes for the fund. The fund offers
other classes of shares separately. Each class has its own fees and expenses,
offering you a choice of cost structures. Class A, Class B and Class C shares
are intended for investors seeking the advice and assistance of a financial
representative, who may receive compensation for those services through sales
commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
--------------------------------------------------------------------------------
Classes and features Points to help you compare
--------------------------------------------------------------------------------
Class A
o Sales charges of up to 5.75%, charged o Some investors may be able to reduce
when you buy shares or eliminate their sales charges;
see next page
o In most cases, no charges when you
sell shares o Total annual operating expenses are
lower than those for Class B or
Class C
o 0.25% service fee
--------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate falls
to zero after six years
o Deferred sales charge declining from
4.00%, charged when you sell shares o Shares automatically convert to
you bought within the last six years Class A after six years, which means
lower annual expenses going forward
o 1.00% distribution/service fee
--------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never convert
o Deferred sales charge of 1.00%, to Class A, so annual expenses
charged when you sell shares you remain higher
bought within the last year
o 1.00% distribution/service fee
11
<PAGE>
Class A shares
Class A shares do have a 12b-1 plan, under which a service fee of 0.25% is
deducted from fund assets each year. Class A shares have a sales charge that
varies with the amount you invest:
Your investment Sales charge as a Sales charge as
% of offering price % of your net investment
--------------------------------------------------------------------------------
Up to $50,000 5.75% 6.10%
--------------------------------------------------------------------------------
$50,000-$99,999 4.50 4.71
--------------------------------------------------------------------------------
$100,000-$249,999 3.50 3.63
--------------------------------------------------------------------------------
$250,000-$499,999 2.60 2.67
--------------------------------------------------------------------------------
$500,000-$999,999 2.00 2.04
--------------------------------------------------------------------------------
$1 million or more See below and next page
--------------------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $50,000
("cumulative discount")
o you are investing a total of $50,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
12
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a fee
to an investment advisor or other firm for portfolio management services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper Service
Company can answer your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Kemper Service Company can answer your questions and help you
determine if you're eligible.
13
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% and a
service fee of 0.25% are deducted from fund assets each year. This means the
annual expenses for Class B shares are somewhat higher (and their performance
correspondingly lower) compared to Class A shares. After six years, Class B
shares automatically convert to Class A, which has the net effect of lowering
the annual expenses from the seventh year on. However, unlike Class A shares,
your entire investment goes to work immediately.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 4.00%
--------------------------------------------------------------------------------
Second or third year 3.00
--------------------------------------------------------------------------------
Fourth or fifth year 2.00
--------------------------------------------------------------------------------
Sixth year 1.00
--------------------------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses.
14
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges. However,
Class C shares do have a 12b-1 plan under which a distribution fee of 0.75% and
a service fee of 0.25% are deducted from fund assets each year. Because of these
fees, the annual expenses for Class C shares are similar to those of Class B
shares, but higher than those for Class A shares (and the performance of Class C
shares is correspondingly lower than that of Class A). However, unlike Class A
shares, your entire investment goes to work immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 1.00%
--------------------------------------------------------------------------------
Second year and later None
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
15
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
--------------------------------------------------------------------------------
First investment Additional investments
--------------------------------------------------------------------------------
$1,000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using the o Contact your representative using
method that's most convenient for you the method that's most convenient
for you
--------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check made out to "Kemper
Funds" and an investment slip to
o Send it to us at the appropriate us at the appropriate address
address, along with an investment below
check
o If you don't have an investment
slip, simply include a letter with
your name, account number, the full
name of the fund and the share class
and your investment instructions
--------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
With an automatic investment plan
-- o To set up regular investments from
a bank checking account, call
(800) 621-1048 (minimum $50)
--------------------------------------------------------------------------------
On the Internet
-- o Go to www.kemper.com and register
o Follow the instructions for buying
shares with money from your bank
account
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
16
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
--------------------------------------------------------------------------------
Exchanging into another fund Selling shares
--------------------------------------------------------------------------------
$1,000 or more to open a new account Some transactions, including most for
($250 for IRAs) over $50,000, can only be ordered in
writing with a signature guarantee; if
$100 or more for exchanges between you're in doubt, see page 20
existing accounts
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the o Contact your representative by the
method that's most convenient for you method that's most convenient for
you
--------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number o the fund, class and account number
you're exchanging out of from which you want to sell shares
o the dollar amount or number of shares o the dollar amount or number of
you want to exchange shares you want to sell
o the name and class of the fund you o your name(s), signature(s) and
want to exchange into address, as they appear on your
account
o your name(s), signature(s) and
address, as they appear on your o a daytime telephone number
account
o a daytime telephone number
--------------------------------------------------------------------------------
With a systematic exchange plan
o To set up regular exchanges from a --
fund account, call (800) 621-1048
--------------------------------------------------------------------------------
With a systematic withdrawal plan
-- o To set up regular cash payments from
a fund account, call (800) 621-1048
--------------------------------------------------------------------------------
On the Internet
o Go to www.kemper.com and register --
o Follow the instructions for making
on-line exchanges
--------------------------------------------------------------------------------
17
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you
received from them. As a general rule, you should follow the information in
those materials wherever it contradicts the information given here. Please note
that an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class A, Class B and Class C shares. The fund does have other
share classes, which are described in a separate prospectus and which have
different fees, requirements and services.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. Eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
18
<PAGE>
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Scudder or Kemper funds generally and on accounts held directly at Kemper. You
can also use it to make exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Scudder or Kemper account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $100 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject or limit purchase orders,
for these or other reasons.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www.kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
19
<PAGE>
When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns of
excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege, redemption of shares whose dealer of record at the time of the
investment notifies Kemper Distributors that the dealer waives the
applicable commission
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper Service Company can answer your questions and help you determine if you
are eligible.
20
<PAGE>
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Scudder or Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Kemper Service Company or your
financial representative.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
21
<PAGE>
How the fund calculates share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing a Share Class")
Class B and Class C shares -- net asset value per share, or NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each share class, the price at which you sell shares is also the NAV,
although for Class B and Class C investors a contingent deferred sales charge
may be taken out of the proceeds (see "Choosing a Share Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
To the extent that the fund invests in securities that are traded primarily in
foreign markets, the value of its holdings could change at a time when you
aren't able to buy or sell fund shares. This is because some foreign markets are
open on days when the fund doesn't price its shares.
22
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened,
we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for
you to liquidate) rather than cash; the fund generally won't make a
redemption in kind unless your requests over a 90-day period total more
than $250,000 or 1% of the value of the fund's net assets, whichever is
less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
23
<PAGE>
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund intends to pay dividends and distributions to its shareholders annually
in December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
24
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o taxable income dividends you receive from a fund
--------------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
--------------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividend-received deduction for a portion of
income dividends they receive.
25
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get the reports
automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus). If you'd like to ask for copies of these documents, please
contact Kemper or the SEC (see below). If you're a shareholder and have
questions, please contact Kemper. Materials you get from Kemper are free; those
from the SEC involve a copying fee. If you like, you can look over these
materials at the SEC's Public Reference Room in Washington, DC or request them
electronically at [email protected].
SEC Scudder Funds c/o
450 Fifth Street, N.W. Kemper Distributors, Inc.
Washington, DC 20549-0102 222 South Riverside Plaza
www.sec.gov Chicago, IL 60606-5808
Tel (202) 942-8090 www.kemper.com
Tel (800) 621-1048
SEC File Number
Scudder Small Company Stock Fund 811-43
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[RECYCLE LOGO] Printed on recycled paper. XXXX-X (0/0/00) XXXXXX
<PAGE>
SCUDDER CAPITAL GROWTH FUND
SCUDDER SMALL COMPANY STOCK FUND
Class AARP and Class S Shares
Each a series of Investment Trust
Both funds seek to provide long-term capital growth while
actively seeking to reduce downside risk
compared with other similar funds
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
--------------------------------------------------------------------------------
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 December 29, 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, 2000, is
incorporated by reference and is hereby deemed to be part of this Statement of
Additional Information.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.................................................................1
General Investment Objective and Policies............................................................1
Investments..........................................................................................3
Master/feeder Structure.............................................................................19
INVESTMENT RESTRICTIONS......................................................................................20
PURCHASES....................................................................................................21
Additional Information About Opening an Account.....................................................21
Additional Information About Making Subsequent Investments..........................................23
Minimum Balances....................................................................................23
Additional Information About Making Subsequent Investments By Quickbuy..............................23
Checks..............................................................................................24
Wire Transfer of Federal Funds......................................................................24
Share Price.........................................................................................24
Share Certificates..................................................................................25
Other Information...................................................................................25
EXCHANGES AND REDEMPTIONS....................................................................................25
Exchanges...........................................................................................25
Redemption By Telephone.............................................................................26
Redemption By Quicksell.............................................................................27
Redemption By Mail Or Fax...........................................................................27
Redemption-in-Kind..................................................................................28
Other Information...................................................................................28
FEATURES AND SERVICES OFFERED BY THE FUND....................................................................28
The No-Load Concept.................................................................................28
Internet Access.....................................................................................29
Dividends and Capital Gains Distribution Options....................................................29
Transaction Summaries...............................................................................30
THE SCUDDER FAMILY OF FUNDS..................................................................................30
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...............................................................35
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS....................................................................35
PERFORMANCE INFORMATION......................................................................................35
Average Annual Total Return.........................................................................35
Cumulative Total Return.............................................................................36
Total Return........................................................................................37
Comparison of Fund Performance......................................................................37
FUND ORGANIZATION............................................................................................38
i
<PAGE>
INVESTMENT ADVISOR...........................................................................................40
Investment Advisor..................................................................................40
AMA InvestmentLink(SM) Program......................................................................43
Code of Ethics......................................................................................43
TRUSTEES AND OFFICERS........................................................................................44
REMUNERATION.................................................................................................48
Responsibilities of the Board-- Board and Committee Meetings........................................48
Compensation of Officers and Trustees...............................................................48
DISTRIBUTOR..................................................................................................49
Administrative Fee..................................................................................50
TAXES........................................................................................................50
PORTFOLIO TRANSACTIONS.......................................................................................54
Brokerage Commissions...............................................................................54
Portfolio Turnover..................................................................................56
NET ASSET VALUE..............................................................................................56
ADDITIONAL INFORMATION.......................................................................................57
Experts.............................................................................................57
Other Information...................................................................................57
FINANCIAL STATEMENTS.........................................................................................59
</TABLE>
ii
<PAGE>
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 Zurich
Scudder Investments, Inc. (the "Advisor"). Each Fund offers five classes of
shares, Class S, Class AARP, Class A, Class B and Class C. Only Class AARP and
Class S are offered herein. On 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 Advisor, in its discretion, might, but is not required to, use in managing a
Fund's assets. The Advisor 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.
<PAGE>
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 and maintain downside risk compared with other small cap mutual
funds. The Fund pursues this investment objective by investing at least 65% of
total assets in common stocks of small companies. Unlike many other diversified
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. 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
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obligations and corporate debt instruments when the Fund Manager deems such a
position advisable in light of economic or market conditions.
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.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
-------------
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
------------------
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
---------
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
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.
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Dollar rolls may be renewed over a period of several months with a different
purchase and repurchase price fixed and a cash settlement made at each renewal
without physical delivery of securities. Moreover, the transaction may be
preceded by a firm commitment agreement pursuant to which the Funds agree to buy
a security on a future date.
The Funds will not use 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
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default under the terms of the municipal obligation. The selling bank will
receive a fee from the Fund in connection 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
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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
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 Advisor 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.
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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 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
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various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and guarantees are
issued by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security meets the Fund's
investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Fund may buy mortgage-related securities without
insurance or guarantees, if through an examination of the loan experience and
practices of the originators/servicers and poolers, the 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
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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 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
advisor 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
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a position in the derivatives markets as a substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Advisor'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 Advisor'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.
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With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
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 Advisor 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 Advisor. 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.
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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-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
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an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
making up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
Currency Transactions. 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 Advisor.
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 Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Advisor believes that
the value of schillings will decline against the U.S. dollar, the Advisor 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.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the 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 Advisor, 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 Advisor'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 Advisor 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
Advisor. 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.
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Eurodollar Instruments. Each Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. 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 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.
Investment of Uninvested Cash Balances. Each Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, each Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which Zurich Scudder Investments acts as trustee
or investment advisor that operate as cash management investment vehicles and
that are excluded from the definition of investment company pursuant to section
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (collectively, the
"Central Funds") in excess of the limitations of Section 12(d)(1) of the
Investment Company Act. Investment by each Fund in shares of the Central Funds
will be in accordance with each Fund's investment policies and restrictions as
set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance each Fund's ability to
manage Uninvested Cash.
Each Fund will invest Uninvested Cash in Central Funds only to the extent
that each Fund's aggregate investment in the Central Funds does not exceed 25%
of its total assets in shares of the Central Funds. Purchase and sales of shares
of Central Funds are made at net asset value.
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 Advisor. 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
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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;
(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:
(1) borrow money in an amount greater than 5% of its total
assets, except (i) for temporary or emergency purposes and
(ii) by engaging in reverse repurchase agreements, dollar
rolls, or other investments or transactions described in the
Fund's registration statement which may be deemed to be
borrowings;
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(2) enter into either of reverse repurchase agreements or
dollar rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except
(i) short sales against the box, (ii) in connection with
arbitrage transactions, (iii) for margin deposits in
connection with futures contracts, options or other permitted
investments, (iv) that transactions in futures contracts and
options shall not be deemed to constitute selling securities
short, and (v) that the Fund may obtain such short-term
credits as may be necessary for the clearance of securities
transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(7) lend portfolio securities in an amount greater than 5%
of its total assets.
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
All new investors in Class AARP of the Funds are required to provide an AARP
membership number on their account application.
In addition, Class S shares of the Funds will generally not be available to new
investors.
The following investors may continue to purchase Class S shares of
Scudder Funds:
(1) Existing shareholders of Class S shares of any Scudder
Fund as of December 29, 2000, and household members residing
at the same address.
(2) Investors may purchase Class S shares of any Scudder Fund
through any broker-dealer or service agent account until June
30, 2001. After June 30, 2001, only investors who owned Class
S shares as of June 30, 2001 and household members residing at
the same address may open new accounts in Class S of any
Scudder Fund.
(3) Any retirement, employee stock, bonus pension or
profit-sharing plans.
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(4) Any participant who owns Class S shares of any Scudder Fund
through an employee sponsored retirement, employee stock,
bonus, pension or profit sharing plan as of December 29, 2000
may, at a later date, open a new individual account in Class S
of any Scudder Fund.
(5) Any participant who owns Class S shares of any Scudder Fund
through a retirement, employee stock, bonus, pension or profit
sharing plan may complete a direct rollover to an IRA account
that will hold Class S shares. This applies for individuals
who begin their retirement plan investments with a Scudder
Fund at any time, including after December 29, 2000.
(6) Officers, Fund Trustees and Directors, and full-time employees
and their family members, of Zurich Financial Services and its
affiliates.
(7) Class S shares are available to any accounts managed by
Zurich Scudder Investments, Inc., any advisory products
offered by Zurich Scudder Investments, Inc. or Scudder
Investor Services, Inc., and to the Portfolios of Scudder
Pathway Series.
(8) Registered investment advisors ("RIAs") may continue to
purchase Class S shares of Scudder Funds for all clients until
June 30, 2001. After June 30, 2001, RIAs may purchase Class S
shares for any client that has an existing position in Class S
shares of any Scudder Funds as of June 30, 2001.
(9) Broker-dealers and RIAs who have clients participating in
comprehensive fee programs may continue to purchase Class S
shares of Scudder Funds until June 30, 2001. After June 30,
2001, broker dealers and RIAs may purchase Class S shares in
comprehensive fee programs for any client that has an existing
position in Class S shares of a Scudder Fund as of June 30,
2001.
(10) Scudder Investors Services, Inc. may, at its discretion,
require appropriate documentation that shows an investor is
eligible to purchase Class S shares.
Clients having a regular investment counsel account with the Advisor or its
affiliates and members of their immediate families, officers and employees of
the Advisor 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 Advisor or its affiliates and members of
their immediate families, officers and employees of the Advisor 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.
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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 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
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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
1-800-253-2277 or 1-800-SCUDDER for Class S for further instruction.
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
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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 Kansas City by the close of regular
trading on the Exchange.
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 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.
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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
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.
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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.
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).
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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.
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
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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 Advisor 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 Advisor'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.
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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.
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 Medium Term Tax Free Fund Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund Scudder California Tax Free Fund*
Scudder Massachusetts Tax Free Fund* Scudder New York Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Moderate 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
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U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
Scudder Small Company Stock Fund
Scudder Small Company Value Fund
Growth
Scudder Capital Growth Fund
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Fund***
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund Scudder Pacific Opportunities Fund
Scudder Latin America Fund The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Innovation 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.
** Only the Scudder Shares are part of the Scudder Family of Funds.
***Only the International Shares are part of the Scudder Family of Funds.
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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.
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 advisor
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
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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.
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.
The following paragraph applies to Class S shareholders only:
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
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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.
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.
34
<PAGE>
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for minors.
The minimum initial investment is $1,000 unless the donor agrees to continue to
make regular share purchases for the account through Scudder's Automatic
Investment Plan (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 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):
35
<PAGE>
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 September 30, 2000
<TABLE>
<CAPTION>
Total Return
-------------
<S> <C> <C> <C> <C>
One Year Five Years Ten Years
Ended Ended Ended Life
09/30/00 09/30/00 09/30/00 of Fund
-------- -------- -------- -------
Class AARP of Scudder Capital Growth Fund * 26.01 23.16 19.95 --
----- ----- -----
Class AARP of Scudder Small Company Stock Fund *+ 2.41 -- -- 5.83
---- ----
</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 Advisor 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 September 30, 2000
36
<PAGE>
<TABLE>
<CAPTION>
Total Return
------------
<S> <C> <C> <C> <C>
One Year Five Years Ten Years
Ended Ended Ended Life
09/30/00 09/30/00 09/30/00 of Fund
-------- -------- -------- --------
Class AARP of Scudder Capital Growth Fund * 26.01 183.42 516.44 --
------
Class AARP of Scudder Small Company Stock Fund *+ 2.41 -- -- 22.99
</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 Advisor 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 Advisor 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
37
<PAGE>
may involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond funds these factors include, but are
not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment categories
in the following order: bank products, money market funds, bond funds and equity
funds. Shorter-term bond funds generally are considered less risky and offer the
potential for less return than longer-term bond funds. The same is true of
domestic bond funds relative to international bond funds, and bond funds that
purchase higher quality securities relative to bond funds that purchase lower
quality securities. Growth and income equity funds are generally considered to
be less risky and offer the potential for less return than growth funds. In
addition, international equity funds usually are considered more risky than
domestic equity funds but generally offer the potential for greater return.
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 seven 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 Capital Growth Fund and Scudder Small Company Stock Fund.
To the extent that the Funds offer additional share classes, these classes will
be offered in a separate prospectus and have different fees, requirements and
services. 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
38
<PAGE>
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.
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.
The Trust's Board of Trustees supervises the Fund's activities. The Trust
adopted a plan pursuant to Rule 18f-3 under the 1940 Act (the "Plan") to permit
the Trust to establish a multiple class distribution system for the Fund.
Under the Plan, each class of shares will represent interests in the same
portfolio of investments of the Series, and be identical in all respects to each
other class, except as set forth below. The only differences among the various
classes of shares of the Series will relate solely to: (a) different
distribution fee payments or service fee payments associated with any Rule 12b-1
Plan for a particular class of shares and any other costs relating to
implementing or amending such Rule 12b-1 Plan (including obtaining shareholder
approval of such Rule 12b-1 Plan or any amendment thereto) which will be borne
solely by shareholders of such class; (b) different service fees; (c) different
account minimums; (d) the bearing by each class of its Class Expenses, as
defined in Section 2(b) below; (e) the voting rights related to any Rule 12b-1
Plan affecting a specific class of shares; (f) separate exchange privileges; (g)
different conversion features and (h) different class names and designations.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or fraction
thereof in respect of a fractional share) on matters that such shares (or class
of shares) shall be entitled to vote. Shareholders of the Fund shall vote
together on any matter, except to the extent otherwise required by the 1940 Act,
or when the Board of Trustees has determined that the matter affects only the
interest of shareholders of one or more classes of the Fund, in which case only
the shareholders of such class or classes of the Fund shall be entitled to vote
thereon. Any matter shall be deemed to have been effectively acted upon with
respect to the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Trust's Declaration of Trust. As used in the
Prospectus and in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Trust and all additional portfolios (e.g.,
election of directors), means the vote of the lesser of (i) 67% of the Trust's
shares represented at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Fund's outstanding shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the portfolio. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
39
<PAGE>
INVESTMENT ADVISOR
Investment Advisor
Zurich Scudder Investments, Inc., an investment counsel firm, acts as investment
advisor 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
Advisor 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 Advisor, and Zurich
Kemper Investments, Inc., a Zurich subsidiary, became part of the Advisor. The
Advisor'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.
On October 17, 2000, the dual holding company structure of Zurich Financial
Services Group, comprised of Allied Zurich p.l.c. in the United Kingdom and
Zurich Allied A.G. in Switzerland, was unified into a single Swiss holding
company, Zurich Financial Services. The Advisor changed its name from Scudder
Kemper Investments, Inc. to Zurich Scudder Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Advisor'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 Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor 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
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor'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 Advisor with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for a fund and also for other clients
advised by the Advisor. 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 Advisor 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 Advisor in the interest of achieving the most
favorable net results to that fund.
40
<PAGE>
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 Advisor, 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") dated July 17,
2000 were last approved by the Trustees on July 13, 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
Advisor 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 Advisor 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 Advisor 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 Advisor 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 Advisor 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
Advisor and makes available, without expense to the Fund, the services of such
Trustees, officers and employees of the Advisor 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 Advisor 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 Advisor not to exceed 75% of the amount of
the fee then accrued on the books of the Fund and unpaid. For the year ended
September 30, 2000, the fees pursuant to the Agreement amounted to $13,653,750,
which was equivalent to an annual rate of 0.60% of the Fund's average daily net
assets.
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<PAGE>
For these services Scudder Small Company Stock Fund pays the Advisor 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
Advisor not to exceed 75% of the amount of the fee then accrued on the books of
the Fund and unpaid. For the year ended September 30, 2000, the Advisor did not
impose a portion of its fee aggregating $64,772 and the amount imposed
aggregated $448,478, which was equivalent to an annual effective rate of 0.70%
of the Fund's average daily net assets.
Prior to July 17, 2000 each Fund was considered an "AARP Fund", and for
investment management services each Fund paid the Advisor 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 Advisor; 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 Advisor 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 the Scudder name and marks as part of its name, and to use
the Scudder Marks in the Trusts' investment products and services.
42
<PAGE>
In reviewing the terms of each Agreement and in discussions with the Advisor
concerning such Agreement, the Trustees of each Fund who are not "interested
persons" of the Advisor are represented by independent counsel at the Fund's
expense.
Each Agreement provides that the Advisor 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 Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under each Agreement.
The term Scudder Investments is the designation given to the services provided
by Zurich Scudder Investments, Inc. and its affiliates to the Scudder Family of
Funds.
Scudder Kemper has agreed to pay a fee to AARP and/or its affiliates in return
for services relating to investments by AARP members in AARP Class shares of
each fund. This fee is calculated on a daily basis as a percentage of the
combined net assets of AARP Classes of all funds managed by Scudder Kemper. The
fee rates, which decrease as the aggregate net assets of the AARP Classes become
larger, are as follows: 0.07% for the first $6 billion in net assets, 0.06% for
the next $10 billion and 0.05% thereafter.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor 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 Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLinkSM Program. The Advisor
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 advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLinkSM Program will be a customer of the Advisor (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLinkSM
is a service mark of AMA Solutions, Inc.
Code of Ethics
The Funds, the Advisor 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 Advisor 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 Advisor'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 Advisor'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
Advisor's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
43
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
Linda C. Coughlin (48)+* President and Trustee Managing Director of Zurich Scudder Director and Senior
Investments, Inc. Vice President
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 (Not-for-profit business research
organization)
Keith R. Fox (45) Trustee General Partner, Exeter Group of Funds --
10 East 53rd Street
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, LLC (venture capital firm)
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E. Street, NW
7th Floor
Washington, D.C. 20004
Thomas V. Bruns (43) *** Vice President Managing Director of Zurich Scudder None
Investments, Inc.
William F. Glavin (41)+ Vice President Managing Director of Zurich Scudder Vice President
Investments, Inc.
44
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ -------------------- --------------
James E. Masur (40) + Vice President Senior Vice President of Zurich None
Scudder Investments, Inc.
Kathryn L. Quirk (47)++ Vice President and Managing Director of Zurich Scudder Director, Senior Vice
Assistant Secretary Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
Howard Schneider (43) + Vice President Managing Director of Zurich Scudder None
Investments, Inc.
Ann M. McCreary (43) ++ Vice President Managing Director of Zurich Scudder None
Investments, Inc.
John R. Hebble (42)+ Treasurer Senior Vice President of Zurich Assistant Treasurer
Scudder Investments, Inc.
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Zurich None
Scudder Investments, Inc.
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Zurich Clerk
Scudder Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
John Millette (37)+ Vice President and Vice President of Zurich Scudder --
Secretary Investments, Inc.
Bruce F. Beaty (41)++ Vice President Managing Director of Zurich Scudder None
Investments, Inc.
James M. Eysenbach (38)# Vice President Vice President, Zurich Scudder None
Investments, Inc.
William F. Gadsden (45)++ Vice President Managing Director of Zurich Scudder None
Investments, Inc.
Valerie F. Malter (41)++ Vice President Managing Director of Zurich Scudder None
Investments, Inc.
Kathleen T. Millard (39)+ Vice President Managing Director, Zurich Scudder None
Investments, Inc.
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Funds and their
counsel to be persons who are "interested persons" of the Advisor 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
45
<PAGE>
++ Address: 345 Park Avenue, New York, New York
# Address: 101 California Street Suite 4100 San Francisco, California
*** Address: 222 South Riverside Plaza, Chicago, Illinois
The Trustees and officers of the Fund also serve in similar capacities with
respect to other Scudder funds.
Certain accounts for which the Scudder Kemper acts as investment advisor owned
286,987 shares in the aggregate, or 10.82% of the outstanding shares of Scudder
Small Company Stock Fund - Class S - on November 30, 2000. Scudder Kemper may be
deemed to be the beneficial owner of such shares, but disclaims any beneficial
ownership in such shares.
As of November 30, 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 Exchange Act of 1934)
less than 1% of the outstanding shares of any class of any Fund.
To the best of the Fund's knowledge, as of November 30, 2000, except at stated
below, no person owned of record more than 5% or more of the outstanding shares
of any class of any Fund. They may be deemed to be the beneficial owner of
certain of these shares.
<TABLE>
<CAPTION>
Fund Shareholder Shares Class Percentage
---- ----------- ------ ----- ----------
<S> <C> <C> <C> <C>
Capital Growth Elgin National Industries 27,793 S 6.75%
Master Savings and
Profit Sharing
2001 Butterfield Road
Downers Grove, IL 60515
Intevac Inc. 401K/Profit 40,677 S 9.88%
Sharing
Scudder Kemper Inv.,
Trustee
3560 Bassett Street
Santa Clare, CA 95054
Element 401K/Profit 21,881 S 19.77%
Sharing
Scudder Kemper Inv.,
Trustee
500 Canal View Blvd.
Rochester, NY 14623
State Street Bank & 22,492 S 5.46%
Trust Co.
Custodian for AARP Mgd.
Investment Portfolio:
Diversified Income
One Heritage Drive
Quincy, MA 02171
State Street Bank & 212,080 S 51.52%
Trust Co.
Custodian for AARP Mgd.
Investment Portfolio:
Diversified Growth
46
<PAGE>
Fund Shareholder Shares Class Percentage
Capital Growth Elgin National 27,793 S 6.75
Industries
Master Savings and
Profit Sahring
2001 Butterfield Road
Downers Grove, IL
60515
One Heritage Drive
Quincy, MA 02171
Element K 401K/Profit 21,626 S 5.25%
Sharing
Scudder Kemper Inv.,
Trustee
500 Canal View Blvd.
Rochester, NY 14623
</TABLE>
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 Zurich
Scudder 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 Advisor
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 Advisor 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. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at Trustees' educational
seminars or conferences, service on industry or association committees,
participation as speakers at Trustees' conferences or service on special trustee
task forces or subcommittees. Independent Trustees do not receive any employee
benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation. The Independent
Trustees also serve in the same capacity for other funds managed by the Advisor.
These funds differ broadly in type and complexity and in some cases have
substantially different Trustee fee schedules.
47
<PAGE>
On 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.
Name Investment Trust** All Scudder Funds
---- ---------------- -----------------
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)
* 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 Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
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
Advisor, 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.
48
<PAGE>
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.
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 accounting records. Scudder Service Corporation, also
a subsidiary of Zurich Scudder, 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 acts as general counsel for each Fund.
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.
49
<PAGE>
For Capital Growth Fund, for the period July 17, 2000 through September 30,
2000, the Administration Agreement expense amounted to $1,572,375, of which
$642,634 was unpaid at September 30, 2000. For Small Company Stock Fund, for the
period July 17, 2000 through September 30, 2000, the Administration Agreement
expense amounted to $91,200, all of which was unpaid at September 30, 2000.
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, 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
50
<PAGE>
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 for 2001 ($53,000 for married individuals filing a
joint return, with a phase-out of the deduction for adjusted gross income
between $53,000 and $63,000; $33,000 for a single individual, with a phase-out
for adjusted gross income between $33,000 and $43,000). 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. 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
51
<PAGE>
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.
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
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<PAGE>
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.
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.
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Shareholders should consult their tax advisors 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 Advisor.
The primary objective of the Advisor 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
Advisor 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 Advisor
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 Advisor 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 Advisor's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor 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
Advisor 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 Advisor 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 Advisor or a Fund in exchange for the direction by the Advisor of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Advisor will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of a Fund. In effecting transactions in
over-the-counter securities, orders are placed with the principal market makers
for the security being traded unless, after exercising care, it appears that
more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Advisor; 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 Advisor, it is the opinion of the Advisor that such information only
supplements the Advisor's own research effort since the information must still
be analyzed, weighed, and reviewed by the Advisor's staff. Such information may
be useful to the Advisor in providing services to clients other than a Fund, and
not all such information is used by the Advisor in connection with a Fund.
Conversely, such information provided to the Advisor by broker/dealers through
whom other clients of the Advisor effect securities transactions may be useful
to the Advisor in providing services to a Fund.
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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.
[To be updated.] For each year of the fiscal years ended September 30, 1998 and
1999, Class AARP of Scudder Capital Growth Fund (formerly AARP Capital Growth
Fund) paid total brokerage commissions of $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 Advisor. 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 year ended
September 30, 2000, $[xxxxx] ([xx]%) of the total brokerage commissions paid by
Scudder 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 Advisor. The amount of such transactions aggregated $[xxx], of which
$[xxx] ([xx]% 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 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 Advisor. 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. For the fiscal year ended September 30, 2000, $[xxx] ([xx]%) of
the total brokerage commissions paid by Scudder 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 Advisor. The amount of
such transactions aggregated $[xxx], of which $[xxx] ([xx]% 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, 1999 and 2000 was
68% and 66%. For the fiscal years ended 1999 and 2000, Scudder Small Company
Stock Fund (formerly AARP Small Company Stock Fund) had an annualized portfolio
turnover rate of 17.4% and 48%, 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 "Value Time"). The Exchange is scheduled to be closed on the following
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holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas
and on the preceding Friday or subsequent Monday when one of these holidays
falls on 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 Advisor 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.
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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 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 Advisor 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 acts as general counsel to the Funds.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of the Advisor, 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. Prior to July 17,
2000, the amount charged to Capital Growth Fund by SFAC aggregated $142,859, of
which $6,956 was unpaid at September 30, 2000. For the fiscal year ended
September 30, 1999, SFAC charged Class AARP of Scudder Capital Growth Fund
$144,450. For the years ended September 30, 1998 and 1997, SFAC charged Class
AARP of Scudder Capital Growth Fund $129,318 and $110,317, respectively. Prior
to July 17, 2000, the amount charged to Small Company Stock Fund by SFAC
aggregated $43,006, of which $12,644 was unpaid at September 30, 2000. 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 219669,
Kansas City, Missouri, 64121-9669 , a subsidiary of the Advisor, 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. Prior to July 17, 2000, the amount charged to Capital Growth Fund
by SSC aggregated $3,213,530, of which $178,698 was unpaid at September 30,
2000. Prior to July 17, 2000,
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the amount charged to Small Company Stock Fund by SSC aggregated $156,405, of
which $7,612 was unpaid at September 30, 2000. For the year ended September 30,
1999, Class AARP of Scudder Capital Growth Fund was charged $2,823,393. 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. 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 Advisor, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Prior to the implementation of the
Administrative Agreement, each Fund paid Scudder Trust Company an annual fee of
$23.50 per shareholder account. Prior to July 17, 2000, the amounted charged to
Capital Growth Fund by STC aggregated $9,838. For the fiscal years ended
September 30, 1999 and September 30, 1998, the Funds did not incur any fees.
The Funds or the Advisor (including any affiliate of the Advisor), 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 the Funds,
together with the Report of Independent Accountants, Financial Highlights, and
notes to financial statements in the Annual Report to the Shareholders of the
Funds dated September 30, 2000 are incorporated by reference herein and are
hereby deemed to be a part of this Statement of Additional Information.
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SCUDDER GROWTH AND INCOME FUND
Class AARP and Class S Shares
A series of Investment Trust
A Diversified Mutual Fund Seeking Long-Term Growth of Capital,
Current Income and Growth of Income
while Actively Seeking to Reduce Downside Risk
as Compared with other Growth and Income Funds
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
--------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of Scudder Growth and Income Fund dated
December 29, 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 Scudder Growth and Income Fund dated
September 30, 2000 is incorporated by reference and is hereby deemed to be part
of this Statement of Additional Information. The Annual Report may be obtained
without charge by calling 1-800-SCUDDER.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES..........................................................................1
General Investment Objective and Policies.............................................................................1
Master/feeder structure...............................................................................................2
Investment Restrictions..............................................................................................15
PURCHASES............................................................................................................16
Additional Information About Opening An Account......................................................................16
Minimum Balances.....................................................................................................17
Additional Information About Making Subsequent Investments...........................................................18
Additional Information About Making Subsequent Investments by QuickBuy...............................................18
Checks...............................................................................................................19
Wire Transfer of Federal Funds.......................................................................................19
Share Price..........................................................................................................19
Share Certificates...................................................................................................19
Other Information....................................................................................................19
EXCHANGES AND REDEMPTIONS............................................................................................20
Exchanges............................................................................................................20
Redemption by Telephone..............................................................................................21
Redemption by QuickSell..............................................................................................22
Redemption by Mail or Fax............................................................................................22
Redemption-In-Kind...................................................................................................22
Other Information....................................................................................................23
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................23
Internet access......................................................................................................23
Dividend and Capital Gain Distribution Options.......................................................................24
Diversification......................................................................................................24
Reports to Shareholders..............................................................................................24
Transaction Summaries................................................................................................24
THE SCUDDER FAMILY OF FUNDS..........................................................................................24
SPECIAL PLAN ACCOUNTS................................................................................................26
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations and
Self-Employed Individuals.......................................................................................27
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals..................27
Scudder IRA: Individual Retirement Account...........................................................................27
Scudder Roth IRA: Individual Retirement Account......................................................................28
Scudder 403(b) Plan..................................................................................................28
Automatic Withdrawal Plan............................................................................................28
Group or Salary Deduction Plan.......................................................................................29
Automatic Investment Plan............................................................................................29
Uniform Transfers/Gifts to Minors Act................................................................................29
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS.............................................................................30
PERFORMANCE INFORMATION..............................................................................................30
Average Annual Total Return..........................................................................................30
Cumulative Total Return..............................................................................................31
Total Return.........................................................................................................31
Comparison of Fund Performance.......................................................................................31
FUND ORGANIZATION....................................................................................................32
i
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TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISOR...................................................................................................34
AMA InvestmentLink(SM) Program.......................................................................................37
Code of Ethics.......................................................................................................37
TRUSTEES AND OFFICERS................................................................................................37
REMUNERATION.........................................................................................................40
Responsibilities of the Board -- Board and Committee Meetings........................................................40
Compensation of Officers and Trustees................................................................................40
DISTRIBUTOR..........................................................................................................41
Administrative Fee...................................................................................................42
TAXES................................................................................................................42
PORTFOLIO TRANSACTIONS...............................................................................................46
Brokerage Commissions................................................................................................46
Portfolio Turnover...................................................................................................47
NET ASSET VALUE......................................................................................................47
ADDITIONAL INFORMATION...............................................................................................48
Experts..............................................................................................................48
Shareholder Indemnification..........................................................................................48
Other Information....................................................................................................49
FINANCIAL STATEMENTS.................................................................................................50
</TABLE>
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THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
General Investment Objective and Policies
Scudder Growth and Income Fund (the "Fund") is a diversified series of
Investment Trust (the "Trust"), an open-end management investment company which
continuously offers and redeems its shares. It is a company of the type commonly
known as a mutual fund.
The Fund seeks long-term growth of capital, current income and growth of income
while actively seeking to reduce downside risk as compared with other growth and
income funds. The managers use analytical tools to monitor actively the risk
profile of the portfolio as compared to comparable funds and appropriate
benchmarks and peer groups. The managers use several strategies in seeking to
reduce risk, including: (i) managing risk associated with investment in specific
companies by using fundamental analysis, valuation, and by adjusting position
sizes; (ii) portfolio construction emphasizing diversification, blending stocks
with a variety of different attributes, including value and growth stocks; and
(iii) diversifying across many sectors and industries. The portfolio managers'
attempts to manage downside risk may reduce performance in a strong market. In
addition, Scudder Growth and Income Fund does not invest in securities issued by
tobacco-producing companies.
Scudder Growth and Income Fund offers six classes of shares: Class AARP, Class
S, Class A, Class B and Class C shares to provide investors with different
purchase options. Each class has its own important features and policies. Shares
of Class AARP are especially designed for members of AARP. Only Class AARP and
Class S shares are offered herein.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage (such as hedging,
etc.) or a financial instrument which the Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that Zurich Scudder Investments (the "Advisor"), in its discretion,
might, but is not required to, use in managing the Fund's portfolio assets. The
Advisor may, in its discretion, at any time employ such practice, technique or
instrument for one or more Funds, but not for all Funds advised by it.
Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
the Fund, but, to the extent employed, could from time to time have a material
impact on the Fund's performance.
The Fund invests primarily in equities, mainly common stocks. The Fund allocates
its investments among different industries and companies, and adjusts its
portfolio securities for investment considerations and not for trading purposes.
The Fund attempts to achieve its investment objective by investing in
dividend-paying common stocks, preferred stocks and securities convertible into
common stocks. The Fund may also purchase such securities which do not pay
current dividends but which, the fund's management believes, offer prospects for
growth of capital and future income. Convertible securities (which may be
current coupon or zero coupon securities) are bonds, notes, debentures,
preferred stocks and other securities which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The Fund may also invest in nonconvertible preferred stocks consistent with the
Fund's objective. From time to time, for temporary defensive purposes, when the
Fund's investment advisor feels such a position is advisable in light of
economic or market conditions, the Fund may invest, without limit, in cash and
cash equivalents. It is impossible to predict how long such alternative
strategies will be utilized. The Fund may invest in foreign securities, real
estate investment trusts, Standard and Poor's Depository Receipts, illiquid
securities, repurchase agreements and reverse repurchase agreements. It may also
loan securities and may engage in strategic transactions. More information about
investment techniques is provided under "Additional information about policies
and investments."
The Fund's share price fluctuates with changes in interest rates and market
conditions. These fluctuations may cause the value of shares to be higher or
lower than when purchased.
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Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
Master/feeder structure
The Board of Trustees has the discretion to retain the current distribution
arrangement for the Fund while investing in a master fund in a master/feeder
structure fund as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "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.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the Securities and
Exchange Commission (the "SEC"), the Fund may use Uninvested Cash to purchase
shares of affiliated funds including money market funds, short-term bond funds
and Scudder Cash Management Investment Trust, or one or more future entities for
which Zurich Scudder Investments acts as trustee or investment advisor that
operate as cash management investment vehicles and that are excluded from the
definition of investment company pursuant to section 3(c)(1) or 3(c)(7) of the
Investment Company Act of 1940 (collectively, the "Central Funds") in excess of
the limitations of Section 12(d)(1) of the Investment Company Act. Investment by
the Fund in shares of the Central Funds will be in accordance with the Fund's
investment policies and restrictions as set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
Common stocks. Under normal circumstances, the Fund invests mainly in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Convertible Securities. The Fund may invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks, and other securities which are
convertible into common stocks. Investments in convertible securities may
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provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest include fixed-income or
zero coupon debt securities which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. The exchange
ratio for any particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate distributions, or
scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes (LYONS). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely 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 shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Illiquid Securities. The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. This investment
practice, therefore, could have the effect of increasing the level of
illiquidity of the Fund. It is the Fund's policy that illiquid securities
(including repurchase agreements of more than seven days duration, certain
restricted securities, and other securities which are not readily marketable)
may not constitute, at the time of purchase, more than 15% of the value of the
Fund's net assets.
Generally speaking, restricted securities may be sold (i) only to qualified
institutional buyers; (ii) in a privately negotiated transaction to a limited
number of purchasers; (iii) in limited quantities after they have been held for
a specified period of time and other conditions are met pursuant to an exemption
from registration; or (iv) in a public
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offering for which a registration statement is in effect under the 1933 Act.
Issuers of restricted securities may not be subject to the disclosure and other
investor protection requirements that would be applicable if their securities
were publicly traded. If adverse market conditions were to develop during the
period between the Fund's decision to sell a restricted or illiquid security and
the point at which the Fund is permitted or able to sell such security, the Fund
might obtain a price less favorable than the price that prevailed when it
decided to sell. Where a registration statement is required for the resale of
restricted securities, the Fund may be required to bear all or part of the
registration expenses. The Fund may be deemed to be an "underwriter" for
purposes of the 1933 Act when selling restricted securities to the public and,
in such event, the Fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer is materially inaccurate or
misleading.
Among the factors the Advisor may consider in reaching liquidity decisions
relating to Rule 144A securities are: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
market for the security (i.e., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer).
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund will indirectly bear its proportionate share of any
management fees and other expenses paid by such other investment companies. For
example, the Fund may invest in a variety of investment companies which seek to
track the composition and performance of specific indices 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 net asset values
("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.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
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WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indices. 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.
Zero Coupon Securities. The Fund may invest in zero coupon securities, which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon securities which are convertible into common stock offer the opportunity
for capital appreciation as increases (or decreases) in the 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 securities issued directly by the U.S. Treasury,
and U.S. Treasury bonds or notes and their unmatured interest coupons and
receipts for their underlying principal ("coupons") which have been separated by
their holder, typically a custodian bank or investment brokerage firm. A holder
will separate the interest coupons from the underlying principal (the "corpus")
of the U.S. Treasury security. A number of securities firms and banks have
stripped the interest coupons and receipts and then resold them in custodial
receipt programs with a number of different names, including "Treasury Income
Growth Receipts" (TIGRS(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 Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Fund understands that the staff of the Division of Investment
Management of the SEC no longer considers such privately stripped obligations to
be U.S. Government securities, as defined in the 1940 Act; therefore, the Fund
intends 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 Fund is "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").
Foreign Securities. While the Fund generally emphasizes investments in companies
domiciled in the U.S., it may invest in listed and unlisted foreign securities
that meet the same criteria as the Fund's domestic holdings. The Fund may invest
in foreign securities when the anticipated performance of the foreign securities
is believed by the Advisor to offer more potential than domestic alternatives in
keeping with the investment objective of the Fund.
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Investors should recognize that investing in foreign securities involves certain
special considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign stock markets, while growing
in volume of trading activity, have substantially less volume than the New York
Stock Exchange, Inc. (the "Exchange") and securities of some foreign companies
are less liquid and more volatile than securities of domestic companies.
Similarly, volume and liquidity in most foreign bond markets are less than the
volume and liquidity in the U.S. and at times, volatility of price can be
greater than in the U.S. Further, foreign markets have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Fixed commissions on some foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
Fund will endeavor to achieve the most favorable net results on its portfolio
transactions. Further, the Fund may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts. There is generally
less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the U.S. It may be more
difficult for the Fund's agents to keep currently informed about corporate
actions such as stock dividends or other matters which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of nationalization, expropriation, the imposition of withholding or
confiscatory taxes, political, social, or economic instability or diplomatic
developments which could affect U.S. investments in those countries. Investments
in foreign securities may also entail certain risks, such as possible currency
blockages or transfer restrictions and the difficulty of enforcing rights in
other countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
These considerations generally are more of a concern in developing countries.
For example, the possibility of revolution and the dependence on foreign
economic assistance may be greater in these countries than in developed
countries. The management of the Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may be subject to potentially greater risks than investments in developed
countries, the Fund will not invest in any securities of issuers located in
developing countries if the securities, in the judgment of the Advisor, are
speculative.
Investments in foreign securities usually will involve currencies of foreign
countries. Moreover, the Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs and the value of
these assets for the Fund as measured in U.S. dollars may be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations and the Fund may incur costs in connection with conversions
between various currencies. Although the Fund values its assets daily in terms
of U.S. dollars, it does not intend to convert its holdings of foreign
currencies, if any, into U.S. dollars on a daily basis. It may do so from time
to time and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to the Fund at one rate while offering a lesser rate
of exchange should the Fund desire to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions, if any, either on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through forward foreign currency exchange contracts. (See
"Currency Transactions" for more information.)
To the extent that the Fund invests in foreign securities, the Fund's share
price could reflect the movements of both the different stock and bond markets
in which it is invested and the currencies in which the investments are
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denominated; the strength or weakness of the U.S. dollar against foreign
currencies could account for part of the Fund's investment performance.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in
cash, U.S. Government Securities and liquid high grade debt obligations
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. The Fund has the right to call a
loan and obtain the securities loaned on no more than five days' notice. During
the existence of a loan, the Fund will continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and will also receive
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms deemed by the Advisor to be of good standing.
The value of the securities loaned will not exceed 30% of the value of the
Fund's total assets at the time any loan is made.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Advisor. 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, the
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. The fund may have to borrow from a bank at a higher
interest rate if an interfund loan is called or not renewed. Any delay in
repayment to a lending fund could result in a lost investment opportunity or
additional costs. The program is subject to the oversight and periodic review of
the Boards of the participating funds. To the extent the Fund is actually
engaged in borrowing through the interfund lending program, the Fund, as a
matter of non-fundamental policy, may not borrow for other than temporary or
emergency purposes (and not for leveraging), except that the Fund may engage in
reverse repurchase agreements and dollar rolls for any purpose.
Repurchase Agreements. The Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System and any broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Advisor to be at least
as high as that of other obligations the Fund may purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Ratings Services ("S&P").
A repurchase agreement provides a means for the Fund to earn income on funds for
periods as short as overnight. It is an arrangement under which the Fund
acquires a security ("Obligation") and the seller agrees, at the time of sale,
to repurchase the Obligation at a specified time and price. Obligations subject
to a repurchase agreement are held in a segregated account and the value of such
obligations kept at least equal to the repurchase price on a daily basis. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price on
repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the Obligation itself. Obligations will be held by the Fund's custodian
or in the Federal Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
the Fund to the seller of the Obligation subject to the repurchase agreement and
is therefore subject to the Fund's investment restriction applicable to loans.
It is not clear whether a court would consider the Obligation purchased by the
Fund subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may result in loss of interest or decline in price of
the Obligation. If
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the court characterizes the transaction as a loan and the Fund has not perfected
a security interest in the Obligation, the Fund may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at the risk of losing some
or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Fund, the Advisor seeks to minimize
the risk of loss through repurchase agreements by analyzing the creditworthiness
of the obligor, in this case the seller of the Obligation. Apart from the risk
of bankruptcy or insolvency proceedings, there is also the risk that the seller
may fail to repurchase the Obligation, in which case the Fund may incur a loss
if the proceeds to the Fund of its sale of the securities underlying the
repurchase agreement to a third party are less than the repurchase price. To
protect against such potential loss, if the market value (including interest) of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
Obligation to deliver additional securities so that the market value (including
interest) of all securities subject to the repurchase agreement will equal or
exceed the repurchase price. It is possible that the Fund will be unsuccessful
in seeking to enforce the seller's contractual obligation to deliver additional
securities.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
will maintain a segregated account, as described under "Use of Segregated and
Other Special Accounts" in connection with outstanding reverse repurchase
agreements. Reverse repurchase agreements are deemed to be borrowings subject to
the Fund's investment restrictions applicable to that activity. The Fund will
enter into a reverse repurchase agreement only when the Advisor 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.
Real Estate Investment Trusts ("REITs"). The Fund may invest in REITs. REITs are
sometimes informally characterized as equity REITs, mortgage REITs and hybrid
REITs. Investment in REITs may subject the Fund to risks associated with the
direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Changes in interest rates may also
affect the value of the Fund's investment in REITs. For instance, during periods
of declining interest rates, certain mortgage REITs may hold mortgages that the
mortgagors elect to prepay, which prepayment may diminish the yield on
securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended (the "Code"), and to maintain exemption from the registration
requirements of the 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.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors, collars, currency forward contracts, currency futures contracts,
currency swaps or options on currencies, or currency futures and various other
currency transactions (collectively, all the above are called "Strategic
Transactions"). In addition, strategic transactions may also include new
techniques, instruments or strategies that are permitted as regulatory
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changes occur. Strategic Transactions may be used without limit (subject to
certain limitations imposed by the 1940 Act) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Advisor's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options
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are issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties to
such options. The discussion below uses the OCC as an example, but is also
applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Advisor. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
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The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of
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cash is equal to the excess of the closing price of the index over the exercise
price of the option, which also may be multiplied by a formula value. The seller
of the option is obligated, in return for the premium received, to make delivery
of this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of
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obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Advisor, it is in the best interest of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Advisor's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Advisor and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Advisor. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
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Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid assets
denominated in that currency equal to the Fund's obligations or to segregate
cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could
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<PAGE>
purchase a put option if the strike price of that option is the same or higher
than the strike price of a put option sold by the Fund. Moreover, instead of
segregating cash or liquid assets if the Fund held a futures or forward
contract, it could purchase a put option on the same futures or forward contract
with a strike price as high or higher than the price of the contract held. Other
Strategic Transactions may also be offset in combinations. If the offsetting
transaction terminates at the time of or after the primary transaction, no
segregation is required, but if it terminates prior to such time, cash or liquid
assets equal to any remaining obligation would need to be segregated.
Investment Restrictions
Unless specified to the contrary, the following fundamental policies may not be
changed without the approval of a majority of the outstanding voting securities
of the Fund involved which, under the 1940 Act and the rules thereunder and as
used in this Statement of Additional Information, means the lesser of (1) 67% or
more of the voting securities present at a meeting, if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy; or (2) more than 50% of the outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Fund.
As a matter of fundamental policy, the Fund may not:
(1) borrow money, except as permitted under the 1940 Act and as
interpreted or modified by regulatory authority having
jurisdiction from time to time;
(2) issue senior securities, except as permitted under the 1940
Act and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
(3) purchase physical commodities or contracts relating to
physical commodities;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) make loans except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time; or
(7) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, and as interpreted or modified
by regulatory authority having jurisdiction, from time to
time.
The Fund may not, as a nonfundamental policy:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and
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<PAGE>
options shall not be deemed to constitute selling securities
short and (v) that the Fund may obtain such short-term credits
as may be necessary for the clearance of securities
transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(7) lend portfolio securities in an amount greater than 30% of its
total assets.
PURCHASES
Additional Information About Opening An Account
All new investors in Class AARP of the Funds are required to provide an AARP
membership number on their account application.
In addition, Class S shares of the Funds will generally not be available to new
investors.
The following investors may continue to purchase Class S shares of Scudder
Funds:
(1) Existing shareholders of Class S shares of any Scudder Fund as
of December 29, 2000, and household members residing at the
same address.
(2) Investors may purchase Class S shares of any Scudder Fund
through any broker-dealer or service agent account until June
30, 2001. After June 30, 2001, only investors who owned Class
S shares as of June 30, 2001 and household members residing at
the same address may open new accounts in Class S of any
Scudder Fund.
(3) Any retirement, employee stock, bonus pension or
profit-sharing plans.
(4) Any participant who owns Class S shares of any Scudder Fund
through an employee sponsored retirement, employee stock,
bonus, pension or profit sharing plan as of December 29, 2000
may, at a later date, open a new individual account in Class S
of any Scudder Fund.
(5) Any participant who owns Class S shares of any Scudder Fund
through a retirement, employee stock, bonus, pension or profit
sharing plan may complete a direct rollover to an IRA account
that will hold Class S shares. This applies for individuals
who begin their retirement plan investments with a Scudder
Fund at any time, including after December 29, 2000.
(6) Officers, Fund Trustees and Directors, and full-time employees
and their family members, of Zurich Financial Services and its
affiliates.
(7) Class S shares are available to any accounts managed by Zurich
Scudder Investments, Inc., any advisory products offered by
Zurich Scudder Investments, Inc. or Scudder Investor Services,
Inc., and to the Portfolios of Scudder Pathway Series.
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<PAGE>
(8) Registered investment advisors ("RIAs") may continue to
purchase Class S shares of Scudder Funds for all clients until
June 30, 2001. After June 30, 2001, RIAs may purchase Class S
shares for any client that has an existing position in Class S
shares of any Scudder Funds as of June 30, 2001.
(9) Broker-dealers and RIAs who have clients participating in
comprehensive fee programs may continue to purchase Class S
shares of Scudder Funds until June 30, 2001. After June 30,
2001, broker dealers and RIAs may purchase Class S shares in
comprehensive fee programs for any client that has an existing
position in Class S shares of a Scudder Fund as of June 30,
2001.
(10) Scudder Investors Services, Inc. may, at its discretion,
require appropriate documentation that shows an investor is
eligible to purchase Class S shares.
Clients having a regular investment counsel account with the Advisor or its
affiliates and members of their immediate families, officers and employees of
the Advisor 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 for Class S
and $1,000 for Class AARP through Scudder Investor Services, Inc. (the
"Distributor") by letter, fax, or telephone.
Shareholders of other Scudder funds who have submitted an account application
and have a certified tax identification number, clients having a regular
investment counsel account with the Advisor or its affiliates and members of
their immediate families, officers and employees of the Advisor or of any
affiliated organization and members of their immediate families, members of the
NASD, and banks may open an account by wire. Investors interested in investing
in Class S must call 1-800-225-5163 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), name of bank or trust company from which the
wire will be sent, the exact registration of the new account, the tax
identification or Social Security number, address and telephone number. The
investor must then call the bank to arrange a wire transfer to The Scudder
Funds, Boston, MA 02101, ABA Number 011000028, DDA Account Number: 9903-5552.
The investor must give the Scudder fund name, class name, account name and the
new account number. Finally, the investor must send the completed and signed
application to the Fund promptly. Investors interested in investing in Class
AARP should call 1-800-253-2277 for further instructions.
The minimum initial purchase amount is less than $2,500 for Class S under
certain special plan accounts and is $1,000 for Class AARP.
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 Gifts to Minors Act, and Uniform Transfers to Minors
Act accounts, the minimum balance is $1,000 for Class S and $500 for Class AARP.
These amounts may be changed by the Fund's 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 Fund reserves 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; and
o for Class AARP and Class S, 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.
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<PAGE>
Reductions in value that result solely from market activity will not trigger an
annual fee or involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or UTMA)
with balances below $100 are subject to automatic redemption following 60 days'
written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not greater
than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Contact the Distributor at 1-800-SCUDDER for additional
information. A confirmation of the purchase will be mailed out promptly
following receipt of a request to buy. Federal regulations require that payment
be received within three business days. If payment is not received within that
time, the order is subject to cancellation. In the event of such cancellation or
cancellation at the purchaser's request, the purchaser will be responsible for
any loss incurred by the Fund or the principal underwriter by reason of such
cancellation. If the purchaser is a shareholder, the Trust shall have the
authority, as agent of the shareholder, to redeem shares in the account in order
to reimburse the Fund or the principal underwriter for the loss incurred. Net
losses on such transactions which are not recovered from the purchaser will be
absorbed by the principal underwriter. Any net profit on the liquidation of
unpaid shares will accrue to the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of the
Automated Clearing House Network (ACH) and who have elected to participate in
the QuickBuy program, may purchase shares of the Fund by telephone. Through this
service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account, the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have completed and
returned to the Transfer Agent the application, including the designation of a
bank account from which the purchase payment will be debited. New investors
wishing to establish QuickBuy may so indicate on the application. Existing
shareholders who wish to add QuickBuy to their account may do so by completing a
QuickBuy Enrollment Form. After sending in an enrollment form, shareholders
should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls, testing a
caller's identity and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine and to discourage fraud. To the extent that the Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Investors interested in making subsequent investments in Class AARP of the Fund
should call 1-800-253-2277 for further information.
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<PAGE>
Checks
A certified check is not necessary, but checks are only accepted subject to
collection at full face value in U.S. funds and must be drawn on, or payable
through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be uncollectible,
the Trust reserves the right to cancel the purchase immediately, and the
purchaser 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 the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value per share
next computed after the 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 the Fund, to forward the purchase order to Scudder
Service Corporation (the "Transfer Agent") in Kansas City by the close of
regular trading on the Exchange.
Share Certificates
Due to the desire of the Fund's management to afford ease of redemption,
certificates will not be issued to indicate ownership in the Fund. Share
certificates now in a shareholder's possession may be sent to the Fund's
Transfer Agent for cancellation and credit to such shareholder's account.
Shareholders who prefer may hold the certificates in their possession until they
wish to exchange or redeem such shares.
All issued and outstanding shares of what were formerly AARP Funds that were
subsequently reorganized into existing Scudder Funds were simultaneously
cancelled on the books of the AARP Funds. Share certificates representing
interests in shares of the relevant AARP Fund will represent a number of shares
of Class AARP of the relevant Scudder Fund into which the AARP Fund was
reorganized. Class AARP shares of each fund will not issue certificates
representing shares in connection with any reorganization.
Other Information
The 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 the Fund's
behalf. Orders for purchase or redemption will be deemed to have been received
by the Fund when such brokers or their authorized designees accept the orders.
Subject to the terms of the contract between the Fund and the broker, ordinarily
orders will be priced at a class' net asset value next computed after acceptance
by
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<PAGE>
such brokers or their authorized designees. Further, if purchases or redemptions
of the Fund's shares are arranged and settlement is made at an investor's
election through any other authorized NASD member, that member may, at its
discretion, charge a fee for that service. The Board of Trustees and the
Distributor, also the Fund's principal underwriter, each has the right to limit
the amount of purchases by, and to refuse to sell to, any person. The Board of
Trustees and the Distributor may suspend or terminate the offering of shares of
the Fund at any time for any reason.
The "Tax Identification Number" section of the 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, certification of exempt status) will be returned to the
investor. The Fund reserves the right, following 30 days' notice, to redeem all
shares in accounts without a correct certified Social Security or tax
identification number. A shareholder may avoid involuntary redemption by
providing the 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 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 another Fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges into a new Fund account must be for a minimum of $2,500 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, tax identification number, 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 the respective net asset values
determined on that day. Exchange orders received after the close of regular
trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges automatically
executed on a predetermined schedule from one Scudder Fund to an existing
account in another Scudder Fund, at current net asset value, through Scudder's
Automatic Exchange Program. Exchanges must be for a minimum of $50. Shareholders
may add this free feature over the telephone or in writing. Automatic exchanges
will continue until the shareholder requests by telephone or in writing to have
the feature removed, or until the originating account is depleted. The Trust and
the Transfer Agent each reserves the right to suspend or terminate the privilege
of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above (except
for exchanges from funds which impose a redemption fee on shares held less than
a year). An exchange into another Scudder Fund is a redemption of shares, and
therefore may result in tax consequences (gain or loss) to the shareholder and
the proceeds of such exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange by
telephone, automatically without having to elect it. The Fund employs
procedures, including recording telephone calls, testing a caller's identity and
sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine and
to discourage fraud. To the extent that the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Fund
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<PAGE>
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder Funds into which investors may make an exchange are listed under
"THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange, shareholders
should obtain from the Distributor a prospectus of the Scudder Fund into which
the exchange is being contemplated. The exchange privilege may not be available
for certain Scudder Funds or classes of Scudder Funds. For more information,
please call 1-800-225-5163 (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 pre-designated 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 pre-designated 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.
Telephone redemption is not available with respect to shares represented by
share certificates or shares held in retirement accounts.
If a request for redemption to a shareholder's bank account is made by telephone
or fax, payment will be made by Federal Reserve bank wire to the bank account
designated on the application unless a request is made that the redemption check
be mailed to the designated bank account. There will be a $5.00 charge for all
wire redemptions.
Note: Investors designating a savings bank to receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their banks and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
The Fund employs procedures, including recording telephone calls, testing a
caller's identity and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine and to discourage fraud. To the extent that the Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption requests by telephone (technically a repurchase 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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<PAGE>
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of the
Automated Clearing House Network (ACH) and who have elected to participate in
the QuickSell program, may sell shares of the Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4:00 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have completed
and returned to the Transfer Agent the application, including the designation of
a bank account. 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 15 days for this service to be
available.
The Fund employs procedures, including recording telephone calls, testing a
caller's identity and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine and to discourage fraud. To the extent that the Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the Transfer
Agent may request additional documents such as, but not restricted to, stock
powers, trust instruments, certificates of death, appointments as executor,
certificates of corporate authority and waivers of tax (required in some states
when settling estates).
It is suggested that shareholders holding shares registered in other than
individual names contact the Transfer Agent prior to redemptions to ensure that
all necessary documents accompany the request. When shares are held in the name
of a corporation, trust, fiduciary agent, attorney or partnership, the Transfer
Agent requires, in addition to the stock power, certified evidence of authority
to sign. These procedures are for the protection of shareholders and should be
followed to ensure prompt payment. Redemption requests must not be conditional
as to date or price of the redemption. Proceeds of a redemption will be sent
within seven (7) business days after receipt by the Transfer Agent of a request
for redemption that complies with the above requirements. Delays in payment of
more than seven (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 please call 1-800-225-5163.
Redemption-In-Kind
The Trust reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order by making
payment in whole or in part in readily marketable securities chosen by the Trust
and valued as they are for purposes of computing the Fund's net asset value (a
redemption-in-kind). If payment is made in securities, a shareholder may incur
transaction expenses in converting these securities into cash. The Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of
which the Fund is obligated to redeem shares, with respect to any one
shareholder during any 90-day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of the
period.
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<PAGE>
Other Information
Clients, officers or employees of the Advisor or of an affiliated organization
and members of such clients', officers' or employees' immediate families, banks
and members of the NASD may direct repurchase requests to the Trust through the
Distributor at Two International Place, Boston, Massachusetts 02110-4103 by
letter, fax or telephone. A two-part confirmation will be mailed out promptly
after receipt of the redemption request. A written request in good order as
described above and any certificates with a proper signature guarantee(s), as
described in the Fund's prospectus under "Transaction information -- Redeeming
shares -- Signature guarantee", should be sent with a copy of the invoice to
Scudder Service Corporation, Confirmed Processing Department, Two International
Place, Boston, Massachusetts 02110-4103. Failure to deliver shares or required
documents (see above) by the settlement date may result in cancellation of the
trade and the shareholder will be responsible for any loss incurred by the Fund
or the principal underwriter by reason of such cancellation. The Trust 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.
Net losses on such transactions which are not recovered from the shareholder
will be absorbed by the principal underwriter. Any net gains so resulting will
accrue to the Fund. For this group, repurchases will be carried out at the net
asset value next computed after such repurchase requests have been received. The
arrangements described in this paragraph for repurchasing shares are
discretionary and may be discontinued at any time.
If a shareholder redeems all shares in the account after the record date of a
dividend, the shareholder will receive in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. The Trust does not
impose a redemption or repurchase charge although a wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including an exchange into another Scudder Fund, may
result in tax consequences (gain or loss) to the shareholder and the proceeds of
such redemptions may be subject to backup withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts should contact
the employer, trustee or custodian of the Plan for the requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment may be suspended at
times during which (a) the Exchange is closed, other than customary weekend and
holiday closings, (b) trading on the Exchange is restricted for any reason, (c)
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets or (d) the SEC may
by order permit such a suspension for the protection of the Trust's
shareholders; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) will govern as to whether the conditions
prescribed in (b) or (c) exist.
FEATURES AND SERVICES OFFERED BY THE FUND
Internet access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for Class AARP 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 Fund Summaries and details in
the Prospectus. Users can fill out new account forms on-line, order free
software and request literature on funds.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Advisor's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL
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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.
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest any
dividends from net investment income or distributions from realized capital
gains in additional shares of the same class of the Fund. A change of
instructions for the method of payment may be given to the Transfer Agent in
writing at least five days prior to a dividend record date. Shareholders may
change their dividend option either by calling 1-800-225-5163 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 of the class
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 the
Automated Clearing House Network (ACH) can have income and capital gain
distributions automatically deposited to their personal bank account usually
within three business days after the Fund pays its distribution. A Direct
Distributions request form can be obtained by calling 1-800-225-5163 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.
Diversification
Your investment represents an interest in a large, diversified portfolio of
carefully selected securities. Diversification may protect you against the
possible risks associated with concentrating in fewer securities or in a
specific market sector.
Reports to Shareholders
The Fund issues to its shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants. These
include a list of investments held and statements of assets and liabilities,
operations, changes in net assets and financial highlights for the Fund.
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.
THE SCUDDER FAMILY OF FUNDS
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
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TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
TAX FREE
Scudder Medium Term Tax Free Fund Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund Scudder California Tax Free Fund*
Scudder Massachusetts Tax Free Fund* Scudder New York Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Moderate 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 Stock Fund
Scudder Small Company Value Fund
Growth
Scudder Capital Growth Fund
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
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GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Fund***
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund Scudder Pacific Opportunities Fund
Scudder Latin America Fund The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Innovation 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.
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
The net asset values of most Scudder funds can be found daily in the "Mutual
Funds" section of The Wall Street Journal under "Scudder Funds," and in other
leading newspapers throughout the country. The latest seven-day yields for the
money-market funds can be found every Monday and Thursday in the "Money-Market
Funds" section of The Wall Street Journal. This information also may be obtained
by calling the Scudder Automated Information Line (SAIL) at 1-800-343-2890.
Certain Scudder funds or classes of Scudder Funds may not be available for
purchase or exchange. For more information, please call 1-800-225-5163.
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 advisor
with respect to the suitability requirements and tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit sharing and
pension plans and IRAs other than those offered by the Fund's distributor
depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
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Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a plan in the
form of a Scudder Profit-Sharing Plan (including a version of the Plan which
includes a cash-or-deferred feature) or a Scudder Money Purchase Pension Plan
(jointly referred to as the Scudder Retirement Plans) adopted by a corporation,
a self-employed individual or a group of self-employed individuals (including
sole proprietorships and partnerships), or other qualifying organization. Each
of these forms was approved by the IRS as a prototype. The IRS's approval of an
employer's plan under Section 401(a) of the Internal Revenue Code will be
greatly facilitated if it is in such approved form. Under certain circumstances,
the IRS will assume that a plan, adopted in this form, after special notice to
any employees, meets the requirements of Section 401(a) of the Internal Revenue
Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for
Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a plan in the
form of a Scudder 401(k) Plan adopted by a corporation, a self-employed
individual or a group of self-employed individuals (including sole proprietors
and partnerships), or other qualifying organization. This plan has been approved
as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an employer-maintained
retirement plan, such as a pension or profit sharing plan, a governmental plan,
a simplified employee pension plan, a simple retirement account, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. If an individual is an active participant, the deductibility of his or
her IRA contributions in 2000 is phased out if the individual has gross income
between $32,000 and $42,000 and is single, if the individual has gross income
between $52,000 and $62,000 and is married filing jointly, or if the individual
has gross income between $0 and $10,000 and is married filing separately; the
phase-out ranges for individuals who are single or married filing jointly are
subject to annual adjustment through 2005 and 2007, respectively. If an
individual is married filing jointly and the individual's spouse is an active
participant but the individual is not, the deductibility of his or her IRA
contributions is phased out if their combined gross income is between $150,000
and $160,000. Whenever the adjusted gross income limitation prohibits an
individual from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions. There are
special rules for determining how withdrawals are to be taxed if an IRA contains
both deductible and nondeductible amounts. In general, a proportionate amount of
each withdrawal will be deemed to be made from nondeductible contributions;
amounts treated as a return of nondeductible contributions will not be taxable.
An eligible individual may contribute as much as $2,000 of qualified income
(earned income or, under certain circumstances, alimony) to an IRA each year (up
to $2,000 per individual for married couples, even if only one spouse has earned
income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
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Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a Roth
Individual Retirement Account which meets the requirements of Section 408A of
the Internal Revenue Code.
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.
The following paragraph applies to Class S shareholders only:
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment for tax
sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal Plan to
receive monthly, quarterly or periodic redemptions from his or her account for
any designated amount of $50 or more. Shareholders may designate which day they
want the automatic withdrawal to be processed. The check amounts may be based on
the redemption of a fixed dollar amount, fixed share amount, percent of account
value or declining balance. The Plan provides for income dividends and capital
gains distributions, if any, to be reinvested in additional shares. Shares are
then liquidated as necessary to provide for withdrawal payments. Since the
withdrawals are in amounts selected by the investor and have no relationship to
yield or income, payments received cannot be considered as yield or income on
the investment and the resulting liquidations may deplete or possibly extinguish
the initial investment and any reinvested dividends and capital gains
distributions. Requests for increases in withdrawal amounts or to change the
payee must be submitted in writing, signed exactly as the account is registered
and contain signature guarantee(s). Any such requests must be received by the
Fund's transfer agent 10 days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the Trust, or its agent on written notice, and will be terminated
when all shares of the Fund under the Plan have been liquidated or upon receipt
by the Trust of notice of death of the shareholder.
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An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163 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 Class S shares 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 S shares.
Shareholders may arrange to make periodic investments in Class AARP of the 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 the 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 Class
AARP for $500 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.
The Trust reserves the right, after notice has been given to the shareholder and
custodian, to redeem and close a shareholder's account in the event that regular
investments to the account cease before the $1,000 minimum is reached.
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DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund intends to follow the practice of distributing substantially all of its
investment company taxable income which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However,
the Fund may retain all or part of such gain for reinvestment, after paying the
related federal taxes for which shareholders may then be able to claim a credit
against their federal tax liability.
If the Fund does not distribute the amount of capital gain and/or net investment
income required to be distributed by an excise tax provision of the Internal
Revenue Code, the Fund may be subject to that excise tax. In certain
circumstances, the Fund may determine that it is in the interest of shareholders
to distribute less than the required amount. (See "TAXES.")
The Fund intends to distribute investment company taxable income, exclusive of
net short-term capital gains in excess of net long-term capital losses, in
March, June, September and December each year. Distributions of net capital
gains realized during each fiscal year will be made annually before the end of
the Fund's fiscal year on September 30. Additional distributions, including
distributions of net short-term capital gains in excess of net long-term capital
losses, may be made, if necessary.
Both types of distributions will be made in shares of the Fund and confirmations
will be mailed to each shareholder unless, for Class S and Class AARP
shareholders only, a shareholder has elected to receive cash, in which case a
check will be sent.
PERFORMANCE INFORMATION
From time to time, quotations of the Fund's Class AARP and Class S shares
performance may be included in advertisements, sales literature or reports to
shareholders or prospective investors. These performance figures are calculated
in the following manners:
Average Annual Total Return
Average annual total return is the average annual compound rate of return for
periods of one year, five years and ten years (or such shorter periods as may be
applicable dating from the commencement of the Fund's operations under its
current investment objective), all ended on the last day of a recent calendar
quarter. Average annual total return quotations reflect changes in the price of
the shares of the Fund by class and assume that all dividends and capital gains
distributions during the respective periods were reinvested in the same class.
Average annual total return is calculated by finding the average annual compound
rates of return of a hypothetical investment, over such periods, according to
the following formula (average annual total return is then expressed as a
percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return.
P = a hypothetical initial investment of $1,000.
N = Number of years.
ERV = Ending redeemable value: ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 investment
made at the beginning of the applicable period.
Average Annual Total Return for periods ended September 30, 2000*
One Year Five Years Ten Years
8.84% 14.36% 15.83%
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* On May 3, 1999, the Trust adopted a plan to permit the Trust
to establish a multiple class distribution system for the
Fund. Prior to that date, the Fund comprised a single class of
shares. Shares outstanding on May 3, 1999 were redesignated as
Class S shares of the Fund. Performance information provided
is for the Fund's Class S. As Class AARP shares are a new
class for the Fund, they have no past performance data
available.
As described above, average annual total return is based on historical earnings
and is not intended to indicate future performance. Average annual total return
for the Fund 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, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return.
P = a hypothetical initial investment of $1,000.
ERV = ending redeemable value: ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 investment
made at the beginning of the applicable period.
Cumulative Total Return for periods ended September 30, 2000*
One Year Five Years Ten Years
8.84% 95.63% 334.55%
* On May 3, 1999, the Trust adopted a plan to permit the Trust
to establish a multiple class distribution system for the
Fund. Prior to that date, the Fund comprised a single class of
shares. Shares outstanding on May 3, 1999 were redesignated as
Scudder Shares of the Fund, as of August 14, 2000, Scudder
Shares were redesignated as Class S shares of the Fund.
Performance information provided is for the Fund's Class S. As
Class AARP shares are a new class for the Fund, they have no
past performance data available.
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 Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
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From time to time, in advertising and marketing literature, this Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and officers
of the Fund, the Fund's portfolio manager or members of the portfolio management
team may be depicted and quoted to give prospective and current shareholders a
better sense of the outlook and approach of those who manage the Fund. In
addition, the amount of assets that the Advisor has under management in various
geographical areas may be quoted in advertising and marketing materials.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the potential
risks and rewards associated with an investment in the Fund. The description may
include a "risk/return spectrum" which compares the Fund to other Scudder funds
or broad categories of funds, such as money market, bond or equity funds, in
terms of potential risks and returns. Money market funds are designed to
maintain a constant $1.00 share price and have a fluctuating yield. Share price,
yield and total return of a bond fund will fluctuate. The share price and return
of an equity fund also will fluctuate. The description may also compare the Fund
to bank products, such as certificates of deposit. Unlike mutual funds,
certificates of deposit are insured up to $100,000 by the U.S. Government and
offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and money
market funds seek stability of principal, these investments are considered to be
less risky than investments in either bond or equity funds, which may involve
the loss of principal. However, all long-term investments, including investments
in bank products, may be subject to inflation risk, which is the risk of erosion
of the value of an investment as prices increase over a long time period. The
risks/returns associated with an investment in bond or equity funds depend upon
many factors. For bond funds these factors include, but are not limited to, a
fund's overall investment objective, the average portfolio maturity, credit
quality of the securities held and interest rate movements. For equity funds,
factors include a fund's overall investment objective, the types of equity
securities held and the financial position of the issuers of the securities. The
risks/returns associated with an investment in international bond or equity
funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment categories
in the following order: bank products, money market funds, bond funds and equity
funds. Shorter-term bond funds generally are considered less risky and offer the
potential for less return than longer-term bond funds. The same is true of
domestic bond funds relative to international bond funds, and bond funds that
purchase higher quality securities relative to bond funds that purchase lower
quality securities. Growth and income equity funds are generally considered to
be less risky and offer the potential for less return than growth funds. In
addition, international equity funds usually are considered more risky than
domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical information made by
independent sources may also be used in advertisements concerning the Fund,
including reprints of, or selections from, editorials or articles about this
Fund.
FUND ORGANIZATION
The 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 again 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 seven series: Scudder Growth and Income Fund, Scudder
Large Company Growth Fund, Classic Growth Fund, Scudder S&P 500 Index Fund,
Scudder Small Company Stock Fund, Scudder Capital Growth Fund and Scudder
Dividend & Growth Fund. The Fund's shares are currently divided into five
classes of shares: Class AARP, Class S, Class A, Class B and Class C. To the
extent that the Fund offers additional
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<PAGE>
share classes, these classes will be offered in a separate prospectus and have
different fees, requirements and services.
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 the Fund has equal rights with each other share of the 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
Statement of Additional Information and in the Fund's prospectus.
The assets of the Trust received for the issue or sale of the shares of each
series and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon only by shareholders of the series involved. Additionally, approval of the
investment advisory agreement is a matter to be determined separately by each
series. Approval by the shareholders of one series is effective as to that
series whether or not enough votes are received from the shareholders of the
other series to approve such agreement as to other series.
The Fund's activities are supervised by the Trust's Board of Trustees. The Trust
has adopted a plan pursuant to Rule 18f-3 (the "Plan") under the 1940 Act to
permit the Trust to establish a multiple class distribution system.
Under the Plan, each class of shares will represent interests in the same
portfolio of investments of the Series, and be identical in all respects to each
other class, except as set forth below. The only differences among the various
classes of shares of the Series will relate solely to: (a) different
distribution fee payments or service fee payments associated with any Rule 12b-1
Plan for a particular class of shares and any other costs relating to
implementing or amending such Rule 12b-1 Plan (including obtaining shareholder
approval of such Rule 12b-1 Plan or any amendment thereto) which will be borne
solely by shareholders of such class; (b) different service fees; (c) different
account minimums; (d) the bearing by each class of its Class Expenses, as
defined in Section 2(b) below; (e) the voting rights related to any Rule 12b-1
Plan affecting a specific class of shares; (f) separate exchange privileges; (g)
different conversion features and (h) different class names and designations.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class and certain securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or fraction
thereof in respect of a fractional share) on matters that such shares (or class
of shares) shall be entitled to vote. Shareholders of the Fund shall vote
together on any matter, except to the extent otherwise required by the 1940 Act,
or when the Board of Trustees has determined that the matter affects only the
interest of shareholders of one or more classes of the Fund, in which case only
the shareholders of such class or classes of the Fund shall be entitled to vote
thereon. Any matter shall be
33
<PAGE>
deemed to have been effectively acted upon with respect to the Fund if acted
upon as provided in Rule 18f-2 under the 1940 Act, or any successor rule, and in
the Fund's Declaration of Trust. As used in the Prospectus and in this Statement
of Additional Information, the term "majority", when referring to the approvals
to be obtained from shareholders in connection with general matters affecting
the Trust and all additional portfolios (e.g., election of directors), means the
vote of the lesser of (i) 67% of the Trust's shares represented at a meeting if
the holders of more than 50% of the outstanding shares are present in person or
by proxy, or (ii) more than 50% of the Fund's outstanding shares. The term
"majority", when referring to the approvals to be obtained from shareholders in
connection with matters affecting a single Fund or any other single portfolio
(e.g., annual approval of investment management contracts), means the vote of
the lesser of (i) 67% of the shares of the portfolio represented at a meeting if
the holders of more than 50% of the outstanding shares of the portfolio are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the portfolio. Shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held.
The Declaration of Trust provides that obligations of the Fund are not binding
upon the Trustees individually but only upon the property of the Fund, that the
Trustees and officers will not be liable for errors of judgment or mistakes of
fact or law and that the Fund will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the 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 the 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 ADVISOR
Zurich Scudder Investments, Inc., an investment counsel firm, acts as investment
advisor to the Fund. This organization, the predecessor of which is Scudder,
Stevens & Clark, Inc., is one of the most experienced investment counsel firms
in the U. S. It was established as a partnership in 1919 and pioneered the
practice of providing investment counsel to individual clients on a fee basis.
In 1928 it introduced the first no-load mutual fund to the public. In 1953 the
Advisor 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 Advisor, and Zurich
Kemper Investments, Inc., a Zurich subsidiary, became part of the Advisor. The
Advisor'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.
On October 17, 2000, the dual holding company structure of Zurich Financial
Services Group, comprised of Allied Zurich p.l.c. in the United Kingdom and
Zurich Allied A.G. in Switzerland, was unified into a single Swiss holding
company, Zurich Financial Services. The Advisor changed its name from Scudder
Kemper Investments, Inc. to Zurich Scudder Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Advisor'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 Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor receives
34
<PAGE>
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 Advisor's clients. However, the Advisor regards this
information and material as an adjunct to its own research activities. The
Advisor's international investment management team travels the world,
researching hundreds of companies. In selecting the securities in which the Fund
may invest, the conclusions and investment decisions of the Advisor with respect
to the Funds are based primarily on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Advisor. Investment decisions for the fund and other clients are
made with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the fund. Purchase and sale orders for the fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to the fund.
In certain cases, the investments for the fund are managed by the same
individuals who manage one or more other mutual funds advised by the Advisor,
that have similar names, objectives and investment styles. You should be aware
that the Fund is likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of the
Fund can be expected to vary from those of these other mutual funds.
The present investment management agreement (the "Agreement") was last approved
by the Trustees on July 10, 2000 and became effective on August 14, 2000. The
Agreement will continue in effect until September 30, 2001 and from year to year
thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreement or interested
persons of the Advisor or the Trust, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Trust's Trustees
or of a majority of the outstanding voting securities of the Fund. The Agreement
may be terminated at any time without payment of penalty by either party on
sixty days' written notice and automatically terminate in the event of its
assignment.
The Advisor also renders significant administrative services (not otherwise
provided by third parties) necessary for the Fund's operations as an open-end
investment company including, but not limited to, preparing reports and notices
to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Fund (such as the Fund's transfer agent, pricing agents, custodian, accountants
and others); preparing and making filings with the SEC and other regulatory
agencies; assisting in the preparation and filing of the Fund's federal, state
and local tax returns; preparing and filing the Fund's federal excise tax
returns; assisting with investor and public relations matters; monitoring the
valuation of securities and the calculation of net asset value; monitoring the
registration of shares of the Fund under applicable federal and state securities
laws; maintaining the Fund's books and records to the extent not otherwise
maintained by a third party; assisting in establishing accounting policies of
the Fund; assisting in the resolution of accounting and legal issues;
establishing and monitoring the Fund's operating budget; processing the payment
of the Fund's bills; assisting the Fund in, and otherwise arranging for, the
payment of distributions and dividends; and otherwise assisting the Fund in the
conduct of its business, subject to the direction and control of the Trustees.
The Advisor pays the compensation and expenses (except those for attending Board
and Committee meetings outside New York, New York and Boston, Massachusetts) of
all Trustees, officers and executive employees of the Trust affiliated with the
Advisor and makes available, without expense to the Trust, the services of such
Trustees, officers and employees of the Advisor as may duly be elected officers
or Trustees of the Trust, subject to their individual consent to serve and to
any limitations imposed by law, and provides the Trust's office space and
facilities.
For the Advisor's services from August 13, 1996 to May 1, 1997, the Fund paid
the Advisor an annual fee of 0.60% of the first $500 million of average daily
net assets, 0.55% of such assets in excess of $500
35
<PAGE>
million, 0.50% of such assets in excess of $1 billion, 0.475% of such assets in
excess of $1.5 billion, 0.45% of such assets in excess of $2 billion, 0.425% of
such assets in excess of $3 billion.
For the Advisor's services from May 2, 1997 to September 7, 1998, the Fund paid
the Advisor an annual fee of 0.60% of the first $500 million of average daily
net asset, 0.55% of such assets in excess of $500 million, 0.50% of such assets
in excess of $1 billion, 0.475% of such assets in excess of $1.5 billion, 0.45%
of such assets in excess of $2 billion, 0.425% of such assets in excess of $3
billion and 0.405% of such assets in excess of $4.5 billion.
For the Advisor's services from September 8, 1998 until August 14, 2000, the
Fund paid the Advisor an annual fee of 0.60% of the first $500 million of
average daily net asset, 0.55% of such assets in excess of $500 million, 0.50%
of such assets in excess of $1 billion, 0.475% of such assets in excess of $1.5
billion, 0.45% of such assets in excess of $2 billion, 0.425% of such assets in
excess of $3 billion, 0.405% of such assets in excess of $4.5 billion, 0.3875%
of such assets in excess of $6 billion, and 0.37% of such assets in excess of
$10 billion.
For the Advisor's services after August 14, 2000, the Fund pays Scudder Kemper a
fee equal to 0.450% of average daily net assets on such assets up to $14
billion, 0.425% of average daily net assets on such assets exceeding $14
billion, 0.400% of average daily net assets on such assets exceeding $16
billion, and 0.385% of average daily net assets on such assets exceeding $18
billion. The fee is graduated so that increases in the Fund's net assets may
result in a lower annual fee rate and decreases in the Fund's net assets may
result in a higher annual fee rate. The fee is payable monthly, provided that
the Fund will make such interim payments as may be requested by the Advisor not
to exceed 75% of the amount of the fee then accrued on the books of the Fund and
unpaid.
For the period ended September 30, 2000, the Fund was charged by the Advisor
aggregate fees pursuant to its then effective investment advisory agreement of
$24,109,868, which was equivalent to an annualized effective rate of 0.46% of
the Fund's average daily net assets. For the years ended December 31, 1999, 1998
and 1997, the Fund was charged by the Advisor aggregate fees pursuant to its
then effective investment advisory agreement of $32,454,854, $34,062,247 and
$26,072,293, respectively.
Under the Agreement the Fund is responsible for all of its other expenses
including organizational costs, 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 stock certificates and any other expenses including clerical expenses
of issue, redemption or repurchase of shares; the expenses of and the fees for
registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and employees of the Trust who are not affiliated with the
Advisor; the cost of printing and distributing reports and notices to
shareholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses incurred in connection with litigation, proceedings and claims and the
legal obligation it may have to indemnify its officers and Trustees with respect
thereto.
The Agreement expressly provides that the Advisor shall not be required to pay a
pricing agent of the Fund for portfolio pricing services, if any.
The Agreement identifies the Advisor as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Scudder Kemper Investments, Inc." and
"Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this
license, the Trust, with respect to the Fund, has the non-exclusive right to use
and sublicense the Scudder name and marks as part of its name, and to use the
Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the Advisor
concerning such Agreement, the Trustees of the Trust who are not "interested
persons" of the Trust have been represented by independent counsel at the Fund's
expense.
The Agreement provides that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting
36
<PAGE>
from willful misfeasance, bad faith or gross negligence on the part of the
Advisor in the performance of its duties or from reckless disregard by the
Advisor of its obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Advisor's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.
The Advisor may serve as advisor to other funds with investment objectives and
policies similar to those of the Funds that may have different distribution
arrangements or expenses, which may affect performance. None of the officers or
Trustees of the Trust may have dealings with the Fund as principals in the
purchase or sale of securities, except as individual subscribers or holders of
shares of the Trust.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor 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 Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
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 advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (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 Fund, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Fund and employees of the Advisor and principal underwriter are permitted
to make personal securities transactions, including transactions in securities
that may be purchased or held by the Fund, subject to requirements and
restrictions set forth in the applicable Code of Ethics. The Advisor's Code of
Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Advisor'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
Advisor'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 Trust Principal Occupation** Services, Inc.
--------------------- ------------------- -------------------- --------------
<S> <C> <C> <C>
Linda C. Coughlin (48 )+* President and Trustee Managing Director of Zurich Director and Senior Vice
Scudder Investments, Inc. President
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational None
WGBH Foundation
125 Western Avenue
Allston, MA 02134
37
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Trust Principal Occupation** Services, Inc.
--------------------- ------------------- -------------------- --------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for None
4909 SW 9th Place Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates (consulting firm)
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic None
50023 Brogden Counsellor, The Conference
Chapel Hill, NC Board, Inc. (not-for-profit
business research organization)
Keith R. Fox (46) Trustee General Partner, Exeter Group None
10 East 53rd Street of Funds
New York, NY 10022
Joan E. Spero (55) Trustee President, Doris Duke None
Doris Duke Charitable Foundation Charitable Foundation;
650 Fifth Avenue Department of State -
New York, NY 10128 Undersecretary of State for
Economic, Business and
Agricultural Affairs (March
1993 to January 1997)
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial None
3816 Military Road, NW Institutions Issues, U.S.
Washington, D.C. General Accounting Office
(1996-1997); Partner, Fulbright
& Jaworski (law firm)
(1978-1996)
Jean C. Tempel (56) Trustee Managing Director, First Light None
One Boston Place Capital, LLC (venture capital
23rd Floor firm)
Boston, MA 02108
Steven Zaleznick (45)* Trustee President and CEO, AARP None
601 E. Street, NW Services, Inc.
7th Floor
Washington, D.C. 20004
Kathryn L. Quirk (47)++ Vice President and Managing Director of Zurich Director, Senior Vice
Assistant Secretary Scudder Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
Thomas V. Bruns (43) *** Vice President Managing Director of Zurich None
Scudder Investments, Inc.
William F. Glavin (41)+ Vice President Managing Director of Zurich Vice President
Scudder Investments, Inc.
38
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Trust Principal Occupation** Services, Inc.
--------------------- ------------------- -------------------- --------------
James E. Masur (40) + Vice President Senior Vice President of Zurich None
Scudder Investments, Inc.
Howard Schneider (43) + Vice President Managing Director of Zurich None
Scudder Investments, Inc.
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Zurich None
Scudder Investments, Inc.
John R. Hebble (42)+ Treasurer Senior Vice President of Zurich Assistant Treasurer
Scudder Investments, Inc.
Caroline Pearson (38)+ Assistant Secretary Senior Vice President, Zurich Clerk
Scudder Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm) 1989 to 1997
John Millette (37)+ Vice President and Vice President, Zurich Scudder None
Secretary Investments, Inc.
ADDITIONAL OFFICERS
William F. Gadsden (45)++ Vice President Managing Director of Zurich None
Scudder Investments, Inc.
Valerie F. Malter (41)++ Vice President Managing Director of Zurich None
Scudder Investments, Inc.
James M. Eysenbach (38)# Vice President Managing Director, Zurich None
Scudder Investments, Inc.
Kathleen T. Millard (39)+ Vice President Managing Director, Zurich None
Scudder Investments, Inc.
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and
its counsel to be persons who are "interested persons" of the
Advisor or of the Trust, within the meaning of the 1940 Act.
** 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
# Address: 101 California Street Suite 4100 San Francisco,
California
*** Address: 222 South Riverside Plaza, Chicago, Illinois
39
<PAGE>
As of November 30, 2000, all Trustees and Officers of the 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 of
any class of the Fund.
Certain accounts for which Scudder Kemper acts as investment adviser
owned 1,176,802 shares in the aggregate, or 5.71% of the outstanding shares of
Class S shares of the fund. Scudder Kemper may be deemed to be the beneficial
owner of such shares, but disclaims any beneficial ownership in such shares.
To the knowledge of the Fund, as of November 30, 2000, no person owned
beneficially more than 5% of the outstanding shares of the fund.
The Trustees and officers of the Fund also serve in similar capacities with
other respect to Scudder funds.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the Fund's
business. A majority of the Board's members are not affiliated with Zurich
Scudder Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Advisor
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Advisor and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Fund's independent public accountants and
reviews accounting policies and controls. 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 service. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at trustee's 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.
40
<PAGE>
During 1999, the Independent Trustees participated in 25 meetings of the Fund's
board or board committees, which were held on 21 different days during the year.
The Independent Trustees also serve in the same capacity for other funds managed
by Scudder. These funds differ broadly in type and complexity and in some cases
have substantially different Trustee fee schedules. The following table shows
the aggregate compensation received by each Independent Trustee during 1999 from
the Trust and from all of Scudder funds as a group.
Name Investment Trust** All Scudder Funds
---- ------------------ -----------------
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)
* 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 Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
DISTRIBUTOR
The Trust, on behalf of the Fund, has an underwriting agreement Scudder Investor
Services, Inc., Two International Place, Boston, MA 02110 (the "Distributor"), a
Massachusetts corporation, which is a subsidiary of the Advisor, a Delaware
corporation. The Trust's underwriting agreement dated May 8, 2000 will remain in
effect until September 30, 2001 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 July 10, 2000.
Under the underwriting agreement, the Fund is responsible for: the payment of
all fees and expenses in connection with the preparation and filing with the
Commission of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering the Fund as a broker/dealer in various
states as required; the fees and expenses of preparing, printing and mailing
prospectuses annually to existing shareholders (see below for expenses relating
to prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications to shareholders of the Fund; the cost of printing and
mailing confirmations of purchases of shares and any prospectuses accompanying
such confirmations; any issuance taxes and/or any initial transfer taxes; a
portion of shareholder toll-free telephone charges and expenses of customer
service representatives; the cost of wiring funds for share purchases and
redemptions (unless paid by the shareholder who initiates the transaction); the
cost of printing and postage of business reply envelopes; and a portion of the
cost of computer terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or reports
prepared for its use in connection with the offering of the Fund's shares to the
public and preparing, printing and mailing any other literature or advertising
in connection with the offering of shares of the Fund to the public. The
Distributor will pay all fees and expenses in
41
<PAGE>
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 the Fund shall bear some or all of such expenses.
Administrative Fee
The Fund has entered into an administrative services agreement with Scudder
Kemper (the "Administrative Agreement"), pursuant to which Scudder Kemper will
provide or pay others to provide substantially all of the administrative
services required by the Fund (other than those provided by Scudder Kemper under
its investment management agreement with the Fund, as described above) in
exchange for the payment by the Fund of an administrative services fee (the
"Administrative Fee") of 0.300% of its average daily net assets. One effect of
these arrangements is to make the Fund's future expense ratio more predictable.
The Administrative Fee became effective on August 14, 2000.
Various third-party service providers (the "Service Providers"), some of which
are affiliated with Scudder Kemper, provide certain services to the Fund
pursuant to separate agreements with the Fund. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Fund and maintains their accounting records. Scudder Service Corporation, also a
subsidiary of Zurich Scudder, is the transfer, shareholder servicing and
dividend-paying agent for the shares of the Fund. Scudder Trust Company, an
affiliate of Zurich Scudder, 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 Fund,
pursuant to a custodian agreement. PricewaterhouseCoopers LLP audits the
financial statements of the Fund and provides other audit, tax, and related
services. Dechert acts as general counsel for the Fund.
Zurich Scudder will pay the Service Providers for the provision of their
services to the Fund and will pay other Fund expenses, including insurance,
registration, printing and postage fees. In return, the Fund will pay Zurich
Scudder an Administrative Fee.
The Administrative Agreement has an initial term of three years, subject to
earlier termination by the Trust's Board. The fee payable by the Fund to Zurich
Scudder pursuant to the Administrative Agreement is reduced by the amount of any
credit received from the Fund's custodian for cash balances.
Certain expenses of the Fund will not be borne by Zurich Scudder under the
Administrative Agreement, 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, the Fund will
continue to pay the fees required by its investment management agreement with
Scudder Kemper.
For the period August 14, 2000 through September 30, 2000, the Administrative
Fee charged to the Fund amounted to $4,500,933 of which, $2,898,304 was unpaid
at September 30, 2000.
TAXES
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, or a predecessor statute and has qualified as such
since its inception. Such qualification does not involve governmental
supervision or management of investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90 percent of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code.
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable
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to shareholders to the extent of the Fund's earnings and profits, and would be
eligible for the dividends received deduction, in the case of corporate
shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income generally is made up of dividends, interest
and net short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, the Fund intends to elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a proportionate share of federal income taxes paid by the Fund on
such gains as a credit against the shareholder's federal income tax liability,
and will be entitled to increase the adjusted tax basis of the shareholder's
Fund shares by the difference between such gains reported and the shareholder's
tax credit. If the Fund makes such an election, it may not be treated as having
met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Dividends from domestic corporations are expected to comprise a substantial part
of the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the 70% deduction for dividends received by
corporations. Shareholders will be informed of the portion of dividends which so
qualify. The dividends-received deduction is reduced to the extent the shares of
the Fund with respect to which the dividends are received are treated as
debt-financed under federal income tax law and is eliminated if either those
shares or the shares of the Fund are deemed to have been held by the Fund or the
shareholder, as the case may be, for less than 46 days during the 90-day period
beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares, including exchanges for shares of
another Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
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 for 2001 ($53,000 for married individuals filing a
joint return, with a phase-out of the deduction for adjusted
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gross income between $53,000 and $63,000; $33,000 for a single individual, with
a phase-out for adjusted gross income between $33,000 and $43,000). However, an
individual not permitted to make a deductible contribution to an IRA for any
such taxable year may nonetheless make nondeductible contributions up to $2,000
to an IRA (up to $2,000 per individual for married couples if only one spouse
has earned income) for that year. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable. Also, annual contributions may
be made to a spousal IRA even if the spouse has earnings in a given year if the
spouse elects to be treated as having no earnings (for IRA contribution
purposes) for the year.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Equity options (including covered call options written on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss will
be recognized by the Fund upon payment of a premium in connection with the
purchase of a put or call option. The character of any gain or loss recognized
(i.e., long-term or short-term) will generally depend, in the case of a lapse or
sale of the option, on the Fund's holding period for the option, and in the case
of the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of any property
in the Fund's portfolio similar to the property underlying the put option. If
the Fund writes an option, no gain is recognized upon its receipt of a premium.
If the call lapses or is closed out, any gain or loss is treated as short-term
capital gain or loss. If the option is exercised, the character of the gain or
loss depends on the holding period of the underlying stock.
Positions of the Fund which consist of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stocks
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by the Fund.
Many futures and forward contracts entered into by the Fund and listed nonequity
options written or purchased by the Fund (including options on debt securities,
options on futures contracts, options on securities indices and options on
currencies) will be governed by Section 1256 of the Code. Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position generally will be treated as 60% long-term and 40%
short-term capital gain or loss, and on the last trading day of the Fund's
fiscal year, all outstanding Section 1256 positions will be marked to market
(i.e., treated as if such positions were closed out at their closing price on
such day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income or loss.
Notwithstanding any of the foregoing, the Fund may recognize gain (but not loss)
from a constructive sale of certain "appreciated financial positions" if the
Fund enters into a short sale, offsetting notional principal contract, futures
or forward contract transaction with respect to the appreciated position or
substantially identical property. Appreciated financial positions subject to
this constructive sale treatment are interests (including options, futures and
forward contracts and short sales) in stock, partnership interests, certain
actively traded trust instruments and certain debt instruments. Constructive
sale treatment of appreciated financial positions does not apply to certain
transactions closed in the 90-day period ending with the 30th day after the
close of the Fund's taxable year, if certain conditions are met.
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Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain options, futures and forward
contracts, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition are also treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
If the Fund invests in stock of certain foreign investment companies, the Fund
may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares; any
mark-to-market losses and any loss from an actual disposition of shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years. The effect of the election would be to treat
excess distributions and gain on dispositions as ordinary income which is not
subject to a fund-level tax when distributed to shareholders as a dividend.
Alternatively, the Fund may elect to include as income and gain its share of the
ordinary earnings and net capital gain of certain foreign investment companies
in lieu of being taxed in the manner described above.
A portion of the difference between the issue price of zero coupon securities
and their face value ("original issue discount") is considered to be income to
the Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount imputed income will comprise
a part of the investment company taxable income of the Fund which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the Fund's
level.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all distributions of investment company taxable income and capital gains as well
as gross proceeds from the redemption or exchange of Fund shares, except in the
case of certain exempt shareholders. Under the backup withholding provisions of
Section 3406 of the Code, distributions of investment company taxable income and
capital gains and proceeds from the redemption or exchange of the shares of a
regulated investment company may be subject to withholding of federal income tax
at the rate of 31% in the case of non-exempt shareholders who fail to furnish
the investment company with their taxpayer identification numbers and with
required certifications regarding their status under the federal income tax law.
Withholding may also be required if the Fund is notified by the IRS or a broker
that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
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Dividend and interest income received by the Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisors 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 Advisor.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for the Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Advisor seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others. The Advisor
routinely reviews commission rates, execution and settlement services performed
and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Advisor is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Advisor 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 Advisor or the Fund in exchange for the direction by the Advisor of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Advisor will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Advisor;
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the Distributor will place orders on behalf of the Fund with issuers,
underwriters or other brokers and dealers. The Distributor will not receive any
commission, fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to the Fund
and to the Advisor, it is the opinion of the Advisor that such information only
supplements the Advisor's own research effort since the information must still
be analyzed, weighed, and reviewed by the Advisor's staff. Such information may
be useful to the Advisor in providing services to clients other than the Fund,
and not all such information is used by the Advisor in connection with the Fund.
Conversely, such information provided to the Advisor by broker/dealers through
whom other clients of the Advisor effect securities transactions may be useful
to the Advisor in providing services to the Fund.
The Trustees review, from time to time, whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Fund on portfolio transactions is legally permissible and advisable.
For the years ended December 31, 1999 and 1998, the Fund paid total brokerage
commissions of $9,542,259 and $8,362,533, respectively. In the year ended
December 31, 1999, the Fund paid brokerage commissions of $8,013,658 (83.98% of
the total brokerage commissions), resulting from orders placed, consistent with
the policy of obtaining the most favorable net results, with brokers and dealers
who provided supplementary research, market and statistical information to the
Trust or Advisor. The total amount of brokerage transactions aggregated
$8,783,336,819, of which $7,300,547,806 (83.12% of all brokerage transactions)
were transactions which included research commissions.
For the nine months ended September 30, 2000, $_________ (____%) of the total
brokerage commissions paid by the 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 Advisor. The amount of such transactions aggregated $___________, of
which $___________ (____% 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
The Fund's average annual portfolio turnover rates, 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 nine months
ended September 30, 2000 was 55% (annualized) and for fiscal years ended
December 31, 1999, and 1998 were 70% and 41%, respectively. Purchases and sales
are made for the Fund's portfolio whenever necessary, in management's opinion,
to meet the Fund's objective.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close of regular
trading on the Exchange on each day the Exchange is open for trading (the "Value
Time"). The Exchange is scheduled to be closed on the following holidays: New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas and on the
preceding Friday or subsequent Monday when one of these holidays falls on
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
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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 Advisor 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 Fund's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Fund included in the Fund's prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been so included or incorporated by reference in reliance on
the report of PricewaterhouseCoopers LLP, 160 Federal Street, Boston,
Massachusetts 02110, independent accountants, and given on the authority of that
firm as experts in accounting and auditing. PricewaterhouseCoopers LLP is
responsible for performing annual audits of the financial statements and
financial highlights of the Fund in accordance with generally accepted auditing
standards and the preparation of federal tax returns.
Shareholder Indemnification
The Fund is an organization of the type commonly known as a Massachusetts
business trust. Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the Fund. The Declaration of Trust contains an express disclaimer of
shareholder liability in connection with the Fund property or the acts,
obligations or affairs of the Fund. The Declaration of Trust also provides for
indemnification out of the Fund property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason of being or having been a shareholder. Thus, the
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risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations.
Other Information
The CUSIP number for Class S shares of the Fund is 811167-10-5.
The CUSIP number for Class AARP shares of the Fund is 460965-767.
The Fund has a fiscal year ending September 30. On February 7, 2000, the Board
changed the Fund's fiscal year end from December 31 to September 30.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Advisor in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert is counsel to the Fund.
The name "Scudder Growth and Income Fund" is the designation of the Trust for
the time being under a Declaration of Trust dated September 20, 1984, as amended
from time to time, and all persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents, shareholders nor other series of the
Trust assume any personal liability for obligations entered into on behalf of
the Fund. No other series of the Trust assumes any liabilities for obligations
entered into on behalf of the Fund. Upon the initial purchase of shares, the
shareholder agrees to be bound by the Fund's Declaration of Trust, as amended
from time to time. The Declaration of Trust is on file at the Massachusetts
Secretary of State's Office in Boston, Massachusetts.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of the Advisor, computes net asset value
for the Fund. Prior to the implementation of the Administrative Agreement, , the
Fund paid SFAC an annual fee equal to 0.025% of the first $150 million of
average daily net assets, 0.0075% of such assets in excess of $150 million,
0.0045% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. For the years ended December 31, 1999 and 1998 SFAC's
fee amounted to $418,401 and $424,247, respectively, of which $33,686 was unpaid
at December 31, 1999. Prior to August 14, 2000, the amount charged to the Fund
by SFAC aggregated $230,833, of which $50,013 was unpaid at September 30,
2000.
Scudder Service Corporation ("SSC"), P.O. Box 219669, Kansas City, Missouri
64121-9669 (Class S) and P.O. Box 219735, Kansas City, Missouri 64121-9735
(Class AARP)a subsidiary of the Advisor, is the transfer, dividend-paying and
shareholder service agent for Class S and Class AARP shares of the Fund. Prior
to the implementation of the Administrative Agreement, the Fund paid SSC an
annual fee of $26.00 for each account maintained for a participant. For the year
ended December 31, 1999, the amount charged to the Fund aggregated $6,867,891.
Prior to August 14, 2000, the amount charged to the Fund by Service Corporation
aggregated $3,615,396, of which $666,049 was unpaid at September 30, 2000.
Kemper Service Corporation ("KSvC"), 811 Main Street, Kansas City, Missouri,
64105-2005, a subsidiary of the Advisor, is the transfer, dividend-paying and
shareholder service agent for the Fund's other classes of sharesand also
provides subaccounting and recordkeeping services for shareholder accounts in
certain retirement and employee benefit plans.
The Fund, or the Advisor (including any affiliate of the Advisor), or both, may
pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are generally
held in an omnibus account.
49
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Scudder Trust Company ("STC"), Two International Place, Boston, Massachusetts
02110-4103, a subsidiary of the Advisor, provides recordkeeping and other
services for shareholder accounts in connection with certain retirement and
employee benefit plans invested in Class S shares of the Fund. Prior to the
implementation of the Administrative Agreement, Class S shares of the Fund paid
annual service fees to STC for such accounts. Class S shares of the Fund
incurred fees of $7,455,505 and $4,655,851 during the years ended December 31,
1998, and 1999, respectively, of which $2,434,246 was unpaid on December 31,
1999. Prior to August 14, 2000, the amount charged to Class S shares of the Fund
by STC aggregated $5,811,841.
The Fund's prospectus and this Statement of Additional Information omit certain
information contained in the Registration Statement and its amendments which the
Fund has filed with the SEC under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further information with respect
to the Fund and the securities offered hereby. The Registration Statement and
its amendments are available for inspection by the public at the SEC in
Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio of Scudder Growth
and Income Fund together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements are incorporated by reference and
attached hereto in the Annual Report to the Shareholders of the Fund dated
September 30, 2000 and are hereby deemed to be a part of this Statement of
Additional Information.
50
<PAGE>
Standard & Poor's Earnings and Dividend Rankings for Common Stocks
The investment process involves assessment of various factors -- such as product
and industry position, corporate resources and financial policy -- with results
that make some common stocks more highly esteemed than others. In this
assessment, Standard & Poor believes that earnings and dividend performance is
the end result of the interplay of these factors and that, over the long run,
the record of this performance has a considerable bearing on relative quality.
The rankings, however, do not pretend to reflect all of the factors, tangible or
intangible, that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of protection for
principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements in
establishing Standard & Poor's earnings and dividend rankings for common stocks,
which are designed to capsulize the nature of this record in a single symbol. It
should be noted, however, that the process also takes into consideration certain
adjustments and modifications deemed desirable in establishing such rankings.
The point of departure in arriving at these rankings is a computerized scoring
system based on per-share earnings and dividend records of the most recent ten
years -- a period deemed long enough to measure significant time segments of
secular growth, to capture indications of basic change in trend as they develop,
and to encompass the full peak-to-peak range of the business cycle. Basic scores
are computed for earnings and dividends, then adjusted as indicated by a set of
predetermined modifiers for growth, stability within long-term trend, and
cyclicality. Adjusted scores for earnings and dividends are then combined to
yield a final score.
Further, the ranking system makes allowance for the fact that, in general,
corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix determined
by analysis of the scores of a large and representative sample of stocks. The
range of scores in the array of this sample has been aligned with the following
ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In
Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the stock is not
amenable to the ranking process.
The positions as determined above may be modified in some instances by special
considerations, such as natural disasters, massive strikes, and non-recurring
accounting adjustments.
A ranking is not a forecast of future market price performance, but is basically
an appraisal of past performance of earnings and dividends, and relative current
standing. These rankings must not be used as market recommendations; a
high-score stock may at times be so overpriced as to justify its sale, while a
low-score stock may be attractively priced for purchase. Rankings based upon
earnings and dividend records are no substitute for complete analysis. They
cannot take into account potential effects of management changes, internal
company policies not yet fully reflected in the earnings and dividend record,
public relations standing, recent competitive shifts, and a host of other
factors that may be relevant to investment status and decision.
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
Scudder Dividend & Growth Fund (Class A, B and C Shares)
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, Class B and Class C Shares (the
"Shares") of Scudder Dividend & Growth Fund (the "Fund"), a diversified series
of Investment Trust (the "Trust"), an open-end management investment company. It
should be read in conjunction with the prospectus of the Shares dated December
29, 2000. The prospectus may be obtained without charge from the Fund at the
address or telephone number on this cover or the firm from which this Statement
of Additional Information was received.
Scudder Dividend & Growth Fund offers the following classes of shares:
Class S, Class AARP, Class A, Class B and Class C shares (the "Shares"). Only
Class A, Class B and Class C shares of Scudder Dividend & Growth Fund are
offered herein.
TABLE OF CONTENTS
Investment Restrictions.....................................................2
Investment Policies and Techniques..........................................3
Dividends, Distributions and Taxes.........................................16
Performance................................................................19
Investment Manager and Underwriter.........................................22
Portfolio Transactions.....................................................27
Net Asset Value............................................................29
Purchase, Repurchase and Redemption of Shares..............................29
Purchase of Shares.........................................................30
Redemption or Repurchase of Shares.........................................34
Special Features...........................................................37
Officers and Trustees......................................................40
Shareholder Rights.........................................................44
Zurich Scudder Investments, Inc. (the "Advisor") serves as the Fund's investment
manager.
The financial statements appearing in the Fund's June 30, 2000 Semiannual Report
to Shareholders are incorporated herein by reference. The Annual Report for the
Fund accompanies this document.
<PAGE>
INVESTMENT RESTRICTIONS
Unless specified to the contrary, the following fundamental policies may not be
changed without the approval of a majority of the outstanding voting securities
of the Fund which, under the Investment Company Act of 1940, as amended (the
"1940 Act") and the rules thereunder and as used in this Statement of Additional
Information, means the lesser of (1) 67% or more of the voting securities
present at such meeting, if the holders of more than 50% of the outstanding
voting securities of the Fund are present or represented by proxy, or (2) more
than 50% of the outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified series of an open-end
investment company.
In addition, as a matter of fundamental policy, the Fund may not:
(1) borrow money, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, and as interpreted or modified
by regulatory authority having jurisdiction, from time to
time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts relating to
physical commodities; or
(7) make loans except as permitted under the Investment Company
Act of 1940, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
Nonfundamental policies may be changed without shareholder approval. As a matter
of nonfundamental policy, the Fund may not:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that, in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants, if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(7) lend portfolio securities in an amount greater than 5% of its
total assets.
2
<PAGE>
Master/feeder Fund Structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Fund while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC that permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Advisor. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging), except that the Fund may engage in reverse repurchase
agreements and dollar rolls for any purpose.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, the Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which the Advisor acts as trustee or investment
advisor that operate as cash management investment vehicles and that are
excluded from the definition of investment company pursuant to section 3(c)(1)
or 3(c)(7) of the Investment Company Act of 1940 (collectively, the "Central
Funds") in excess of the limitations of Section 12(d)(1) of the Investment
Company Act. Investment by the Fund in shares of the Central Funds will be in
accordance with the Fund's investment policies and restrictions as set forth in
its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
Investment Policies and Techniques
Scudder Dividend & Growth Fund is a series of Investment Trust, an open-end
management investment company which continuously offers and redeems shares at
net asset value. The Fund is a company of the type commonly known as a mutual
fund.
3
<PAGE>
General Investment Objective and Policies
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage (such as hedging,
etc.) or a financial instrument which the Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that the Advisor, in its discretion, might, but is not required to,
use in managing the Fund's portfolio assets. The Advisor may, in its discretion,
at any time, employ such practice, technique or instrument for one or more funds
but not for all funds advised by it. Furthermore, it is possible that certain
types of financial instruments or investment techniques described herein may not
be available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of the Fund, but, to the extent employed, could, from
time to time, have a material impact on the Fund's performance.
The Fund's Advisor expects that the average gross income yield of the Fund will
be higher than the yield of the Standard & Poor's Composite Stock Price Index
(the "S&P 500 Index"), a commonly accepted benchmark for U.S. stock market
performance.
The Fund invests primarily in dividend paying common stocks, securities
convertible into common stock, and real estate investment trusts ("REITs").
While broadly diversified and conservatively managed, the Fund's share price
will move up and down with changes in the general level of the financial
markets, particularly the U.S. stock market. Investors should be comfortable
with stock market risk and view the Fund only as a long-term investment.
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in the Fund's investment objective, shareholders should consider whether
the Fund remains an appropriate investment in light of their then financial
position and needs. There can be no assurance that the Fund's objective can be
met.
Primary investments
Under normal market conditions, the Fund will invest at least 80% of net assets
in common stocks, which the Advisor, believes offer a high level of current
income and potential for long-term capital appreciation. The Advisor believes
that an actively managed portfolio of dividend paying stocks, convertible
securities, and REITs offers the potential for a higher level of income and
lower average share price volatility than the S&P 500 Index. The Fund may also
purchase such securities which do not pay current dividends but which offer
prospects for growth of capital and future income.
Common Stocks. Under normal circumstances, the Fund will invest between 40% and
80% of its net assets in equities, mainly common stocks. The Advisor applies a
disciplined investment approach to selecting these stocks of primarily
medium-to-large sized U.S. companies. The first stage of this process involves
analyzing a selected pool of dividend-paying common stocks, to identify stocks
that have high yields relative to the yield of the S&P 500 Index. In the
Advisor's opinion, this subset of higher-yielding stocks offers the potential
for returns over time that are greater than or equal to the S&P 500 Index, at
less risk than this market index. The higher dividends offered by these stocks
may act as a "cushion" when markets are volatile and because stocks with higher
yields tend to sell at more attractive valuations (e.g., lower price-to-earning
ratios and lower price-to-book ratios).
Once this subset of higher-yielding stocks is identified, the Advisor conducts
fundamental analysis of each company's financial strength, profitability,
projected earnings, sustainability of dividends, and ability of management. The
Fund's portfolio may include stocks which are out of favor in the market, but
which, in the opinion of the Advisor, offer compelling valuations and potential
for long-term appreciation in price and dividends. In investing the Fund's
portfolio among different industry sectors, the Advisor evaluates how each
sector reacts to economic factors such as interest rates, inflation, Gross
Domestic Product, and consumer spending. The Fund's portfolio is constructed by
attaining a proper balance of stocks in these sectors based on the Advisor's
economic forecasts.
The Advisor applies disciplined criteria for selling stocks in the Fund's
portfolio as well. When the Advisor determines that the relative yield of a
stock declines too far below the yield of the S&P 500 Index, or that the yield
is at the lower end of the stock's historic range, the stock generally is sold
from the Fund's portfolio. Similarly, if the Advisor's fundamental analysis
determines that the stock's dividend is at risk, or that market expectations for
the stock are too high, the stock is targeted for potential sale. In summary,
the Advisor applies disciplined buy and sell criteria, fundamental company and
industry analysis, and economic forecasts in managing the Fund to pursue
long-term price appreciation and income with lower overall volatility than the
market.
Common stock is issued by companies to raise cash for business purposes and
represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company,
4
<PAGE>
investor perception and general economic or financial market movements. Smaller
companies are especially sensitive to these factors and may even become
valueless. Despite the risk of price volatility, however, common stocks also
offer a greater potential for gain on investment, compared to other classes of
financial assets such as bonds or cash equivalents.
Other investments. While the Fund emphasizes U.S. investments, it can commit a
portion of its assets to income paying equity securities and income producing
convertible securities of foreign companies that meet the criteria applicable to
domestic investments.
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
Advisor deems such a positions advisable in light of economic or market
conditions.
The Fund may invest up to 20% of its net assets in bonds, including those below
investment-grade when the Advisor anticipates that capital appreciation on debt
securities is likely to equal or exceed the capital appreciation on common
stocks over a selected time, such as during periods of unusually high interest
rates. As interest rates fall, the prices of debt securities tend to rise, and
vice versa. The Fund may also invest in money market securities in anticipation
of meeting redemptions or paying Fund expenses. More information about
investment techniques is provided under "Additional information about policies
and investments."
High Yield/High Risk Bonds. The Fund may also purchase debt securities which are
rated below investment-grade (commonly referred to as "junk bonds"), that is,
rated below Baa by Moody's or below BBB by S&P and unrated securities judged to
be of equivalent quality as determined by the Investment Manager. These
securities usually entail greater risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk to principal and income, and may be less liquid,
than securities in the higher rating categories. The lower the ratings of such
debt securities, the more their risks render them like equity securities.
Securities rated D may be in default with respect to payment of principal or
interest. [See the Appendix to this Statement of Additional Information for a
more complete description of the ratings assigned by ratings organizations and
their respective characteristics].
Issuers of such high yielding securities often are highly leveraged and may not
have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yield securities because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer. Prices and yields of high yield securities will
fluctuate over time and, during periods of economic uncertainty, volatility of
high yield securities may adversely affect the Fund's net asset value. In
addition, investments in high yield zero coupon or pay-in-kind bonds, rather
than income-bearing high yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.
The Fund may have difficulty disposing of certain high yield (high risk)
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may have an adverse effect on
the market price and the Fund's ability to dispose of particular issues and may
also make it more difficult for the Fund to obtain accurate market quotations
for purposes of valuing the Fund's assets. Market quotations generally are
available on many high yield issues only from a limited number of dealers and
may not necessarily represent firm bids of such dealers or prices for actual
sales. Adverse publicity and investor perceptions may decrease the values and
liquidity of high yield securities. These securities may also involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
generally the policy of the Advisor not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the Fund's
investment objective by investment in such securities may be more dependent on
the Advisor's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Advisor will determine
whether it is in the best interests of the Fund to retain or dispose of such
security.
5
<PAGE>
Prices for below investment-grade securities may be affected by legislative and
regulatory developments. Also, Congress has from time to time considered
legislation which would restrict or eliminate the corporate tax deduction for
interest payments in these securities and regulate corporate restructurings.
Such legislation may significantly depress the prices of outstanding securities
of this type.
Convertible Securities. The Fund may invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks, and other securities which are
convertible into common stocks. Investments in convertible securities may
provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest include fixed-income or
zero coupon debt securities which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. The exchange
ratio for any particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate distributions, or
scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tend
to decline as interest rates increase and, conversely, tend to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market values of convertible securities typically change as the
market values of the underlying common stocks change, and, therefore, also tend
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes (LYONS). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely 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 shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered to be speculative investments.
Warrants pay no dividends and confer no rights other than a purchase option.
Thus, if a warrant held by the Fund were not exercised by the date of its
expiration, the Fund would lose the entire purchase price of the warrant.
Zero Coupon Securities. The Fund may invest in zero coupon securities, which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon securities which are convertible into common stock offer the opportunity
for capital appreciation as increases (or decreases) in the 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
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issued with options and/or redemption features exercisable by the holder of the
obligation entitling the holder to redeem the obligation and receive a defined
cash payment.
Zero coupon securities include securities issued directly by the U.S. Treasury,
and U.S. Treasury bonds or notes and their unmatured interest coupons and
receipts for their underlying principal ("coupons") which have been separated by
their holder, typically a custodian bank or investment brokerage firm. A holder
will separate the interest coupons from the underlying principal (the "corpus")
of the U.S. Treasury security. A number of securities firms and banks have
stripped the interest coupons and receipts and then resold them in custodial
receipt programs with a number of different names, including "Treasury Income
Growth Receipts" (TIGRS(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 Fund, most likely
will be deemed to be the beneficial holder of the underlying U.S. Government
securities. The Fund understands that the staff of the Division of Investment
Management of the Securities and Exchange Commission (the "SEC") no longer
considers such privately stripped obligations to be U.S. Government securities,
as defined in the 1940 Act; therefore, the Fund intends 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 Fund is
"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").
Foreign Securities. While the Fund generally emphasizes investments in companies
domiciled in the U.S., it may invest in listed and unlisted foreign securities
that meet the same criteria as the Fund's domestic holdings. The Fund may invest
in foreign securities when the anticipated performance of the foreign securities
is believed by the Advisor to offer more potential than domestic alternatives in
keeping with the investment objective of the Fund.
Investors should recognize that investing in foreign securities involves certain
special considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign stock markets, while growing
in volume of trading activity, have substantially less volume than the New York
Stock Exchange, Inc. (the "Exchange") and securities of some foreign companies
are less liquid and more volatile than securities of domestic companies.
Similarly, volume and liquidity in most foreign bond markets are less than the
volume and liquidity in the U.S. and at times, volatility of price can be
greater than in the U.S. Further, foreign markets have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Fixed commissions on some foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
Fund will endeavor to achieve the most favorable net results on its portfolio
transactions. Further, the Fund may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts. There is generally
less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the U.S. It may be more
difficult for the Fund's agents to keep currently informed about corporate
actions such as stock dividends or other matters which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of nationalization, expropriation, the imposition of withholding or
confiscatory taxes, political, social, or economic instability or diplomatic
developments which could affect
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U.S. investments in those countries. Investments in foreign securities may also
entail certain risks, such as possible currency blockages or transfer
restrictions and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing countries.
For example, the possibility of revolution and the dependence on foreign
economic assistance may be greater in these countries than in developed
countries. The management of the Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may be subject to potentially greater risks than investments in developed
countries, the Fund will not invest in any securities of issuers located in
developing countries if the securities, in the judgment of the Advisor, are
speculative.
Investments in foreign securities usually will involve currencies of foreign
countries. Moreover, the Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs and the value of
these assets for the Fund as measured in U.S. dollars may be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations and the Fund may incur costs in connection with conversions
between various currencies. Although the Fund values its assets daily in terms
of U.S. dollars, it does not intend to convert its holdings of foreign
currencies, if any, into U.S. dollars on a daily basis. It may do so from time
to time and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to the Fund at one rate while offering a lesser rate
of exchange should the Fund desire to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions, if any, either on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through forward foreign currency exchange contracts. (See
"Currency Transactions" for more information.)
To the extent that the Fund invests in foreign securities, the Fund's share
price could reflect the movements of both the different stock and bond markets
in which it is invested and the currencies in which the investments are
denominated; the strength or weakness of the U.S. dollar against foreign
currencies could account for part of the Fund's investment performance.
Illiquid Securities. The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. This investment
practice, therefore, could have the effect of increasing the level of
illiquidity of the Fund. It is the Fund's policy that illiquid securities
(including repurchase agreements of more than seven days duration, certain
restricted securities, and other securities which are not readily marketable)
may not constitute, at the time of purchase, more than 15% of the value of the
Fund's net assets. The Trust's Board of Trustees has approved guidelines for use
by the Advisor in determining whether a security is illiquid.
Generally speaking, restricted securities may be sold (i) only to qualified
institutional buyers; (ii) in a privately negotiated transaction to a limited
number of purchasers; or (iii) in limited quantities after they have been held
for a specified period of time and other conditions are met pursuant to an
exemption from registration. Issuers of restricted securities may not be subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Advisor will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Advisor may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Repurchase Agreements. The Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System and any broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Advisor to be at least
as high as that of other obligations the Fund
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may purchase or to be at least equal to that of issuers of commercial paper
rated within the two highest grades assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P").
A repurchase agreement provides a means for the Fund to earn income on funds for
periods as short as overnight. It is an arrangement under which the Fund
acquires a security ("Obligation") and the seller agrees, at the time of sale,
to repurchase the Obligation at a specified time and price. Obligations subject
to a repurchase agreement are held in a segregated account and the value of such
obligations kept at least equal to the repurchase price on a daily basis. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price on
repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the Obligation itself. Obligations will be held by the Fund's custodian
or in the Federal Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
the Fund to the seller of the Obligation subject to the repurchase agreement and
is therefore subject to the Fund's investment restriction applicable to loans.
It is not clear whether a court would consider the Obligation purchased by the
Fund subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may result in loss of interest or decline in price of
the Obligation. If the court characterizes the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Fund, the
Advisor seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the Obligation, in which
case the Fund may incur a loss if the proceeds to the Fund of its sale of the
securities underlying the repurchase agreement to a third party are less than
the repurchase price. To protect against such potential loss, if the market
value (including interest) of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including interest), the Fund will
direct the seller of the Obligation to deliver additional securities so that the
market value (including interest) of all securities subject to the repurchase
agreement will equal or exceed the repurchase price. It is possible that the
Fund will be unsuccessful in seeking to enforce the seller's contractual
obligation to deliver additional securities.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed upon time and price. The
Fund maintains a segregated account in connection with outstanding reverse
repurchase agreements. The Fund will enter into reverse repurchase agreements
only when the Advisor 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.
Real Estate Investment Trusts. The Fund may invest in REITs. REITs are sometimes
informally characterized as equity REITs, mortgage REITs and hybrid REITs.
Investment in REITs may subject the Fund to risks associated with the direct
ownership of real estate, such as decreases in real estate values, overbuilding,
increased competition and other risks related to local or general economic
conditions, increases in operating costs and property taxes, changes in zoning
laws, casualty or condemnation losses, possible environmental liabilities,
regulatory limitations on rent and fluctuations in rental income. Equity REITs
generally experience these risks directly through fee or leasehold interests,
whereas mortgage REITs generally experience these risks indirectly through
mortgage interests, unless the mortgage REIT forecloses on the underlying real
estate. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Changes in interest rates may also affect the value
of the Fund's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalizations, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended (the "Code"), and to maintain exemption from the registration
requirements of the 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.
Under normal market conditions, the Fund will invest up to, but not including,
25% of the Fund's net assets in REITs. REITs pool investor funds for allocation
to income-producing real estate or real estate-related loans or interests. A
REIT is not taxed on income distributed to shareholders if it complies with
several IRS requirements relating to its organization, ownership, assets and
income and, further, if it distributes to its shareholders at least 95% of its
taxable income each year.
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REITs are typically classified as equity REITs, mortgage REITs or hybrid REITs.
Equity REITs own properties and, as such, derive their income primarily from
rents and lease payments. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive their income primarily from
interest payments. Hybrid REITs combine the characteristics of both equity REITs
and mortgage REITs. It is expected that the Fund will invest primarily in the
equity form of REITs. Investment in REITs may subject the Fund to risks similar
to those associated with the direct ownership of real estate (in addition to
securities markets risks).
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). Index-based
investments may not replicate exactly the performance of their specified index
because of transaction costs and because of the temporary unavailability of
certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below 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 mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors or 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"). Strategic Transactions may be used without limit (subject to
certain limits imposed by the 1940 Act) to attempt to protect against possible
changes in the market value of
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securities held in or to be purchased for the Fund's portfolio resulting from
securities markets or currency exchange rate fluctuations, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of fixed-income securities in the Fund's portfolio, or to
establish a position in the derivatives markets as a substitute for purchasing
or selling particular securities. Some Strategic Transactions may also be used
to enhance potential gain although no more than 5% of the Fund's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Advisor's
ability to predict pertinent market movements, which cannot be assured. The Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
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process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from Standard & Poor's
("S&P") or P-1 from Moody's Investors Service ("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 Advisor. The staff of the SEC currently takes the position
that OTC options purchased by the Fund, and portfolio securities "covering" the
amount of the Fund's obligation pursuant to an OTC option sold by it (the cost
of the sell-back plus the in-the-money amount, if any) are illiquid, and are
subject to the Fund's limitation on investing no more than 15% of its assets in
illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments
(whether or not it holds the above securities in its portfolio), and on
securities, indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
General Characteristics of Futures. The Fund may enter into 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,
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risk management, and return enhancement purposes. Futures are generally bought
and sold on the commodities exchanges where they are listed with payment of
initial and variation margin as described below. The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
only for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge, or manage the risk of, the value of portfolio
holdings denominated in particular currencies against fluctuations in relative
value. Currency transactions include forward currency contracts, exchange listed
currency futures, exchange listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or are
determined to be of equivalent credit quality by the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is entering into a currency transaction
with respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will generally 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.
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The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Advisor, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Advisor's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Advisor and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of
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the Counterparty, combined with any credit enhancements, is rated at least A by
S&P or Moody's or has an equivalent rating from another NRSRO or is determined
to be of equivalent credit quality by the Advisor. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid high
grade assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid high grade securities at
least equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high grade assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and, in connection with such options, the
Fund will segregate an amount of assets equal to the full value of the option.
OTC options settling with physical delivery, or with an election of either
physical delivery or cash settlement will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
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Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Capital Gain Distributions
The Fund intends to follow the practice of distributing substantially all of its
investment company taxable income which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However,
the Fund may retain all or part of such gain for reinvestment, after paying the
related federal taxes for which shareholders may then be able to claim a credit
against their federal tax liability. If the Fund does not distribute the amount
of capital gain and/or net investment income required to be distributed by an
excise tax provision of the Internal Revenue Code, the Fund may be subject to
that excise tax. In certain circumstances, the Fund may determine that it is in
the interest of shareholders to distribute less than the required amount. (See
"Taxes.")
The Fund intends to distribute investment company taxable income, exclusive of
net short-term capital gains in excess of net long-term capital losses, in
March, June, September and December each year. Distributions of net capital
gains realized during each fiscal year will be made annually before the end of
the Fund's fiscal year on December 31. Additional distributions, including
distributions of net short-term capital gains in excess of net long-term capital
losses, may be made, if necessary.
Both types of distributions will be made in shares of the Fund and confirmations
will be mailed to each shareholder unless a shareholder has elected to receive
cash, in which case a check will be sent.
Taxes
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, or a predecessor statute and has qualified as such
since its inception. It intends to continue to qualify for such treatment. Such
qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90 percent of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code.
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of the Fund's
earnings and profits, and would be eligible for the dividends received
deduction, in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income generally is made up of dividends, interest
and net short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.
At December 31, 1999, the Fund had a net tax basis capital loss carryforward of
approximately $407,000, which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December 31,
2006, the expiration date.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, the Fund intends to elect to treat
such capital
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gains as having been distributed to shareholders. As a result, each shareholder
will report such capital gains as long-term capital gains, will be able to claim
a proportionate share of federal income taxes paid by the Fund on such gains as
a credit against the shareholder's federal income tax liability, and will be
entitled to increase the adjusted tax basis of the shareholder's Fund shares by
the difference between such reported gains and the shareholder's tax credit. If
the Fund makes such an election, it may not be treated as having met the excise
tax distribution requirement.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Dividends from domestic corporations are expected to comprise a substantial part
of the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the 70% deduction for dividends received by
corporations. Shareholders will be informed of the portion of dividends which so
qualify. The dividends-received deduction is reduced to the extent the shares of
the Fund with respect to which the dividends are received are treated as
debt-financed under federal income tax law and is eliminated if either those
shares or shares of the Fund are deemed to have been held by the Fund or the
shareholder, as the case may be, for less than 46 days during the 90-day period
beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares, including exchanges for shares of
another Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
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 for 2001 ($53,000 for married individuals filing a
joint return, with a phase-out of the deduction for adjusted gross income
between $53,000 and $63,000; $33,000 for a single individual, with a phase-out
for adjusted gross income between $33,000 and $43,000). However, an individual
not permitted to make a deductible contribution to an IRA for any such taxable
year may nonetheless make nondeductible contributions up to $2,000 to an IRA (up
to $2,000 per individual for married couples if only one spouse has earned
income) for that year. There are special rules for determining how withdrawals
are to be taxed if an IRA contains both deductible and nondeductible amounts. In
general, a proportionate amount of each withdrawal will be deemed to be made
from nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
In some cases, shareholders of the Fund will not be permitted to take all or a
portion of their sales loads into account for purposes of determining the amount
of gain or loss realized on the disposition of their shares. This prohibition
generally applies where (1) the shareholder incurs a sales load in acquiring the
shares of the Fund, (2) the shares are disposed of before the 91st day after the
date on which they were acquired, and (3) the shareholder subsequently acquires
shares in the Fund or another regulated investment company and the otherwise
applicable sales charge is reduced under a "reinvestment right" received upon
the initial purchase of Fund shares. The term " reinvestment right" means any
right to acquire shares of one or more regulated investment companies without
the payment of a sales load or with the payment of a reduced sales charge. Sales
charges affected by this rule are treated as if they were incurred with respect
to the shares acquired under the reinvestment right. This provision may be
applied to successive acquisitions of fund shares.
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Dividend and interest income received by the Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains in respect of investments by foreign
investors.
Equity options (including covered call options written on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss will
be recognized by the Fund upon payment of a premium in connection with the
purchase of a put or call option. The character of any gain or loss recognized
(i.e., long-term or short-term) will generally depend, in the case of a lapse or
sale of the option, on the Fund's holding period for the option, and in the case
of the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of any property
in the Fund's portfolio similar to the property underlying the put option. If
the Fund writes an option, no gain is recognized upon its receipt of a premium.
If the option lapses or is closed out, any gain or loss is treated as short-term
capital gain or loss. If a call option is exercised, the character of the gain
or loss depends on the holding period of the underlying stock.
Positions of the Fund which consist of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stocks
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by the Fund.
Many futures and forward contracts entered into by the Fund and listed nonequity
options written or purchased by the Fund (including options on debt securities,
options on futures contracts, options on securities indices and options on
currencies), will be governed by Section 1256 of the Code. Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position generally will be treated as 60% long-term and 40%
short-term capital gain or loss, and on the last trading day of the Fund's
fiscal year, all outstanding Section 1256 positions will be marked to market
(i.e., treated as if such positions were closed out at their closing price on
such day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income or loss.
Positions of the Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or nonequity option or
other position governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position will be treated as a
"mixed straddle." Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses, certain tax elections exist for
them which reduce or eliminate the operation of these rules. The Fund will
monitor its transactions in options, foreign currency futures and forward
contracts and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain options, futures and forward
contracts, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition are also treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
If the Fund invests in stock of certain foreign investment companies, the Fund
may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or
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disposition, would be taxed to the Fund at the highest ordinary income rate in
effect for such year, and the tax would be further increased by an interest
charge to reflect the value of the tax deferral deemed to have resulted from the
ownership of the foreign company's stock. Any amount of distribution or gain
allocated to the taxable year of the distribution or disposition would be
included in the Fund's investment company taxable income and, accordingly, would
not be taxable to the Fund to the extent distributed by the Fund as a dividend
to its shareholders.
The Fund may make an election to 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 stock would be
deductible as ordinary losses to the extent of any net mark-to-market gains
previously included in income in prior years. The effect of this election would
be to treat excess distributions and gain on dispositions as ordinary income
which is not subject to the Fund-level tax when distributed to shareholders as a
dividend. Alternatively, the Fund may elect to include as income and gain their
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
the Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount imputed income will comprise
a part of the investment company taxable income of the Fund which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the Fund's
level.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all distributions of investment company taxable income and capital gains as well
as gross proceeds from the redemption or exchange of Fund shares, except in the
case of certain exempt shareholders. Under the backup withholding provisions of
Section 3406 of the Code, distributions of investment company taxable income and
capital gains and proceeds from the redemption or exchange of the shares of a
regulated investment company may be subject to withholding of federal income tax
at the rate of 31% in the case of non-exempt shareholders who fail to furnish
the investment company with their taxpayer identification numbers and with
required certifications regarding their status under the federal income tax law.
Withholding may also be required if the Fund is notified by the IRS or a broker
that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisors about the application of the
provisions of tax law described in this statement of additional information in
light of their particular tax situations.
PERFORMANCE
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Performance information will be computed separately for each class.
Class A, B and C shares are newly offered and therefore have no available
performance information.
Performance figures for Class A, B and C shares of the Fund are derived from the
historical performance of Class S shares, adjusted to reflect the higher gross
total annual operating expenses applicable to Class A, B and C shares, which may
be higher or lower than those of Class S shares. The performance figures are
also adjusted to reflect the maximum sales charge of 5.75% for Class A shares
and the maximum current contingent deferred sales charge of 4% for Class B
shares and 1% for Class C shares. Returns for the historical performance of the
Class S shares may include the effect of a temporary waiver of management fees
and/or absorption of certain operating expenses by the investment advisor and
certain subsidiaries. Without such a waiver or absorption, returns would have
been lower and ratings or rankings may have been less favorable.
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The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of the Class A, B and C shares of the Fund as described
above; they do not guarantee future results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
Average Annual Total Return
Average annual total return is the average annual compound rate of return for
the periods of one year, five years and ten years (or such shorter periods as
may be applicable dating from the commencement of the Fund's operations), all
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by
computing the average annual compound rates of return of a hypothetical
investment over such periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial investment of $1,000
n = Number of years
ERV = Ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Returns for the Period Ended June 30, 2000^(1)(2)
1 Year Life of Fund
Scudder Dividend & Growth Fund --
Class A 2.67% 5.73%
Scudder Dividend & Growth Fund --
Class B 4.82% 6.40
Scudder Dividend & Growth Fund --
Class C 8.09% 8.06%
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class A, B and C shares for the period prior to
their introduction are based upon the performance of Class S shares as
described above.
(2) As described above, average annual total return is based on historical
earnings and is not intended to indicate future performance. Average
annual total return for the Fund or class will vary based on changes in
market conditions and the level of the Fund's and class' expenses.
Note: If the Advisor had not maintained expenses, the total returns
would have been lower.
In connection with communicating its average annual total return to current or
prospective shareholders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by computing the cumulative
rates of return of a hypothetical investment over such periods, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
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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 June 30, 2000^(1)
1 Year Life of Fund
Scudder Dividend& Growth Fund -- 2.67% 11.78%
Class A
Scudder Dividend & Growth Fund -- 4.82% 13.21%
Class B
Scudder Dividend & Growth Fund -- 8.09% 16.77%
Class C
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class A, B and C shares for the period prior to
their introduction are based upon the performance of Class S shares as
described above.
Note: If the Advisor 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.
From time to time, in advertisements, sales literature, and reports to
shareholders or prospective investors, figures relating to the growth in the
total net assets of the Fund apart from capital appreciation will be cited, as
an update to the information in this section, including, but not limited to: net
cash flow, net subscriptions, gross subscriptions, net asset growth, net account
growth, and subscription rates. Capital appreciation generally will be covered
by marketing literature as part of the Fund's and classes' performance data.
Quotations of a Fund's performance are based on historical earnings, show the
performance of a hypothetical investment, and are not intended to indicate
future performance of the Fund. An investor's shares when redeemed may be worth
more or less than their original cost. Performance of a Fund will vary based on
changes in market conditions and the level of the Fund's expenses.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Historical information on the value of the dollar versus foreign currencies may
be used from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which the Fund invests.
From time to time, in advertising and marketing literature, the Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, members of the Board
and officers of the Fund, the Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Fund. In addition, the amount of assets that the Advisor has under
management in various geographical areas may be quoted in advertising and
marketing materials.
The Fund may be advertised as an investment choice in Scudder's college planning
program.
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Marketing and other Fund literature may include a description of the potential
risks and rewards associated with an investment in the Fund. The description may
include a "risk/return spectrum" which compares the Fund to other Scudder funds
or broad categories of funds, such as money market, bond or equity funds, in
terms of potential risks and returns. Money market funds are designed to
maintain a constant $1.00 share price and have a fluctuating yield. Share price,
yield and total return of a bond fund will fluctuate. The share price and return
of an equity fund also will fluctuate. The description may also compare the Fund
to bank products, such as certificates of deposit. Unlike mutual funds,
certificates of deposit are insured up to $100,000 by the U.S. government and
offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and money
market funds seek stability of principal, these investments are considered to be
less risky than investments in either bond or equity funds, which may involve
the loss of principal. However, all long-term investments, including investments
in bank products, may be subject to inflation risk, which is the risk of erosion
of the value of an investment as prices increase over a long time period. The
risks/returns associated with an investment in bond or equity funds depend upon
many factors. For bond funds these factors include, but are not limited to, a
fund's overall investment objective, the average portfolio maturity, credit
quality of the securities held, and interest rate movements. For equity funds,
factors include a fund's overall investment objective, the types of equity
securities held and the financial position of the issuers of the securities. The
risks/returns associated with an investment in international bond or equity
funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment categories
in the following order: bank products, money market funds, bond funds and equity
funds. Shorter-term bond funds generally are considered less risky and offer the
potential for less return than longer-term bond funds. The same is true of
domestic bond funds relative to international bond funds, and bond funds that
purchase higher quality securities relative to bond funds that purchase lower
quality securities. Growth and income equity funds are generally considered to
be less risky and offer the potential for less return than growth funds. In
addition, international equity funds usually are considered more risky than
domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical information made by
independent sources may also be used in advertisements concerning the Fund,
including reprints of, or selections from, editorials or articles about the
Fund.
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Zurich Scudder Investments, Inc., Two International Place,
Boston, Massachusetts, an investment counsel firm, acts as investment advisor to
the Fund. This organization, the predecessor of which is Scudder, Stevens &
Clark, Inc., ("Scudder") 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
Advisor introduced Scudder International Fund, Inc., the first mutual fund
available in the U.S. investing internationally in securities of issuers in
several foreign countries. The predecessor firm reorganized from a partnership
to a corporation on June 28, 1985. On June 26, 1997, Scudder entered into an
agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder and
Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name been 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. On October
17, 2000, the dual holding company structure of Zurich Financial Services Group,
comprised of Allied Zurich p.l.c. in the United Kingdom and Zurich Allied A.G.
in Switzerland, was unified into a single Swiss holding company, Zurich
Financial Services. The Advisor changed its name from Scudder Kemper
Investments, Inc. to Zurich Scudder Investments, Inc. The Advisor manages the
Fund's daily investment and business affairs subject to the policies established
by the Trust's Board of Trustees. The Trustees have overall responsibility for
the management of the Fund under Massachusetts law.
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.
Pursuant to an investment management agreement with the Fund, the Advisor acts
as the Fund's investment advisor, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions.
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<PAGE>
The principal source of the Advisor's income is professional fees received from
providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today it provides investment counsel
for many individuals and institutions, including insurance companies, industrial
corporations, and financial and banking organizations, as well as providing
investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor 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
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world researching hundreds of companies.
In selecting securities in which the Fund may invest, the conclusions and
investment decisions of the Advisor with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Advisor. Investment decisions for the Fund and other clients are
made with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to the Fund.
Upon consummation of the transaction between Zurich and B.A.T., the Fund's
existing investment management agreement with Scudder Kemper was deemed to have
been assigned and, therefore, terminated. The Board approved the new investment
management agreement with Scudder Kemper, which was substantially identical to
the prior investment management agreement, except for the date of execution and
termination. The present investment management agreement (the "Agreement")
became effective September 7, 1998, and was approved at a shareholder meeting
held on December 15, 1998. An Amended and Restated investment management
agreement on October 10, 2000. The Agreement will continue in effect until
September 30, 2001 and from year to year thereafter only if its continuance is
approved annually by the vote of a majority of those Trustees who are not
parties to such Agreement or interested persons of the Advisor or the Trust,
cast in person at a meeting called for the purpose of voting on such approval,
and either by a vote of the Trust's Trustees or of a majority of the outstanding
voting securities of the Fund. The Agreement may be terminated at any time
without payment of penalty by either party on sixty days' written notice and
automatically terminate in the event of its assignment.
Under the Agreement, the Advisor regularly provides the Fund with continuing
investment management for the Fund's portfolio consistent with the Fund's
investment objective, policies and restrictions and determines what securities
shall be purchased, held or sold and what portion of the Fund's assets shall be
held uninvested, subject to the Trust's Declaration of Trust, By-Laws, the 1940
Act, the Code and to the Fund's investment objective, policies and restrictions,
and subject, further, to such policies and instructions as the Board of Trustees
of the Trust may from time to time establish. The Advisor 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 Fund.
Under the Agreement, the Advisor renders significant administrative services
(not otherwise provided by third parties) necessary for the Fund's operations as
an open-end investment company including, but not limited to, preparing reports
and notices to the Trustees and shareholders; supervising, negotiating
contractual arrangements with, and monitoring various third-party service
providers to the Fund (such as the Fund's transfer agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of the
Fund's federal, state and local tax returns; preparing and filing the Fund's
federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends; and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
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The Advisor pays the compensation and expenses of all Trustees, officers and
executive employees (except expenses incurred attending Board and committee
meetings outside New York, New York; Boston, Massachusetts and Chicago,
Illinois) of the Fund affiliated with the Advisor and makes available, without
expense to the Trust, the services of such Trustees, officers and employees of
the Advisor as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities.
For these services, as of October 10, 2000, the Fund will pay the Advisor an
annual fee equal to 0.75 of 1% of the first $500 million of average daily net
assets, and 0.70 of 1% on assets in excess of $500 million. The fee is payable
monthly, provided the Fund will make such interim payments as may be requested
by the Advisor not to exceed 75% of the amount of the fee then accrued on the
books of the Fund and unpaid. The Advisor had agreed until April 30, 2000, to
maintain the total annualized expenses of the Fund at no more than 0.75% of the
average daily net assets of the Fund. Additionally, the advisor voluntarily
capped expenses at 0.75% through September 30, 2000. Under the prior Agreement,
the Fund paid an annual fee equal to 0.75% of the Fund's average daily net
assets. For the period July 17, 1998 (commencement of operations) to December
31, 1998, the Advisor did not impose any of its management fee, which amounted
to $79,570. For the fiscal year ended December 31, 1999, the Advisor did not
impose any of its management fee, which amounted to $181,066. In addition,
during the year ended December 31, 1999, the Advisor reimbursed the Fund
$120,981 for losses incurred in connection with equity securities trading. For
the six months ended June 30, 2000, the Advisor did not impose any of its fee,
which amounted to $91,380.
Under the Agreement the Fund is responsible for all of its other expenses
including: organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the Transfer Agent; 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
Advisor; the cost of printing and distributing reports and notices to
stockholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses of shareholders' meetings, the cost of responding to shareholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees of the Fund with respect thereto.
The Agreement identifies the Advisor as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Scudder Kemper Investments, Inc." and
"Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this
license, the Trust, with respect to the Fund, has the non-exclusive right to use
and sublicense the Scudder name and marks as part of its name, and to use the
Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the Advisor
concerning such Agreement, the Trustees of the Trust who are not "interested
persons" of the Advisor are represented by independent counsel at the Fund's
expense.
The Agreement provides that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Advisor's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.
The Advisor may serve as advisor to other funds with investment objectives and
policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the Fund as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of Shares of the Fund.
The term Scudder Investments is the designation given to the services provided
by Zurich Scudder Investments, Inc. and its affiliates to the Scudder Family of
Funds.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor 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 Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
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 advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the
24
<PAGE>
Advisor (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 Fund, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Trust and employees of the Advisor and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Advisor's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Advisor'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
Advisor's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, is the principal underwriter and distributor for the Class A, B and C
shares of the Fund and acts as agent of the Fund in the continuous offering of
its Shares. KDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. The Fund pays
the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI, as principal underwriter, pays for
the printing and distribution of copies thereof used in connection with the
offering of Shares to prospective investors. KDI also pays for supplementary
sales literature and advertising costs.
The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of the Fund, including the Trustees who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees or a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the distribution agreement or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The distribution agreement may not be amended for a class to increase
the fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund, and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the distribution
agreement.
Class B Shares and Class C Shares. The Fund has adopted a plan under Rule 12b-1
(the "Rule 12b-1 Plan") that provides for fees payable as an expense of the
Class B shares and Class C shares that are used by KDI to pay for distribution
and services for those classes. Because 12b-1 fees are paid out of fund assets
on an ongoing basis they will, over time, increase the cost of an investment and
cost more than other types of sales charges.
Rule 12b-1 Plan. Since the distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class B shares. This fee is accrued daily as an
expense of Class B shares. KDI also receives any contingent deferred sales
charges. KDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class C shares. This fee is accrued daily as an
expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or the Fund. KDI also receives any
contingent deferred sales charges.
25
<PAGE>
Administrative Fee. The Fund has entered into an administrative services
agreement with Zurich Scudder (the "Administration Agreement"), pursuant to
which Zurich Scudder will provide or pay others to provide substantially all of
the administrative services required by the Fund (other than those provided by
Zurich Scudder under its investment management agreement with the Fund, as
described above) in exchange for the payment by the Fund of an administrative
services fee (the "Administrative Fee") of 0.325% for Class A, 0.375% for Class
B and 0.350% for Class C. One effect of these arrangements is to make the Fund's
future expense ratio more predictable.
Various third-party service providers (the "Service Providers"), some of which
are affiliated with Zurich Scudder, provide certain services to the Fund
pursuant to separate agreements with the Fund. Scudder Fund Accounting
Corporation, a subsidiary of Zurich Scudder, computes net asset value for the
Fund and maintains their accounting records. Kemper Service Company is the
transfer, shareholder servicing and dividend-paying agent for the shares of the
Fund. As custodian, State Street Bank holds the portfolio securities of the
Fund, pursuant to a custodian agreement. PricewaterhouseCoopers LLP audits the
financial statements of the Fund and provides other audit, tax, and related
services. Dechert acts as general counsel for the Fund.
Zurich Scudder will pay the Service Providers for the provision of their
services to the Fund and will pay other Fund expenses, including insurance,
registration, printing and postage fees. In return, the Fund will pay Zurich
Scudder an Administrative Fee.
The Administration Agreement has an initial term of three years, subject to
earlier termination by the Fund's Board. The fee payable by the Fund to Zurich
Scudder pursuant to the Administration Agreement is reduced by the amount of any
credit received from the Fund's custodian for cash balances.
Certain expenses of the Fund will not be borne by Zurich Scudder 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, the Fund will
continue to pay the fees required by its investment management agreement with
Zurich Scudder.
Administrative Services. Administrative services are provided to the Fund on
behalf of Class A, B and C shareholders under an administrative services
agreement ("administrative agreement") with KDI. KDI bears all its expenses of
providing services pursuant to the administrative agreement between KDI and the
Fund, including the payment of service fees. The Fund pays KDI an administrative
services fee, payable monthly, at an annual rate of up to 0.25% of the average
daily net assets of each class.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms") that provide services and facilities
for their customers or clients who are investors in the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A Shares, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to 0.25% of the net assets in Fund accounts that it maintains
and services attributable to Class A Shares, commencing with the month after
investment. With respect to Class B and Class C Shares, KDI currently advances
to firms the first-year service fee at a rate of up to 0.25% of the purchase
price of such Shares. For periods after the first year, KDI currently intends to
pay firms a service fee at a rate of up to 0.25% (calculated monthly and paid
quarterly) of the net assets attributable to Class B and Class C Shares
maintained and serviced by the firm. After the first year, a firm becomes
eligible for the quarterly service fee and the fee continues until terminated by
KDI or the Fund. Firms to which service fees may be paid include affiliates of
KDI. In addition KDI may, from time to time, from its own resources pay certain
firms additional amounts for ongoing administrative services and assistance
provided to their customers and clients who are shareholders of the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of 0.25%
based upon Fund assets in accounts for which a firm provides administrative
services and at the annual rate of 0.15% based upon Fund assets in accounts for
which there is no firm of record (other than KDI) listed on the Fund's records.
The effective administrative services fee rate to be charged against all assets
of the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services. The Board of Trustees of the Fund, in its discretion,
may approve basing the fee to KDI at the annual rate of 0.25% on all Fund assets
in the future
26
<PAGE>
Certain trustees or officers of the Fund are also directors or officers of the
Advisor or KDI, as indicated under "Officers and Trustees."
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, a subsidiary of the Advisor,
computes net asset value for the Fund. Prior to the implementation of the
Administration Agreement, the Fund paid SFAC an annual fee equal to 0.025% of
the first $150 million of average daily net assets, 0.0075% of such assets in
excess of $150 million and 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges for this service. For the period July 17, 1998
(commencement of operations) to December 31, 1998 and the fiscal year ended
December 31, 1999, SFAC did not impose any of its fees, which amounted to
$17,881 and $37,826, respectively.
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company (the "Custodian"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian has custody of all securities and cash of the Fund held
outside the United States. The Custodian attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Fund. Kemper Service Company ("KSVC"), 811 Main Street, Kansas City,
Missouri 64105-2005, an affiliate of the Advisor, is the Fund's transfer agent,
dividend-paying agent and shareholder service agent for the Fund's Class A, B
and C shares. Prior to the implementation of the Administrative Agreement, KSVC
received as transfer agent, annual account fees of $5 per account, transaction
and maintenance charges, annual fees associated with the contingent deferred
sales charge (Class B shares only) and out-of-pocket expense reimbursement.
These fees are now included as part of the unitary administrative fee.
Independent Accountants and Reports to Shareholders. The financial highlights of
the Fund included in the Fund's prospectus and the Financial Statements
incorporated by reference in this Statement of Additional Information have been
so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. PricewaterhouseCoopers LLP audits the financial
statements of the Fund and provides other audit, tax and related services.
Shareholders will receive annual audited financial statements and semi-annual
unaudited financial statements.
PORTFOLIO TRANSACTIONS
Brokerage Commissions. Allocation of brokerage may be placed by the Advisor.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for the Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Advisor seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others. The Advisor
routinely reviews commission rates, execution and settlement services performed
and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Advisor or the Fund. The term "research services" includes advice as to the
value of securities; the advisability of investing in, purchasing or selling
securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is authorized when placing portfolio transactions, if applicable,
for the Fund to pay a brokerage commission in excess of that which another
broker might charge for executing the same transaction on account of execution
services and the receipt of research services. The Adviser has negotiated
arrangements, which are not applicable to most fixed-income transactions, with
certain broker/dealers pursuant to which a broker/dealer will provide research
services, to the Adviser or the Fund in
27
<PAGE>
exchange for the direction by the Adviser of brokerage transactions to the
broker/dealer. These arrangements regarding receipt of research services
generally apply to equity security transactions. The Adviser will not place
orders with a broker/dealer on the basis that the broker/dealer has or has not
sold shares of the Fund. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Advisor, it is the opinion
of the Advisor that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than the Fund and not all such information is used by
the Advisor in connection with the Fund. Conversely, such information provided
to the Advisor by broker/dealers through whom other clients of the Advisor
effect securities transactions may be useful to the Advisor in providing
services to the Fund.
The Trustees review, from time to time, whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Fund on portfolio transactions is legally permissible and advisable.
For the period July 17, 1998 (commencement of operations) to December 31, 1998
and the fiscal year ended December 31, 1999, the Fund paid brokerage commissions
of $31,190 and $46,583. For the fiscal period ended December 31, 1998, $24,763
(79% of the total brokerage commissions paid) resulted from orders placed,
consistent with the policy of obtaining the most favorable net results, with
brokers and dealers who provided supplementary research services to the Fund or
the Advisor. For the fiscal year ended December 31, 1999, $38,471 (82.59% of the
total brokerage commissions paid) resulted from orders placed, consistent with
the policy of obtaining the most favorable net results, with brokers and dealers
who provided supplementary research services to the Fund or the Advisor.
For the fiscal period ended December 31, 1998, the total amount of brokerage
commissions aggregated $29,559,053, of which $14,989,086 (51% of all brokerage
transactions) were transactions which included research commissions. For the
fiscal period ended December 31, 1999, the total amount of brokerage commissions
aggregated $44,625,449, of which $31,177,723 (69.87% of all brokerage
transactions) were transactions which included research commissions.
Portfolio Turnover
The Fund's average annual portfolio turnover rate is the ratio of the lesser of
sales or purchases to the monthly average value of the portfolio securities
owned during the year, excluding all securities with maturities or expiration
dates at the time of acquisition of one year or less. The Fund's portfolio rate
for the period July 17, 1998 (commencement of operations) to December 31, 1998
was 41%. The Fund's portfolio rate for the fiscal year ended December 31, 1999
was 93%. A higher rate involves greater brokerage transaction expenses to the
Fund and may result in the realization of net capital gains, which would be
taxable to shareholders when distributed. Purchases and sales are made for the
Fund's portfolio whenever necessary, in management's opinion, to meet the Fund's
objective.
28
<PAGE>
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close of regular
trading on the Exchange on each day the Exchange is open for trading (the "Value
Time"). The Exchange is scheduled to be closed on the following holidays: New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas and on the
preceding Friday or subsequent Monday when one of these holidays falls on
Saturday or Sunday, respectively. Net asset value per share of each class of the
Fund is computed by dividing the value of the total assets attributable to
shares of a class, less all liabilities attributable shares of that class, by
the total number of outstanding shares of that class. The per share net asset
value of the Class B and Class C Shares of the Fund will generally be lower than
that of the Class A Shares of the Fund because of the higher expenses borne by
the Class B and Class C Shares.
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 Advisor may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee, most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Fund Shares are sold at their public offering price, which is the net asset
value per such shares next determined after an order is received in proper form
plus, with respect to Class A Shares, an initial sales charge. An order for the
purchase of Shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
29
<PAGE>
PURCHASE OF SHARES
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution/services fees. These differences are summarized in the table below.
Each class has distinct advantages and disadvantages for different investors,
and investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees^(1)
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 0.25% Initial sales charge
4.50% of the public offering waived or reduced for
price^(2) certain purchases
Class B Maximum contingent deferred sales 1.00% Shares convert to Class A
charge of 4% of redemption shares six years after
proceeds; declines to zero after issuance
six years
Class C Contingent deferred sales charge of 1.00% No conversion feature
1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
^(1) There is a service fee of 0.25% for each class.
^(2) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales
charge if redeemed within one year of purchase and a 0.50% contingent
deferred sales charge if redeemed within the second year of purchase.
The minimum initial investment for each of Class A, B and C of the Fund is
$1,000 and the minimum subsequent investment is $100. The minimum initial
investment for an Individual Retirement Account is $250 and the minimum
subsequent investment is $50. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion. The Fund may waive the minimum for
purchases by trustees, directors, officers or employees of the Fund or the
Advisor and its affiliates.
Share certificates will not be issued unless requested in writing and may
not be available for certain types of account registrations. It is recommended
that investors not request share certificates unless needed for a specific
purpose. You cannot redeem shares by telephone or wire transfer or use the
telephone exchange privilege if share certificates have been issued. A lost or
destroyed certificate is difficult to replace and can be expensive to the
shareholder (a bond worth 2% or more of the certificate value is normally
required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of As a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10 5.20
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over .00** .00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
30
<PAGE>
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI, the
Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Zurich
Scudder Mutual Funds listed under "Special Features -- Class A Shares --
Combined Purchases" totals at least $1,000,000 including purchases of Class A
shares pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features"; or (b) a
participant-directed qualified retirement plan described in Code Section 401(a),
a participant-directed non-qualified deferred compensation plan described in
Code Section 457 or a participant-directed qualified retirement plan described
in Code Section 403(b)(7) which is not sponsored by a K-12 school district,
provided in each case that such plan has not less than 200 eligible employees
(the "Large Order NAV Purchase Privilege"). Redemption within two years of the
purchase of shares purchased under the Large Order NAV Purchase Privilege may be
subject to a contingent deferred sales charge. See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Large Order NAV Purchase
Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer-sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
cumulative amount invested by the purchaser in the Fund and other Zurich Scudder
Mutual Funds listed under "Special Features -- Class A Shares -- Combined
Purchases," including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features referred to above. The privilege of
purchasing Class A shares of the Fund at net asset value under the Large Order
NAV Purchase Privilege is not available if another net asset value purchase
privilege also applies.
Class A shares of the Fund or of any other Zurich Scudder Mutual Funds listed
under "Special Features -- Class A Shares -- Combined Purchases" may be
purchased at net asset value in any amount by members of the plaintiff class in
the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten-year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may in its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the Fund at net asset value under this privilege is not available if another net
asset value purchase privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
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Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, employees (including retirees) and sales representatives of the Fund,
its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) any trust, pension,
profit-sharing or other benefit plan for only such persons; (d) persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
programs described in the prospectuses of such trusts that have such programs.
Class A shares of the Fund may be sold at net asset value through certain
investment advisors registered under the 1940 Act and other financial services
firms acting solely as agent for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
advisor or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another investment company, or
to shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share of the Class B shares. The purpose of the conversion feature is to relieve
holders of Class B shares from the distribution services fee when they have been
outstanding long enough for KDI to have been compensated for distribution
related expenses. For purposes of conversion to Class A shares, shares purchased
through the reinvestment of dividends and other distributions paid with respect
to Class B shares in a shareholder's Fund account will be converted to Class A
shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares." KDI currently advances to firms the first year distribution fee
at a rate of 0.75%] of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this
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decision, investors should review their particular circumstances carefully with
their financial representative. Investors making investments that qualify for
reduced sales charges might consider Class A shares. Investors who prefer not to
pay an initial sales charge and who plan to hold their investment for more than
six years might consider Class B shares. Investors who prefer not to pay an
initial sales charge but who plan to redeem their shares within six years might
consider Class C shares. KDI has established the following procedures regarding
the purchase of Class A, Class B and Class C shares. These procedures do not
reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $500,000 or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value where the combined
subaccount value in a Fund or other Zurich Scudder Mutual Funds listed under
"Special Features - Class A Shares - Combined Purchases" is in excess of $1
million for Class B shares or $5 million for Class C shares including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features." KemFlex Plans that on May
1, 2000 have in excess of $1 million invested in Class B shares of Kemper Mutual
Funds, or have in excess of $850,000 invested in Class B shares of Kemper Mutual
Funds and are able to qualify for the purchase of Class A shares at net asset
value (e.g., pursuant to a Letter of Intent), will have future investments made
in Class A shares and will have the option to covert their holdings in Class B
shares to Class A shares free of any contingent deferred sales charge on May 1,
2002. For more information about the three sales arrangements, consult your
financial representative or the Shareholder Service Agent. Financial services
firms may receive different compensation depending upon which class of shares
they sell.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. KDI does not believe
that termination of a relationship with a bank would result in any material
adverse consequences to the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to tome, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other Funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of the Fund next determined after receipt in good order
by KDI of the order accompanied by payment. However, orders received by dealers
or other financial services firms prior to the determination of net asset value
(see "Net Asset Value") and received in good order by KDI prior to the close of
its business day will be confirmed at a price based on the net asset value
effective on that day ("trade date"). The Fund reserves the right to determine
the net asset value more frequently than once a day if deemed desirable. Dealers
and other financial services firms are obligated to transmit orders promptly.
Collection may take significantly longer for a check drawn on a foreign bank
than for a check drawn on a domestic bank. Therefore, if an order is accompanied
by a check drawn on a foreign bank, funds must normally be collected before
shares will be purchased. See "Purchase and Redemption of Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including
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affiliates of KDI, may receive compensation from the Fund through the
Shareholder Service Agent for these services. This prospectus should be read in
connection with such firms' material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders for any reason. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper Funds, Attention: Redemption Department, P.O.
Box 219153, Kansas City, Missouri 64141-9153. When certificates for shares have
been issued, they must be mailed to or deposited with the Shareholder Service
Agent, along with a duly endorsed stock power and accompanied by a written
request for redemption. Redemption requests and a stock power must be endorsed
by the account holder with signatures guaranteed by a commercial bank, trust
company, savings and loan association, federal savings bank, member firm of a
national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed exactly as the account is
registered including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
The redemption price for shares of a class of the Fund will be the net asset
value per share of that class of the Fund next determined following receipt by
the Shareholder Service Agent of a properly executed request with any required
documents as described above. Payment for shares redeemed will be made in cash
as promptly as practicable but in no event later than seven days after receipt
of a properly executed request accompanied by any outstanding share certificates
in proper form for transfer. When the Fund is asked to redeem shares for which
it may not have yet received good payment (i.e., purchases by check,
EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of redemption
proceeds until it has determined that collected funds have been received for the
purchase of such shares, which will be up to 10 days from receipt by the Fund of
the purchase amount. The redemption within two years of Class A shares purchased
at net asset value under the Large Order NAV Purchase Privilege may be subject
to a contingent deferred sales charge (see "Purchase of Shares -- Initial Sales
Charge Alternative -- Class A Shares"), the redemption of Class B shares within
six years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge -- Class B Shares" below), and the redemption of Class C
shares within the first year following purchase may be subject to a contingent
deferred sales charge (see "Contingent Deferred Sales Charge -- Class C Shares"
below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $800 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer-sponsored employee benefit plans
using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
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Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the
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account; and (f) redemptions of shares whose dealer of record at the time of the
investment notifies KDI that the dealer waives the discretionary commission
applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
(g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly, and (g)
redemption of shares purchased through a dealer-sponsored asset allocation
program maintained on an omnibus record-keeping system provided the dealer of
record had waived the advance of the first year administrative services and
distribution fees applicable to such shares and has agreed to receive such fees
quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of 3% ($300) because it was in the second year after the purchase was
made.
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The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in March
1998 will be eligible for the second year's charge if redeemed on or after March
1, 1999. In the event no specific order is requested when redeeming shares
subject to a contingent deferred sales charge, the redemption will be made first
from shares representing reinvested dividends and then from the earliest
purchase of shares. KDI receives any contingent deferred sales charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Zurich Scudder Mutual Funds listed under "Special Features --
Class A Shares -- Combined Purchases" (other than shares of the Kemper Cash
Reserves Fund purchased directly at net asset value) may reinvest up to the full
amount redeemed at net asset value at the time of the reinvestment in Class A
shares of the Fund or of the other listed Zurich Scudder Mutual Funds. A
shareholder of the Fund or other Zurich Scudder Mutual Funds who redeems Class A
shares purchased under the Large Order NAV Purchase Privilege (see "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares") or Class B shares
or Class C shares and incurs a contingent deferred sales charge may reinvest up
to the full amount redeemed at net asset value at the time of the reinvestment,
in the same class of shares as the case may be, of the Fund or of other Zurich
Scudder Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge schedule.
Also, a holder of Class B shares who has redeemed shares may reinvest up to the
full amount redeemed, less any applicable contingent deferred sales charge that
may have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Fund or of the other Zurich Scudder Mutual Funds listed
under "Special Features -- Class A Shares -- Combined Purchases." Purchases
through the reinvestment privilege are subject to the minimum investment
requirements applicable to the shares being purchased and may only be made for
Zurich Scudder Mutual Funds available for sale in the shareholder's state of
residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same value used to
determine net asset value, and selecting the securities in such manner as the
Board of Trustees may deem fair and equitable. If such a distribution occurred,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Trust has elected, however, to be governed by Rule 18f-1
under the 1940 Act, as a result of which the Fund is obligated to redeem shares,
with respect to any one shareholder during any 90-day period, solely in cash up
to the lesser of $250,000 or 1% of the net asset value of a Share at the
beginning of the period.
SPECIAL FEATURES
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Strategic Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash
Reserves Fund (available only upon exchange or conversion from Class A shares of
another Kemper Fund), Kemper U.S. Mortgage Fund, Kemper Short-Intermediate
Government Fund, Kemper Value Plus Growth Fund, Kemper Horizon Fund, Kemper New
Europe Fund, Inc., Kemper Asian Growth Fund, Kemper Aggressive Growth Fund,
Kemper Global/International Series, Inc., Kemper Equity Trust and Kemper
Securities Trust, Scudder 21st Century Growth Fund, The Japan Fund, Inc.,
Scudder High Yield Tax Free Fund, Scudder Pathway Series - Moderate Portfolio,
Scudder Pathway Series - Conservative Portfolio, Scudder Pathway Series - Growth
Portfolio, Scudder International Fund, Scudder Growth and Income Fund, Scudder
Large Company Growth Fund, Scudder Health Care Fund, Scudder Technology
Innovation Fund, Global Discovery Fund, Value Fund, and Classic Growth Fund
("Zurich Scudder Mutual Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich Money Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investor's Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"),
which are not considered a "Zurich Scudder Mutual Fund" for purposes hereof. For
purposes of the Combined Purchases feature described above as well as for the
Letter of Intent and Cumulative Discount features described
37
<PAGE>
below, employer sponsored employee benefit plans using the subaccount record
keeping system made available through the Shareholder Service Agent may include:
(a) Money Market Funds as "Kemper Mutual Funds", (b) all classes of shares of
any Kemper Fund and (c) the value of any other plan investments, such as
guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Zurich Scudder Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Zurich Scudder Mutual Funds held of record as of the initial purchase
date under the Letter as an "accumulation credit" toward the completion of the
Letter, but no price adjustment will be made on such shares. Only investments in
Class A shares are included for this privilege.
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Zurich Scudder Mutual Funds (computed at the maximum
offering price at the time of the purchase for which the discount is applicable)
already owned by the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Zurich
Scudder Mutual Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Zurich Scudder Mutual Funds and shares of
the Money Market Funds listed under "Special Features -- Class A Shares --
Combined Purchases" above may be exchanged for each other at their relative net
asset values. Shares of Money Market Funds and the Kemper Cash Reserves Fund
that were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. Series of
Kemper Target Equity Fund are available on exchange only during the Offering
Period for such series as described in the applicable prospectus. Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund and Investors Cash Trust are available on exchange
but only through a financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of calculating the contingent deferred sales charge.
Class B Shares. Class B shares of the Fund and Class B shares of any other
Zurich Scudder Mutual Funds listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class B shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of calculating the
contingent deferred sales charge that may be imposed upon the redemption of the
Class B shares received on exchange, amounts exchanged retain their original
cost and purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Zurich Scudder Mutual Funds listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class C shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of determining
whether there is a contingent deferred sales charge that may be imposed upon the
redemption of the Class C shares received by exchange, they retain the cost and
purchase date of the shares that were originally purchased and exchanged.
General. Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange through another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15-Day Hold Policy"). In addition, shares of a Kemper
fund with a value of $1,000,000 or less
38
<PAGE>
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
fund, or from a money market fund, may not be exchanged thereafter until they
have been owned for 15 days, if, in the Advisor's judgment, the exchange
activity may have an adverse effect on the fund. In particular, a pattern of
exchanges that coincides with a "market timing" strategy may be disruptive to
the Kemper fund and therefore may be subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including, without limitation, accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged must
at least equal the minimum investment requirement of the Kemper Fund into which
they are being exchanged. Exchanges are made based on relative dollar values of
the shares involved in the exchange. There is no service fee for an exchange;
however, dealers or other firms may charge for their services in effecting
exchange transactions. Exchanges will be effected by redemption of shares of the
fund held and purchase of shares of the other fund. For federal income tax
purposes, any such exchange constitutes a sale upon which a gain or loss may be
realized, depending upon whether the value of the shares being exchanged is more
or less than the shareholder's adjusted cost basis of such shares. Shareholders
interested in exercising the exchange privilege may obtain prospectuses of the
other Funds from dealers, other firms or KDI. Exchanges may be accomplished by a
written request to Kemper Service Company, Attention: Exchange Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the shareholder
has given authorization. Once the authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048, subject to the
limitations on liability under "Redemption or Repurchase of Shares -- General."
Any share certificates must be deposited prior to any exchange of such shares.
During periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone exchange privilege. The
exchange privilege is not a right and may be suspended, terminated or modified
at any time. Exchanges may only be made for Funds that are available for sale in
the shareholder's state of residence. Currently, Tax-Exempt California Money
Market Fund is available for sale only in California and Investors Municipal
Cash Fund is available for sale only in certain states. Except as otherwise
permitted by applicable regulations, 60 days' prior written notice of any
termination or material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Kemper Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($50 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the shareholder or the Kemper Fund terminates the privilege.
Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated ClearingHouse System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (minimum $50
and maximum $50,000) from the shareholder's account at a bank, savings and loan
or credit union into the shareholder's Fund account. By enrolling in Bank Direct
Deposit, the shareholder authorizes the Fund and its agents to either draw
checks or initiate Automated ClearingHouse debits against the designated account
at a bank or other financial institution. This privilege may be selected by
completing the appropriate section on the Account Application or by contacting
the Shareholder Service Agent for appropriate forms. A shareholder may terminate
his or her Plan by sending written notice to Kemper Service Company, P.O. Box
419415, Kansas City, Missouri 64141-6415. Termination by a shareholder will
become effective within thirty days after the Shareholder Service Agent has
received the request. The Fund may immediately terminate a shareholder's Plan in
the event that any item is unpaid by the shareholder's financial institution.
The Fund may terminate or modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government
39
<PAGE>
check is automatically invested in the Fund account each payment period. A
shareholder may terminate participation in these programs by giving written
notice to the shareholder's employer or government agency, as appropriate. (A
reasonable time to act is required.) The Fund is not responsible for the
efficiency of the employer or government agency making the payment or any
financial institutions transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $50. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts
("IRAs"). This includes Savings Incentive Match Plan for Employees of
Small Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP")
IRA accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to
employees of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be
adopted by employers. The maximum annual contribution per participant
is the lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the Exchange is closed other than customary
weekend and holiday closings or during any period in which trading on the
Exchange is restricted, (b) during any period when an emergency exists as a
result of which (i) disposal of the Fund's investments is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund to determine
the value of its net assets, or (c) for such other periods as the SEC may by
order permit for the protection of the Fund's shareholders.
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B Shares and
not Class A Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B Shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their ages, their principal occupations
and their affiliations, if any, with the Advisor, and Kemper Distributors, Inc.,
are as follows:
40
<PAGE>
<TABLE>
<CAPTION>
------------------------------------- -------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ -------------------- ----
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Linda C. Coughlin (48)+* Trustee and Managing Director of Zurich Scudder Director and Vice
President Investments, Inc. Chairman
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board, Inc.
Chapel Hill, NC (not-for-profit business research
organization)
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Keith R. Fox (45) Trustee Private Equity Investor, General --
10 East 53rd Street Partner, Exeter Group of Funds
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, LLC (venture capital firm)
Boston, MA 02108
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Thomas V. Bruns (43)# Vice President Managing Director of Zurich Scudder President
Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
William F. Glavin (41)# Vice President Managing Director of Zurich Scudder Managing Director
Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
James E. Masur (40)+ Vice President Senior Vice President of Zurich __
Scudder Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
41
<PAGE>
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ -------------------- ----
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Ann M. McCreary (43) ++ Vice President Managing Director of Zurich Scudder --
Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Kathryn L. Quirk (47)+ Vice President and Managing Director of Zurich Scudder Director, Secretary,
Assistant Secretary Investments, Inc. Chief Legal Officer and
Vice President
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Howard S. Schneider (43)# Vice President Managing Director of Zurich Scudder __
Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
John R. Hebble (42)+ Treasurer Senior Vice President of Zurich __
Scudder Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Zurich __
Scudder Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Zurich __
Scudder Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
John Millette (37)+ Vice President and Vice President of Zurich Scudder --
Secretary Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
ADDITIONAL OFFICERS
------------------------------------- -------------------- --------------------------------------- -------------------------
James M. Eysenbach (38) @ Vice President Managing Director of Zurich Scudder --
Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
William F. Gadsden (45) ++ Vice President Managing Director of Zurich Scudder --
Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Valerie F. Malter (41)++ Vice President Managing Director of Zurich Scudder --
Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
------------------------------------- -------------------- --------------------------------------- -------------------------
Kathleen T. Millard (39)+ Vice President Managing Director of Zurich Scudder --
Investments, Inc.
------------------------------------- -------------------- --------------------------------------- -------------------------
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and
its counsel to be persons who are "interested persons" of the
Advisor 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
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
42
<PAGE>
The Trustees and Officers of the Trusts also serve in similar
capacities with respect to other Scudder Funds.
[TO BE UPDATED: INSERTION OF SHAREHOLDING INFORMATION]
Remuneration
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees of the Trust is responsible for the general oversight of
the Fund's business. A majority of the Board's members are not affiliated with
Zurich Scudder Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund of the Trust and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to Scudder and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by Scudder and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee of Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Fund's independent public accountants and
reviews accounting policies and controls. In addition, Independent Trustees from
time to time have established and served on task forces and subcommittees
focusing on particular matters such as investment, accounting and shareholder
service issues.
Compensation of Officers and Trustees of the Fund
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 service. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' conferences or service on special
trustee task forces or subcommittees. Independent Trustees do not receive any
employee benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation.
The Independent Trustees also serve in the same capacity for other funds managed
by the Advisor. These funds differ broadly in type and complexity and in some
cases have substantially different Trustee fee schedules. The following table
shows the aggregate compensation received by each Independent Trustee during
1999 from each Trust and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
------------------------------ ----------------------------- -------------------
NAME INVESTMENT TRUST* ALL SCUDDER FUNDS
------------------------------ ----------------------------- -------------------
<S> <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>
* Investment Trust consists of 7 funds: Classic Growth Fund, Scudder
Capital Growth Fund, Scudder Dividend & Growth Fund, Scudder Growth and
Income Fund, Scudder Large Company Growth Fund, Scudder S&P 500 Index
Fund, and Scudder Small Company Stock Fund.
** Newly elected Trustee. On July 13, 2000, shareholders of the Fund
elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly-constituted Board of Trustees.
+ Mr. Fiedler's total compensation includes the $9,900 accrued, but not
received, through the deferred compensation program.
43
<PAGE>
Members of the Board of Trustees who are employees of the Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
SHAREHOLDER RIGHTS
The 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 March 6, 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 seven series: Classic Growth Fund, Scudder Capital Growth Fund,
Scudder Dividend & Growth Fund, Scudder Growth and Income Fund, Scudder Large
Company Growth Fund, Scudder S&P 500 Index Fund, and Scudder Small Company Stock
Fund. The Fund is further divided into five classes of shares: Class AARP, Class
S, Class A, Class B, and Class C.
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 the Fund has equal rights with each other share of the 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
Statement of Additional Information and in the Fund's prospectus.
The assets of the Trust received for the issue or sale of the shares of each
series and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting that 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.
The Trustees, in their discretion, may authorize the division of shares of the
Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution.
The Declaration of Trust provides that obligations of the Fund are not binding
upon the Trustees individually but only upon the property of the Fund, that the
Trustees and officers will not be liable for errors of judgment or mistakes of
fact or law and that the Fund will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the 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 the 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.
The Fund's activities are supervised by the Trust's Board of Trustees. The Trust
adopted a plan on pursuant to Rule 18f-3 under the 1940 Act (the "Plan") to
permit the Trust to establish a multiple class distribution system for the
Funds.
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Each class of shares will represent interests in the same portfolio of
investments of the Series, and be identical in all respects to each other class,
except as set forth below. The only differences among the various classes of
shares of the Series will relate solely to: (a) different distribution fee
payments or service fee payments associated with any Rule 12b-1 Plan for a
particular class of shares and any other costs relating to implementing or
amending such Rule 12b-1 Plan (including obtaining shareholder approval of such
Rule 12b-1 Plan or any amendment thereto) which will be borne solely by
shareholders of such class; (b) different service fees; (c) different account
minimums; (d) the bearing by each class of its Class Expenses, as defined in
Section 2(b) below; (e) the voting rights related to any Rule 12b-1 Plan
affecting a specific class of shares; (f) separate exchange privileges; (g)
different conversion features and (h) different class names and designations.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or fraction
thereof in respect of a fractional share) on matters that such shares (or class
of shares) shall be entitled to vote. Shareholders of the Fund shall vote
together on any matter, except to the extent otherwise required by the 1940 Act,
or when the Board of Trustees has determined that the matter affects only the
interest of shareholders of one or more classes of the Fund, in which case only
the shareholders of such class or classes of the Fund shall be entitled to vote
thereon. Any matter shall be deemed to have been effectively acted upon with
respect to the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Trust's Declaration of Trust. As used in the
Prospectus and in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Trust and all additional portfolios (e.g.,
election of directors), means the vote of the lesser of (i) 67% of the Trust's
shares represented at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Fund's outstanding shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the portfolio. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
Additional Information
Other Information
The CUSIP numbers of the classes are:
Class A: 460965-650
Class B: 460965-643
Class C: 460965-635
The Fund has a fiscal year ending December 31.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Advisor in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert is counsel to the Fund.
The Fund's Shares prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Fund has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statement for further information
with respect to the Fund and the securities offered hereby. The Registration
Statement and its amendments are available for inspection by the public at the
SEC in Washington, D.C.
Financial Statements
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Semiannual Report to Shareholders dated
June 30, 2000 and the Annual Report to the Shareholders of the Fund dated
December 31, 1999, are incorporated herein by reference and are hereby deemed to
be a part of this Statement of Additional Information.
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APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate bonds.
Ratings of Corporate Bonds
S&P: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating. Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. Bonds which are rated
B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
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Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
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STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
Scudder Growth and Income Fund (Class A, B and C Shares)
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A (formerly known as Class R),
Class B and Class C Shares (the "Shares") of Scudder Growth and Income Fund (the
"Fund"), a diversified series of Investment Trust (the "Trust"), an open-end
management investment company. It should be read in conjunction with the
prospectus of the Shares dated December 29, 2000. The prospectus may be obtained
without charge from the Fund at the address or telephone number on this cover or
the firm from which this Statement of Additional Information was received.
Scudder Growth and Income Fund offers the following classes of shares: Class
AARP, Class S, Class A, Class B and Class C shares (the "Shares"). Only Class A,
Class B and Class C shares of Scudder Growth and Income Fund are offered herein.
TABLE OF CONTENTS
Investment Restrictions.......................................................2
Investment Policies and Techniques............................................4
Dividends, Distributions and Taxes...........................................18
Performance..................................................................23
Investment Manager and Underwriter...........................................26
Portfolio Transactions.......................................................33
Net Asset Value..............................................................35
Purchase, Repurchase and Redemption of Shares................................36
Purchase of Shares...........................................................36
Redemption or Repurchase of Shares...........................................41
Special Features.............................................................45
Officers and Trustees........................................................49
Shareholder Rights...........................................................53
Scudder Investments, Inc. (the "Advisor") serves as the Fund's investment
manager.
The financial statements appearing in the Fund's September 30, 2000 Annual
Report to Shareholders are incorporated herein by reference. The Annual Report
for the Fund accompanies this document.
<PAGE>
Investment Restrictions
Unless specified to the contrary, the following fundamental policies may not be
changed without the approval of a majority of the outstanding voting securities
of the Fund involved which, under the Securities Act of 1940 Act, as amended,
(the "1940 Act") and the rules thereunder and as used in this Statement of
Additional Information, means the lesser of (1) 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy;
or (2) more than 50% of the outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Fund.
As a matter of fundamental policy, the Fund may not:
1. borrow money, except as permitted under the 1940 Act and as interpreted
or modified by regulatory authority having jurisdiction from time to
time;
2. issue senior securities, except as permitted under the 1940 Act and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
3. purchase physical commodities or contracts relating to physical
commodities;
4. engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
5. purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured
by real estate or interests therein, except that the Fund reserves
freedom of action to hold and to sell real estate acquired as a result
of the Fund's ownership of securities;
6. make loans except as permitted under the 1940 Act and as interpreted or
modified by regulatory authority having jurisdiction, from time to
time; or
7. concentrate its investments in a particular industry, as that term is
used in the 1940 Act, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
The Trustees of the Trust have voluntarily adopted certain policies and
restrictions, which are observed in the conduct of the Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of shareholders.
The Fund may not, as a nonfundamental policy:
1. borrow money in an amount greater than 5% of its total assets, except
(i) for temporary or emergency purposes and (ii) by engaging in reverse
repurchase agreements, dollar rolls, or other investments or
transactions described in the Fund's registration statement which may
be deemed to be borrowings;
2. enter into either of reverse repurchase agreements or dollar rolls in
an amount greater than 5% of its total assets;
3. purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage transactions,
(iii) for margin deposits in connection with futures contracts, options
or other permitted investments, (iv) that transactions in futures
contracts and options shall not be deemed to constitute selling
securities short and (v) that the Fund may obtain such short-term
credits as may be necessary for the clearance of securities
transactions;
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<PAGE>
4. purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of the
obligations underlying such put options would exceed 50% of its total
assets;
5. enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf of
the Fund and the premiums paid for such options on futures contracts
does not exceed 5% of the fair market value of the Fund's total assets;
provided that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in computing the
5% limit;
6. purchase warrants if as a result, such securities, taken at the lower
of cost or market value, would represent more than 5% of the value of
the Fund's total assets (for this purpose, warrants acquired in units
or attached to securities will be deemed to have no value); and
7. lend portfolio securities in an amount greater than 30% of its total
assets.
Master/feeder Fund Structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Fund while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the Securities and Exchange Commission (the "SEC") which permits the Fund
to participate in an interfund lending program among certain investment
companies advised by the Advisor. The interfund lending program allows the
participating funds to borrow money from and loan money to each other for
temporary or emergency purposes. The program is subject to a number of
conditions designed to ensure fair and equitable treatment of all participating
funds, including the following: (1) no fund may borrow money through the program
unless it receives a more favorable interest rate than a rate approximating the
lowest interest rate at which bank loans would be available to any of the
participating funds under a loan agreement; and (2) no fund may lend money
through the program unless it receives a more favorable return than that
available from an investment in repurchase agreements and, to the extent
applicable, money market cash sweep arrangements. In addition, a fund may
participate in the program only if and to the extent that such participation is
consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging), except that the Fund may engage in reverse repurchase
agreements and dollar rolls for any purpose.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet
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<PAGE>
anticipated redemptions and dividend payments, and new cash received from
investors. Uninvested Cash may be invested directly in money market instruments
or other short-term debt obligations. Pursuant to an Exemptive Order issued by
the SEC, the Fund may use Uninvested Cash to purchase shares of affiliated funds
including money market funds, short-term bond funds and Scudder Cash Management
Investment Trust, or one or more future entities for which Zurich Scudder
Investments acts as trustee or investment advisor that operate as cash
management investment vehicles and that are excluded from the definition of
investment company pursuant to section 3(c)(1) or 3(c)(7) of the 1940 Act
(collectively, the "Central Funds") in excess of the limitations of Section
12(d)(1) of the Investment Company Act. Investment by the Fund in shares of the
Central Funds will be in accordance with the Fund's investment policies and
restrictions as set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
INVESTMENT POLICIES AND TECHNIQUES
General Investment Objective and Policies
Scudder Growth and Income Fund is a diversified series of Investment Trust, an
open-end management investment company which continuously offers and redeems its
shares. It is a company of the type commonly known as a mutual fund.
The Fund seeks long-term growth of capital, current income and growth of income
while actively seeking to reduce downside risk as compared with other growth and
income funds. The managers use analytical tools to monitor actively the risk
profile of the portfolio as compared to comparable funds and appropriate
benchmarks and peer groups. The managers use several strategies in seeking to
reduce risk, including: (i) managing risk associated with investment in specific
companies by using fundamental analysis, valuation, and by adjusting position
sizes; (ii) portfolio construction emphasizing diversification, blending stocks
with a variety of different attributes, including value and growth stocks; and
(iii) diversifying across many sectors and industries. The portfolio managers'
attempts to manage downside risk may reduce performance in a strong market. In
addition, Scudder Growth and Income Fund does not invest in securities issued by
tobacco-producing companies.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage (such as hedging,
etc.) or a financial instrument which the Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that the Advisor, in its discretion, might, but is not required to,
use in managing the Fund's portfolio assets. The Advisor may, in its discretion,
at any time employ such practice, technique or instrument for one or more Funds,
but not for all Funds advised by it. Furthermore, it is possible that certain
types of financial instruments or investment techniques described herein may not
be available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of the Fund, but, to the extent employed, could from
time to time have a material impact on the Fund's performance.
The Fund invests primarily in equities, mainly common stocks. The Fund allocates
its investments among different industries and companies, and adjusts its
portfolio securities for investment considerations and not for trading purposes.
The Fund attempts to achieve its investment objective by investing in
dividend-paying common stocks, preferred stocks and securities convertible into
common stocks. The Fund may also purchase such securities which do not
4
<PAGE>
pay current dividends but which, the Fund's management believes, offer prospects
for growth of capital and future income. Convertible securities (which may be
current coupon or zero coupon securities) are bonds, notes, debentures,
preferred stocks and other securities which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The Fund may also invest in nonconvertible preferred stocks consistent with the
Fund's objective. From time to time, for temporary defensive purposes, when the
Fund's investment advisor feels such a position is advisable in light of
economic or market conditions, the Fund may invest, without limit, in cash and
cash equivalents. It is impossible to predict how long such alternative
strategies will be utilized. The Fund may invest in foreign securities, real
estate investment trusts, Standard and Poor's Depository Receipts, illiquid
securities, repurchase agreements and reverse repurchase agreements. It may also
loan securities and may engage in strategic transactions.
The Fund's share price fluctuates with changes in interest rates and market
conditions. These fluctuations may cause the value of shares to be higher or
lower than when purchased.
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
Common stocks. Common stock is issued by companies to raise cash for business
purposes and represents a proportionate interest in the issuing companies.
Therefore, the Fund participates in the success or failure of any company in
which it holds stock. The market values of common stock can fluctuate
significantly, reflecting the business performance of the issuing company,
investor perception and general economic or financial market movements. Smaller
companies are especially sensitive to these factors and may even become
valueless. Despite the risk of price volatility, however, common stocks have
historically offered a greater potential for gain on investment, compared to
other classes of financial assets such as bonds or cash equivalents, although
there can be no assurance that this will be true in the future.
Convertible Securities. The Fund may invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks, and other securities which are
convertible into common stocks. Investments in convertible securities may
provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest include fixed-income or
zero coupon debt securities which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. The exchange
ratio for any particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate distributions, or
scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Convertible securities
generally offer lower yields than non-convertible securities of similar quality
because of their conversion or exchange features.
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<PAGE>
Of course, like all debt securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities. Convertible securities may be issued as fixed income
obligations that pay current income or as zero coupon notes and bonds, including
Liquid Yield Option Notes ("LYONs"(TM)). Illiquid Securities and Restricted
Securities. The Fund may purchase securities that are subject to legal or
contractual restrictions on resale ("restricted securities"). Generally
speaking, restricted securities may be sold (i) only to qualified institutional
buyers; (ii) in a privately negotiated transaction to a limited number of
purchasers; (iii) in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration; or (iv) in a public offering for which a registration
statement is in effect under the 1933 Act.
Restricted securities are often illiquid, but they also may be liquid. For
example, restricted securities that are eligible for resale under Rule 144A are
often deemed to be liquid.
Among the factors the Advisor may consider in reaching liquidity decisions
relating to Rule 144A securities are: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
market for the security (i.e., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer).
Issuers of restricted securities may not be subject to the disclosure and other
investor protection requirements that would be applicable if their securities
were publicly traded. Where a registration statement is required for the resale
of restricted securities, the Fund may be required to bear all or part of the
registration expenses. A Fund may be deemed to be an "underwriter" for purposes
of the 1933 Act when selling restricted securities to the public and, in such
event, the Fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer is materially inaccurate or
misleading.
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The Fund may also purchase securities that are not subject to legal or
contractual restrictions on resale, but that are deemed illiquid. Such
securities may be illiquid, for example, because there is a limited trading
market for them.
The fund may be unable to sell a restricted or illiquid security. In addition,
it may be more difficult to determine a market value for restricted or illiquid
securities. Moreover, if adverse market conditions were to develop during the
period between the Fund's decision to sell a restricted or illiquid security and
the point at which the Fund is permitted or able to sell such security, the Fund
might obtain a price less favorable than the price that prevailed when it
decided to sell.
This investment practice, therefore, could have the effect of increasing the
level of illiquidity of the Fund.
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indices 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 net asset values
("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.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
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Nasdaq-100(R) Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They
are issued by the Nasdaq-100 Trust, a unit investment trust that holds a
portfolio consisting of substantially all of the securities, in substantially
the same weighting, as the component stocks of the Nasdaq-100 Index and seeks to
closely track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indices. 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.
Zero Coupon Securities. The Fund may invest in zero coupon securities, which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon securities which are convertible into common stock offer the opportunity
for capital appreciation (or depreciation) as increases (or decreases) in the
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.
Stripped Zero Coupon Securities. Zero coupon securities include securities
issued directly by the U.S. Treasury, and U.S. Treasury bonds or notes and their
unmatured interest coupons and receipts for their underlying principal
("coupons") which have been separated by their holder, typically a custodian
bank or investment brokerage firm. A holder will separate the interest coupons
from the underlying principal (the "corpus") of the U.S. Treasury security. A
number of securities firms and banks have stripped the interest coupons and
receipts and then resold them in custodial receipt programs with a number of
different names, including "Treasury Income Growth Receipts" (TIGRS(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.
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").
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Foreign Securities. While the Fund generally emphasizes investments in companies
domiciled in the U.S., it may invest in listed and unlisted foreign securities
that meet the same criteria as the Fund's domestic holdings. The Fund may invest
in foreign securities when the anticipated performance of the foreign securities
is believed by the Advisor to offer more potential than domestic alternatives in
keeping with the investment objective of the Fund.
Investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. securities and which may favorably or unfavorably affect the
Fund's performance. As foreign companies are not generally subject to uniform
accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may be
less publicly available information about a foreign company than about a
domestic company. Many foreign stock markets, while growing in volume of trading
activity, have substantially less volume than the New York Stock Exchange, Inc.
(the "Exchange") and securities of some foreign companies are less liquid and
more volatile than securities of domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than the volume and liquidity in
the U.S. and at times, volatility of price can be greater than in the U.S.
Further, foreign markets have different clearance and settlement procedures and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems either
could result in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Fixed commissions
on some foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Fund may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Fund's agents to keep
currently informed about corporate actions such as stock dividends or other
matters which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. In addition, with respect to
certain foreign countries, there is the possibility of nationalization,
expropriation, the imposition of withholding or confiscatory taxes, political,
social, or economic instability or diplomatic developments which could affect
U.S. investments in those countries. Investments in foreign securities may also
entail certain risks, such as possible currency blockages or transfer
restrictions and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing countries.
For example, the possibility of revolution and the dependence on foreign
economic assistance may be greater in these countries than in developed
countries. The management of the Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may be subject to potentially greater risks than investments in developed
countries, the Fund will not invest in any securities of issuers located in
developing countries if the securities, in the judgment of the Advisor, are
speculative.
Investments in foreign securities usually will involve currencies of foreign
countries. Moreover, the Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs and the value of
these assets for the Fund as measured in U.S. dollars may be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations and the Fund may incur costs in connection with conversions
between various currencies. Although the Fund values its assets daily in terms
of U.S. dollars, it does not intend to convert its holdings of foreign
currencies, if any, into U.S. dollars on a daily basis. It may do so from time
to time and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the
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difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer. The Fund will conduct its foreign
currency exchange transactions, if any, either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market or through
forward foreign currency exchange contracts. (See "Currency Transactions" for
more information.)
To the extent that the Fund invests in foreign securities, the Fund's share
price could reflect the movements of both the different stock and bond markets
in which it is invested and the currencies in which the investments are
denominated; the strength or weakness of the U.S. dollar against foreign
currencies could account for part of the Fund's investment performance.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in
cash, U.S. Government Securities and liquid high grade debt obligations
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. The Fund has the right to call a
loan and obtain the securities loaned on no more than five days' notice. During
the existence of a loan, the Fund will continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and will also receive
compensation based on investment of the collateral. The risks in lending
securities, as with other extensions of secured credit, consist of a possible
delay in recovery or even loss of rights in the collateral should the borrower
of the securities fail financially. Loans may be made only to firms deemed by
the Advisor to be of good standing and will not be made unless, in the judgment
of the Advisor, the consideration to be earned from such loans would justify the
risk. The value of the securities loaned will not exceed 30% of the value of the
Fund's total assets at the time any loan is made.
Repurchase Agreements. The Fund may invest in repurchase agreements pursuant to
its investment guidelines. In a repurchase agreement, the Fund acquires
ownership of a security and simultaneously commits to resell that security to
the seller, typically a bank to broker/dealer.
A repurchase agreement provides a means for the Fund to earn income on funds for
periods as short as overnight. It is an arrangement under which the Fund
acquires a security ("Obligation") and the seller agrees, at the time of sale,
to repurchase the Obligation at a specified time and price. Obligations subject
to a repurchase agreement are held in a segregated account and the value of such
obligations kept at least equal to the repurchase price on a daily basis. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price on
repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the Obligation itself. Obligations will be held by the Fund's custodian
or in the Federal Reserve Book Entry System.
It is not clear whether a court would consider the Obligation purchased by the
Fund subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may result in loss of interest or decline in price of
the Obligation. If the court characterizes the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
the risk of losing some or all of
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the principal and income involved in the transaction. As with any unsecured debt
instrument purchased for the Fund, the Advisor seeks to reduce the risk of loss
through repurchase agreements by analyzing the creditworthiness of the obligor,
in this case the seller of the Obligation. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may fail to
repurchase the Obligation, in which case the Fund may incur a loss if the
proceeds to the Fund of its sale of the securities underlying the repurchase
agreement to a third party are less than the repurchase price. To protect
against such potential loss, if the market value (including interest) of the
Obligation subject to the repurchase agreement becomes less than the repurchase
price (including interest), the Fund will direct the seller of the Obligation to
deliver additional securities so that the market value (including interest) of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase such securities at an agreed time and
price. The Fund will maintain a segregated account, as described under "Use of
Segregated and Other Special Accounts" in connection with outstanding reverse
repurchase agreements. The Fund will enter into a reverse repurchase agreement
only when the Advisor 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 transactions may increase fluctuations in the
market value of Fund assets and its yield.
Real Estate Investment Trusts ("REITs"). REITs are sometimes informally
characterized as equity REITs, mortgage REITs and hybrid REITs. Investment in
REITs may subject the Fund to risks associated with the direct ownership of real
estate, such as decreases in real estate values, overbuilding, increased
competition and other risks related to local or general economic conditions,
increases in operating costs and property taxes, changes in zoning laws,
casualty or condemnation losses, possible environmental liabilities, regulatory
limitations on rent and fluctuations in rental income. Equity REITs generally
experience these risks directly through fee or leasehold interests, whereas
mortgage REITs generally experience these risks indirectly through mortgage
interests, unless the mortgage REIT forecloses on the underlying real estate.
Equity REITs can also realize capital gains by selling properties that have
appreciated in value. Changes in interest rates may also affect the value of the
Fund's investment in REITs. For instance, during periods of declining interest
rates, certain mortgage REITs may hold mortgages that the mortgagors elect to
prepay, which prepayment may diminish the yield on securities issued by those
REITs.
Certain REITs have relatively small market capitalization, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended (the "Code"), and to maintain exemption from the registration
requirements of the 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.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors, collars, currency forward contracts, currency futures contracts,
currency swaps or options on currencies, or currency futures and various other
currency transactions (collectively, all the above are called "Strategic
Transactions"). In
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addition, strategic transactions may also include new techniques, instruments or
strategies that are permitted as regulatory changes occur. Strategic
Transactions may be used without limit (subject to certain limitations imposed
by the 1940 Act) to attempt to protect against possible changes in the market
value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of fixed-income securities in the Fund's
portfolio, or to establish a position in the derivatives markets as a substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of the Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of the
Fund to utilize these Strategic Transactions successfully will depend on the
Advisor's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter fundamental investment purposes and
characteristics of the Fund, and the Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the
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underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The Fund is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Advisor. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-
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money amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option
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that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the
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value of the Fund's securities denominated in correlated currencies. For
example, if the Advisor considers that the Austrian schilling is correlated to
the German deutschemark (the "D-mark"), the Fund holds securities denominated in
schillings and the Advisor believes that the value of schillings will decline
against the U.S. dollar, the Advisor may enter into a commitment or option to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived correlation between various
currencies may not be present or may not be present during the particular time
that the Fund is engaging in proxy hedging. If the Fund enters into a currency
hedging transaction, the Fund will comply with the asset segregation
requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Advisor, it is in the best interest of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Advisor's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case
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may be, only the net amount of the two payments. Inasmuch as the Fund will
segregate assets (or enter into offsetting positions) to cover its obligations
under swaps, the Advisor and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Advisor. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid assets
denominated in that currency equal to the Fund's obligations or to segregate
cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC
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guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
cash or liquid assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Capital Gains Distributions
The Fund intends to follow the practice of distributing substantially all of its
investment company taxable income which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However,
the Fund may retain all or part of such gain for reinvestment, after paying the
related federal taxes for which shareholders may then be able to claim a credit
against their federal tax liability.
If the Fund does not distribute the amount of capital gain and/or net investment
income required to be distributed by an excise tax provision of the Code, the
Fund may be subject to that excise tax. In certain circumstances, the Fund may
determine that it is in the interest of shareholders to distribute less than the
required amount. (See "TAXES.")
The Fund intends to distribute investment company taxable income, exclusive of
net short-term capital gains in excess of net long-term capital losses, in
March, June, September and December each year. Distributions of net capital
gains realized during each fiscal year will be made annually before the end of
the Fund's fiscal year on September 30. Additional distributions, including
distributions of net short-term capital gains in excess of net long-term capital
losses, may be made, if necessary.
Both types of distributions will be made in shares of the Fund and confirmations
will be mailed to each shareholder unless a shareholder has elected to receive
cash, in which case a check will be sent.
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Dividends paid by the Fund with respect to each class of its shares will be
calculated in the same manner, at the same time and on the same day. The level
of income dividends per share (as a percentage of net asset value) will be lower
for Class B and Class C Shares than for Class A Shares primarily as a result of
the distribution services fee applicable to Class B and Class C Shares.
Distributions of capital gains, if any, will be paid in the same proportion for
each class.
Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value on the reinvestment date, except that, upon written request
to the Shareholder Service Agent, a shareholder may select one of the following
options:
1. To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net
asset value; or
2. To receive income and capital gain dividends in cash.
Dividends will be reinvested in Shares of the same class of the Fund unless
shareholders indicate in writing that they wish to receive them in cash or in
shares of other Scudder Funds with multiple classes of shares or Kemper Funds as
provided in the prospectus. See "Special Features -- Class A Shares -- Combined
Purchases" for a list of such other Funds. To use this privilege of investing
dividends of the Fund in shares of another Scudder or Kemper Fund, shareholders
must maintain a minimum account value of $1,000 in the Fund distributing the
dividends. The Fund will reinvest dividend checks (and future dividends) in
shares of that same Fund and class if checks are returned as undeliverable.
Dividends and other distributions of the Fund in the aggregate amount of $10 or
less are automatically reinvested in shares of the Fund unless the shareholder
requests that such policy not be applied to the shareholder's account.
TAXES
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, or a predecessor statute and has qualified as such
since its inception. Such qualification does not involve governmental
supervision or management of investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90 percent of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code.
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of the Fund's
earnings and profits, and would be eligible for the dividends received
deduction, in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income generally is made up of dividends, interest
and net short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, the Fund intends to elect
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to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a proportionate share of federal income taxes paid
by the Fund on such gains as a credit against the shareholder's federal income
tax liability, and will be entitled to increase the adjusted tax basis of the
shareholder's Fund shares by the difference between such reported gains and the
shareholder's tax credit. If the Fund makes such an election, it may not be
treated as having met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Dividends from domestic corporations are expected to comprise a substantial part
of the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the 70% deduction for dividends received by
corporations. Shareholders will be informed of the portion of dividends which so
qualify. The dividends-received deduction is reduced to the extent the shares of
the Fund with respect to which the dividends are received are treated as
debt-financed under federal income tax law and is eliminated if either those
shares or the shares of the Fund are deemed to have been held by the Fund or the
shareholder, as the case may be, for less than 46 days during the 90-day period
beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares, including exchanges for shares of
another Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
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 for 2001 ($53,000 for married individuals filing a
joint return, with a phase-out of the deduction for adjusted gross income
between $53,000 and $63,000; $33,000 for a single individual, with a phase-out
for adjusted gross income between $33,000 and $43,000). However, an individual
not permitted to make a deductible contribution to an IRA for any such taxable
year may nonetheless make nondeductible contributions up to $2,000 to an IRA (up
to $2,000 per individual for married couples if only one spouse has earned
income) for that year. There are special rules for determining how withdrawals
are to be taxed if an IRA contains both deductible and nondeductible amounts. In
general, a proportionate amount of each withdrawal will be deemed to be made
from nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it
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may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of capital upon the distribution, which will nevertheless be
taxable to them.
In some cases, shareholders of the Fund will not be permitted to take all or a
portion of their sales loads into account for purposes of determining the amount
of gain or loss realized on the disposition of their shares. This prohibition
generally applies where (1) the shareholder incurs a sales load in acquiring the
shares of the Fund, (2) the shares are disposed of before the 91st day after the
date on which they were acquired, and (3) the shareholder subsequently acquires
shares in the Fund or another regulated investment company and the otherwise
applicable sales charge is reduced under a "reinvestment right" received upon
the initial purchase of Fund shares. The term " reinvestment right" means any
right to acquire shares of one or more regulated investment companies without
the payment of a sales load or with the payment of a reduced sales charge. Sales
charges affected by this rule are treated as if they were incurred with respect
to the shares acquired under the reinvestment right. This provision may be
applied to successive acquisitions of fund shares.
Equity options (including covered call options written on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss will
be recognized by the Fund upon payment of a premium in connection with the
purchase of a put or call option. The character of any gain or loss recognized
(i.e. long-term or short-term) will generally depend, in the case of a lapse or
sale of the option, on the Fund's holding period for the option, and in the case
of the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of any property
in the Fund's portfolio similar to the property underlying the put option. If
the Fund writes an option, no gain is recognized upon its receipt of a premium.
If the call lapses or is closed out, any gain or loss is treated as short-term
capital gain or loss. If the option is exercised, the character of the gain or
loss depends on the holding period of the underlying stock.
Positions of the Fund which consist of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stocks
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by the Fund.
Many futures and forward contracts entered into by the Fund and listed nonequity
options written or purchased by the Fund (including options on debt securities,
options on futures contracts, options on securities indices and options on
currencies) will be governed by Section 1256 of the Code. Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position generally will be treated as 60% long-term and 40%
short-term capital gain or loss, and on the last trading day of the Fund's
fiscal year, all outstanding Section 1256 positions will be marked to market
(i.e., treated as if such positions were closed out at their closing price on
such day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income or loss.
Notwithstanding any of the foregoing, the Fund may recognize gain (but not loss)
from a constructive sale of certain "appreciated financial positions" if the
Fund enters into a short sale, offsetting notional principal contract, futures
or forward contract transaction with respect to the appreciated position or
substantially identical property. Appreciated financial positions subject to
this constructive sale treatment are interests (including options, futures and
forward contracts and short sales) in stock, partnership interests, certain
actively traded trust instruments and certain debt instruments. Constructive
sale treatment of appreciated financial positions does not apply to certain
transactions closed in the 90-day period ending with the 30th day after the
close of the Fund's taxable year, if certain conditions are met.
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Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain options, futures and forward
contracts, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition are also treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
If the Fund invests in stock of certain foreign investment companies, the Fund
may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares; any
mark-to-market losses and any loss from an actual disposition of shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years. The effect of the election would be to treat
excess distributions and gain on dispositions as ordinary income which is not
subject to a fund-level tax when distributed to shareholders as a dividend.
Alternatively, the Fund may elect to include as income and gain its share of the
ordinary earnings and net capital gain of certain foreign investment companies
in lieu of being taxed in the manner described above.
A portion of the difference between the issue price of zero coupon securities
and their face value ("original issue discount") is considered to be income to
the Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount imputed income will comprise
a part of the investment company taxable income of the Fund which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the Fund's
level. In addition, if the Fund invests in certain high yield original issue
discount obligations issued by corporations, a portion of the original issue
discount accruing on the obligation may be eligible for the deduction for
dividends received by corporations. In such event, dividends of investment
company taxable income received from the Fund by its corporate shareholders, to
the extent attributable to such portion of accrued original issue discount, may
be eligible for this deduction for dividends received by corporations if so
designated by the Fund in a written notice to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all distributions of investment company taxable income and capital gains as well
as gross proceeds from the redemption or exchange of Fund shares, except in the
case of certain exempt shareholders. Under the backup withholding provisions of
Section 3406 of the Code, distributions of investment company taxable income and
capital gains and proceeds from the redemption or exchange of the shares of a
regulated investment company may be subject to withholding of federal income tax
at the rate of 31% in the case of non-exempt shareholders who fail to furnish
the investment company with their taxpayer identification numbers and with
required certifications regarding their status under the federal income tax law.
Withholding may also be required if the Fund is notified by the IRS or a broker
that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously
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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 the Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisors about the application of the
provisions of tax law described in this statement of additional information in
light of their particular tax situations.
PERFORMANCE
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Performance information will be computed separately for each class.
Class A, B and C shares are newly offered and therefore have no available
performance information.
Performance figures for Class A, B and C shares of the Fund are derived from the
historical performance of Class S shares, adjusted to reflect the operating
expenses applicable to Class A, B and C shares, which may be higher or lower
than those of Class S shares. The performance figures are also adjusted to
reflect the maximum sales charge of 5.75% for Class A shares and the maximum
current contingent deferred sales charge of 4% for Class B shares and 1% for
Class C shares. Returns for the historical performance of the Class S shares may
include the effect of a temporary waiver of management fees and/or absorption of
certain operating expenses by the investment advisor and certain subsidiaries.
Without such a waiver or absorption, returns would have been lower and ratings
or rankings may have been less favorable.
The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of Class A, B and C shares of the Fund as described above;
they do not guarantee future results. Investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
Average Annual Total Return
Average annual total return is the average annual compound rate of return for
the periods of one year, five years and ten years (or such shorter periods as
may be applicable dating from the commencement of the Fund's operations), all
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by
computing the average annual compound rates of return of a hypothetical
investment over such periods, according to the following formula (average annual
total return is then expressed as a percentage):
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T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Returns for the Period Ended September 30, 2000^(1)^(2)
1 Year 5 Years 10 Years
Scudder Growth and Income Fund - Class A 1.74% 12.45% 14.70%
Scudder Growth and Income Fund - Class B 4.44% 12.91% 14.59%
Scudder Growth and Income Fund - Class C 7.70% 13.17% 14.62%
^(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class A, B and C shares for the period prior to
their introduction are based upon the performance of Class S shares as
described above.
^(2) Total returns would have been lower if expenses had not been reduced.
As described above, average annual total return is based on historical earnings
and is not intended to indicate future performance. Average annual total return
for the Fund or class 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, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by computing the cumulative
rates of return of a hypothetical investment over such periods, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $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 September 30, 2000^(1)^(2)
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<PAGE>
1 Year 5 Years 10 Years
Scudder Growth and Income Fund - Class A 1.74% 79.83% 293.99%
Scudder Growth and Income Fund - Class B 4.44% 83.53% 290.24%
Scudder Growth and Income Fund - Class C 7.70% 85.62% 291.22%
^(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class A, B and C shares for the period prior to
their introduction are based upon the performance of Class S shares.
^(2) Total returns would have been lower if expenses had not been reduced.
Total Return
Total return is the rate of return on an investment for a specified period of
time calculated in the same manner as cumulative total return.
From time to time, in advertisements, sales literature, and reports to
shareholders or prospective investors, figures relating to the growth in the
total net assets of the Fund apart from capital appreciation will be cited, as
an update to the information in this section, including, but not limited to: net
cash flow, net subscriptions, gross subscriptions, net asset growth, net account
growth, and subscription rates. Capital appreciation generally will be covered
by marketing literature as part of the Fund's and classes' performance data.
Quotations of the Fund's performance are based on historical earnings, show the
performance of a hypothetical investment, and are not intended to indicate
future performance of the Fund. An investor's shares when redeemed may be worth
more or less than their original cost. Performance of the Fund will vary based
on changes in market conditions and the level of the Fund's expenses.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Historical information on the value of the dollar versus foreign currencies may
be used from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which the Fund invests.
From time to time, in advertising and marketing literature, the Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, members of the Board
and officers of the Fund, the Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Fund. In addition, the amount of assets that the Advisor has under
management in various geographical areas may be quoted in advertising and
marketing materials.
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Marketing and other Fund literature may include a description of the potential
risks and rewards associated with an investment in the Fund. The description may
include a "risk/return spectrum" which compares the Fund to other Scudder funds
or broad categories of funds, such as money market, bond or equity funds, in
terms of potential risks and returns. Money market funds are designed to
maintain a constant $1.00 share price and have a fluctuating yield. Share price,
yield and total return of a bond fund will fluctuate. The share price and return
of an equity fund also will fluctuate. The description may also compare the Fund
to bank products, such as certificates of deposit. Unlike mutual funds,
certificates of deposit are insured up to $100,000 by the U.S. government and
offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and money
market funds seek stability of principal, these investments are considered to be
less risky than investments in either bond or equity funds, which may involve
the loss of principal. However, all long-term investments, including investments
in bank products, may be subject to inflation risk, which is the risk of erosion
of the value of an investment as prices increase over a long time period. The
risks/returns associated with an investment in bond or equity funds depend upon
many factors. For bond funds these factors include, but are not limited to, a
fund's overall investment objective, the average portfolio maturity, credit
quality of the securities held, and interest rate movements. For equity funds,
factors include a fund's overall investment objective, the types of equity
securities held and the financial position of the issuers of the securities. The
risks/returns associated with an investment in international bond or equity
funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment categories
in the following order: bank products, money market funds, bond funds and equity
funds. Shorter-term bond funds generally are considered less risky and offer the
potential for less return than longer-term bond funds. The same is true of
domestic bond funds relative to international bond funds, and bond funds that
purchase higher quality securities relative to bond funds that purchase lower
quality securities. Growth and income equity funds are generally considered to
be less risky and offer the potential for less return than growth funds. In
addition, international equity funds usually are considered more risky than
domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical information made by
independent sources may also be used in advertisements concerning the Fund,
including reprints of, or selections from, editorials or articles about the
Fund.
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Zurich Scudder Investments, Inc., Two International Place,
Boston, Massachusetts, an investment counsel firm, acts as investment advisor to
the Fund. This organization, the predecessor of which is Scudder, Stevens &
Clark, Inc., ("Scudder") 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
Advisor introduced Scudder International Fund, Inc., the first mutual fund
available in the U.S. investing internationally in securities of issuers in
several foreign countries. The predecessor firm reorganized from a partnership
to a corporation on June 28, 1985. On June 26, 1997, Scudder entered into an
agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder and
Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name 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. On October 17, 2000, the
dual holding company structure of Zurich Financial Services Group, comprised of
Allied Zurich p.l.c. in the United Kingdom and Zurich Allied A.G. in
Switzerland, was unified into a single Swiss holding company, Zurich Financial
Services. The Advisor changed its name from Scudder Kemper Investments, Inc. to
Zurich Scudder Investments, Inc. The Advisor manages the Fund's daily investment
and business
26
<PAGE>
affairs subject to the policies established by the Trust's Board of Trustees.
The Trustees have overall responsibility for the management of the Fund under
Massachusetts law.
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.
Pursuant to an investment management agreement with the Fund, the Advisor acts
as the Fund's Investment Advisor, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions.
The principal source of the Advisor's income is professional fees received from
providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today it provides investment counsel
for many individuals and institutions, including insurance companies, industrial
corporations, and financial and banking organizations, as well as providing
investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor 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
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world researching hundreds of companies.
In selecting securities in which the Fund may invest, the conclusions and
investment decisions of the Advisor with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Advisor. Investment decisions for the Fund and other clients are
made with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to the Fund.
In certain cases, the investments for the Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Advisor,
that have similar names, objectives and investment styles. You should be aware
that the Fund is likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of he
Fund can be expected to vary from those of these other mutual funds.
The present investment management agreement (the "Agreement") was most recently
last approved by the Trustees on July 10, 2000 and became effective on August
14, 2000. The Agreement will continue in effect until September 30, 2001 and
from year to year thereafter only if its continuance is approved annually by the
vote of a majority of those Trustees who are not parties to such Agreement or
interested persons of the Advisor or the Fund, cast in person at a meeting
called for the purpose of voting on such approval, and either by a vote of the
Trust's Trustees or of a majority of the outstanding voting securities of the
Fund. The Agreement may be terminated at any time without payment of penalty by
either party on sixty days' written notice and automatically terminates in the
event of its assignment
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<PAGE>
Under the Agreement, the Advisor regularly provides the Fund with continuing
investment management for the Fund's portfolio consistent with the Fund's
investment objective, policies and restrictions and determines what securities
shall be purchased, held or sold and what portion of the Fund's assets shall be
held uninvested, subject to the Trust's Declaration of Trust, By-Laws, the 1940
Act, the Code and to the Fund's investment objective, policies and restrictions,
and subject, further, to such policies and instructions as the Board of Trustees
of the Trust may from time to time establish. The Advisor 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 Fund.
Under the Agreement, the Advisor renders significant administrative services
(not otherwise provided by third parties) necessary for the Fund's operations as
an open-end investment company including, but not limited to, preparing reports
and notices to the Trustees and shareholders; supervising, negotiating
contractual arrangements with, and monitoring various third-party service
providers to the Fund (such as the Fund's transfer agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of the
Fund's federal, state and local tax returns; preparing and filing the Fund's
federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends; and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
The Advisor pays the compensation and expenses of all Trustees, officers and
executive employees (except expenses incurred attending Board and committee
meetings outside New York, New York; Boston, Massachusetts and Chicago,
Illinois) of the Fund affiliated with the Advisor and makes available, without
expense to the Trust, the services of such Trustees, officers and employees of
the Advisor as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities.
For the Advisor's services from August 13, 1996 to May 1, 1997, the Fund paid
the Advisor an annual fee of 0.60% of the first $500 million of average daily
net assets, 0.55% of such assets in excess of $500 million, 0.50% of such assets
in excess of $1 billion, 0.475% of such assets in excess of $1.5 billion, 0.45%
of such assets in excess of $2 billion, 0.425% of such assets in excess of $3
billion.
For the Advisor's services from May 2, 1997 to September 7, 1998, the Fund paid
the Advisor an annual fee of 0.60% of the first $500 million of average daily
net asset, 0.55% of such assets in excess of $500 million, 0.50% of such assets
in excess of $1 billion, 0.475% of such assets in excess of $1.5 billion, 0.45%
of such assets in excess of $2 billion, 0.425% of such assets in excess of $3
billion and 0.405% of such assets in excess of $4.5 billion.
For the Advisor's services from September 8, 1998 until August 14, 2000, the
Fund paid the Advisor an annual fee of 0.60% of the first $500 million of
average daily net asset, 0.55% of such assets in excess of $500 million, 0.50%
of such assets in excess of $1 billion, 0.475% of such assets in excess of $1.5
billion, 0.45% of such assets in excess of $2 billion, 0.425% of such assets in
excess of $3 billion, 0.405% of such assets in excess of $4.5 billion, 0.3875%
of such assets in excess of $6 billion, and 0.37% of such assets in excess of
$10 billion.
For the Advisor's services after August 14, 2000, the Fund pays Zurich Scudder a
fee equal to 0.450% of average daily net assets on such assets up to $14
billion, 0.425% of average daily net assets on such assets exceeding $14
billion, 0.400% of average daily net assets on such assets exceeding $16
billion, and 0.385% of average daily net assets on such assets exceeding $18
billion. The fee is graduated so that increases in the Fund's net assets may
result in a lower annual fee rate and decreases in the Fund's net assets may
result in a higher annual fee rate. The fee is payable monthly, provided that
the Fund will make such interim payments as
28
<PAGE>
may be requested by the Advisor not to exceed 75% of the amount of the fee then
accrued on the books of the Fund and unpaid.
For the period ended September 30, 2000, the Fund was charged by the Advisor
aggregate fees pursuant to its then effective investment advisory agreement of
$24,109,868, which was equivalent to an annualized effective rate of 0.46% of
the Fund's average daily net assets. For the years ended December 31, 1999, 1998
and 1997, the Fund was charged by the Advisor aggregate fees pursuant to its
then effective investment advisory agreement of $32,454,854, $34,062,247 and
$26,072,293, respectively.
Under the Agreement the Fund is responsible for all of its other expenses
including: organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the Transfer Agent; 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
Advisor; the cost of printing and distributing reports and notices to
stockholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses of shareholders' meetings, the cost of responding to shareholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees of the Fund with respect thereto.
The Agreement expressly provides that the Advisor shall not be required to pay a
pricing agent of the fund for portfolio pricing services, if any.
The Agreement identifies the Advisor as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Scudder Kemper Investments, Inc." and
"Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this
license, the Trust, with respect to the Fund, has the non-exclusive right to use
and sublicense the Scudder name and marks as part of its name, and to use the
Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the Advisor
concerning such Agreement, the Trustees of the Trust who are not "interested
persons" of the Advisor are represented by independent counsel at the Fund's
expense.
The Agreement provides that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Advisor's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.
The Advisor may serve as advisor to other funds with investment objectives and
policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the Fund as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of Shares of the Fund.
The term Scudder Investments is the designation given to the services provided
by Zurich Scudder Investments, Inc. and its affiliates to the Scudder Family of
Funds.
AMA InvestmentLink(SM) Program
29
<PAGE>
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor 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 Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
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 advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (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 Fund, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Trust and employees of the Advisor and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Advisor's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Advisor'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
Advisor's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, is the principal underwriter and distributor for the Class A, B and C
shares of the Fund and acts as agent of the Fund in the continuous offering of
its Shares. KDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. The Fund pays
the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI, as principal underwriter, pays for
the printing and distribution of copies thereof used in connection with the
offering of Shares to prospective investors. KDI also pays for supplementary
sales literature and advertising costs.
The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of the Fund, including the Trustees who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees or a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the distribution agreement or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The distribution agreement may not be amended for a class to increase
the fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund, and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the distribution
agreement.
Class B Shares and Class C Shares. The Fund has adopted a plan under Rule 12b-1
(the "Rule 12b-1 Plan") that provides for fees payable as an expense of the
Class B shares and Class C shares that are used by KDI to pay for distribution
and services for those classes. Because 12b-1 fees are paid out of fund assets
on an ongoing basis they will, over time, increase the cost of an investment and
cost more than other types of sales charges.
Rule 12b-1 Plan. Since the distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is
30
<PAGE>
approved and reviewed separately for the Class B shares and the Class C shares
in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in
which an investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class B shares. This fee is accrued daily as an
expense of Class B shares. KDI also receives any contingent deferred sales
charges. KDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class C shares. This fee is accrued daily as an
expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or a Fund. KDI also receives any
contingent deferred sales charges.
Administrative Fee. The Fund has entered into an administrative services
agreement with Zurich Scudder (the "Administration Agreement"), pursuant to
which Zurich Scudder will provide or pay others to provide substantially all of
the administrative services required by the Fund (other than those provided by
Zurich Scudder under its investment management agreements with the Fund, as
described above) in exchange for the payment by the Fund of an administrative
services fee (the "Administrative Fee") of 0.40% for Class A, 0.45% for Class B
and 0.43% for Class C. One effect of this arrangement is to make the future
expense ratio for each class more predictable.
Various third-party service providers (the "Service Providers"), some of which
are affiliated with Zurich Scudder, provide certain services to the Fund
pursuant to separate agreements with the Fund. Scudder Fund Accounting
Corporation, a subsidiary of Zurich Scudder, computes net asset value for the
Fund and maintains their accounting records. Scudder Service Corporation, also a
subsidiary of Zurich Scudder, is the transfer, shareholder servicing and
dividend-paying agent for the shares of the Fund. As custodian, State Street
Bank and Trust Company holds the portfolio securities of the Fund, pursuant to a
custodian agreement. PricewaterhouseCoopers LLP audits the financial statements
of the Fund and provides other audit, tax, and related services. Dechert acts as
general counsel for the Fund.
Zurich Scudder will pay the Service Providers for the provision of their
services to the Fund and will pay other fund expenses, including insurance,
registration, printing and postage fees. In return, the Fund will pay Zurich
Scudder an Administrative Fee.
The Administration Agreement has an initial term of three years, subject to
earlier termination by the Fund's Board. The fee payable by the Fund to Zurich
Scudder pursuant to the Administration Agreement is reduced by the amount of any
credit received from the Fund's custodian for cash balances.
Certain expenses of the Fund will not be borne by Zurich Scudder under the
Administration Agreement, such as taxes, brokerage, interest and extraordinary
expenses; and the fees and expenses of the Independent Directors (including the
fees and expenses of their independent counsel). In addition, the Fund will
continue to pay the fees required by its investment management agreement with
Zurich Scudder.
For the period August 14, 2000 through September 30, 2000, the Administrative
Fee charged to the Fund amounted to $4,500,933 of which, $2,898,304 was unpaid
at September 30, 2000.
31
<PAGE>
Administrative Services. Administrative services are provided to the Fund on
behalf of Class A, B and C shareholders under an administrative services
agreement ("administrative agreement") with KDI. KDI bears all its expenses of
providing services pursuant to the administrative agreement between KDI and the
Fund, including the payment of service fees. The Fund pays KDI an administrative
services fee, payable monthly, at an annual rate of up to 0.25% of the average
daily net assets of each class.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms") that provide services and facilities
for their customers or clients who are investors in the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A Shares, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to 0.25% of the net assets in Fund accounts that it maintains
and services attributable to Class A Shares, commencing with the month after
investment. With respect to Class B and Class C Shares, KDI currently advances
to firms the first-year service fee at a rate of up to 0.25% of the purchase
price of such Shares. For periods after the first year, KDI currently intends to
pay firms a service fee at a rate of up to 0.25% (calculated monthly and paid
quarterly) of the net assets attributable to Class B and Class C Shares
maintained and serviced by the firm. After the first year, a firm becomes
eligible for the quarterly service fee and the fee continues until terminated by
KDI or the Fund. Firms to which service fees may be paid include affiliates of
KDI. In addition KDI may, from time to time, from its own resources pay certain
firms additional amounts for ongoing administrative services and assistance
provided to their customers and clients who are shareholders of the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of 0.25%
based upon Fund assets in accounts for which a firm provides administrative
services and at the annual rate of 0.15% based upon Fund assets in accounts for
which there is no firm of record (other than KDI) listed on the Fund's records.
The effective administrative services fee rate to be charged against all assets
of the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services. The Board of Trustees of the Fund, in its discretion,
may approve basing the fee to KDI at the annual rate of 0.25% on all Fund assets
in the future
Certain trustees or officers of the Fund are also directors or officers of the
Advisor or KDI, as indicated under "Officers and Trustees."
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, a subsidiary of the Advisor,
computes net asset value for the Fund. Prior to the implementation of the
Administration Agreement, the Fund paid SFAC an annual fee equal to 0.025% of
the first $150 million of average daily net assets, 0.0075% of such assets in
excess of $150 million, 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges for this service. For the years ended December
31, 1999 and 1998 SFAC's fee amounted to $418,401 and $424,247, respectively.
Prior to August 14, 2000, the amount charged to the Fund by SFAC aggregated
$230,833, of which $50,013 was unpaid at September 30, 2000
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company (the "Custodian"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian has custody of all securities and cash of the Fund held
outside the United States. The Custodian attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Fund. Kemper Service Company ("KSVC"), 811 Main Street, Kansas City,
Missouri 64105-2005, an affiliate of the Advisor, is the Fund's transfer agent,
dividend-paying agent and shareholder service agent for the Fund's Class A, B
and C shares. Prior to the implementation of the Administration Agreement, KSVC
received as transfer agent, annual account fees of $5
32
<PAGE>
per account, transaction and maintenance charges, annual fees associated with
the contingent deferred sales charge (Class B shares only) and out-of-pocket
expense reimbursement.
Independent Accountants and Reports to Shareholders. The financial highlights of
the Fund included in the Fund's prospectus and the Financial Statements
incorporated by reference in this Statement of Additional Information have been
so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. PricewaterhouseCoopers, LLP audits the financial
statements of the Fund and provides other audit, tax and related services.
Shareholders will receive annual audited financial statements and semi-annual
unaudited financial statements.
Portfolio Transactions
Brokerage Commissions. Allocation of brokerage is supervised by the Advisor.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for the Fund's portfolio is to obtain the most favorable net
results taking into account such factors as price, commission where applicable,
size of order, difficulty of execution and skill required of the executing
broker/dealer. The Advisor seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
Scudder Investor Services, Inc. ("SIS"), a corporation registered as a
broker-dealer and a subsidiary of the Advisor, with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Advisor reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Advisor is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Advisor 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 Advisor or the Fund in exchange for the direction by the Advisor of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Advisor will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-
33
<PAGE>
counter securities, orders are placed with the principal market makers for the
security being traded unless, after exercising care, it appears that more
favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions throughthe Distributor, which is a corporation
registered as a broker/dealer and a subsidiary of the Advisor; the Distributor
will place orders on behalf of the Fund with issuers, underwriters or other
brokers and dealers. The Distributor will not receive any commission, fee or
other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to the Fund
and to the Advisor, it is the opinion of the Advisor that such information only
supplements the Advisor's own research effort since the information must still
be analyzed, weighed, and reviewed by the Advisor's staff. Such information may
be useful to the Advisor in providing services to clients other than the Fund,
and not all such information is used by the Adviser in connection with the Fund.
Conversely, such information provided to the Advisor by broker/dealers through
whom other clients of the Advisor effect securities transactions may be useful
to the Advisor in providing services to the Fund.
The Trustees of the Fund review, from time to time, whether the recapture for
the benefit of the Fund of some portion of the brokerage commissions or similar
fees paid by the Fund on portfolio transactions is legally permissible and
advisable.
For the fiscal year ended September 30, 2000, the Fund paid total brokerage
commissions of $[xxxxxx]. For the fiscal years ended December 31, 1999, 1998 and
1997, the Fund paid total brokerage commissions of $9,542,259, $8,362,533 and
$4,072,780, respectively. In the fiscal year ended September 30, 2000, the Fund
paid brokerage commissions of $[xxxxxx] (xx% of the total brokerage
commissions), resulting from orders placed, consistent with the policy of
obtaining the most favorable net results, with brokers and dealers who provided
supplementary research, market and statistical information to the Trust or
Advisor. The total amount of brokerage transactions aggregated $xxxxxxxxx, of
which $xxxxxxxx (xx% of all brokerage transactions) were transactions which
included research commissions. In the fiscal year ended December 31, 1999, the
Fund paid brokerage commissions of $8,013,658 (83.98% of the total brokerage
commissions), resulting from orders placed, consistent with the policy of
obtaining the most favorable net results, with brokers and dealers who provided
supplementary research, market and statistical information to the Trust or
Advisor. The total amount of brokerage transactions aggregated $8,783,336,819,
of which $7,300,547,806 (83.12% of all brokerage transactions) were transactions
which included research commissions.
Portfolio Turnover
The Fund's average annual portfolio turnover rates, 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 year
ended September 30, 2000 was 55% and for fiscal years ended December 31, 1999,
was 70%. Purchases and sales are made for the Fund's portfolio whenever
necessary, in management's opinion, to meet the Fund's objective.
34
<PAGE>
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close of regular
trading on the Exchange on each day the Exchange is open for trading (the "Value
Time"). The Exchange is scheduled to be closed on the following holidays: New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas and on the
preceding Friday or subsequent Monday when one of these holidays falls on
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. The per share net asset value of the Class
B and Class C Shares of the Fund will generally be lower than that of the Class
A Shares of the Fund because of the higher expenses borne by the Class B and
Class C Shares.
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 Advisor 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 Fund's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is
35
<PAGE>
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
Purchase, Repurchase and Redemption of Shares
Fund Shares are sold at their public offering price, which is the net asset
value per such shares next determined after an order is received in proper form
plus, with respect to Class A Shares, an initial sales charge. The minimum
initial investment for Class A, B or C is $1,000 and the minimum subsequent
investment is $100 but such minimum amounts may be changed at any time. The Fund
may waive the minimum for purchases by trustees, directors, officers or
employees of the Fund or the Advisor and its affiliates. An order for the
purchase of Shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
Purchase of Shares
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution/services fees. These differences are summarized in the table below.
Each class has distinct advantages and disadvantages for different investors,
and investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees^(1)
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 0.25% Initial sales charge
5.75% of the public offering waived or reduced for
price(2) certain purchases
Class B Maximum contingent deferred sales 1.00% Shares convert to Class A
charge of 4% of redemption shares six years after
proceeds; declines to zero after issuance
six years
Class C Contingent deferred sales charge of 1.00% No conversion feature
1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
^(1) There is a service fee of 0.25% for each class.
^(2) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales
charge if redeemed within one year of purchase and a 0.50% contingent
deferred sales charge if redeemed within the second year of purchase.
36
<PAGE>
The minimum initial investment for each of Class A, B and C of the Fund is
$1,000 and the minimum subsequent investment is $100. The minimum initial
investment for an Individual Retirement Account is $250 and the minimum
subsequent investment is $50. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of As a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.00%
$250,000 but less than $500,000 2.60% 2.67% 2.25%
$500,000 but less than $1 million 2.00% 2.04% 1.75%
$1 million and over .00** .00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI, the
Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, such
dealers may be deemed to be underwriters as that term is defined in the 1933
Act.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Zurich
Scudder Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" totals at least $1,000,000 including purchases of Class A shares
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features"; or (b) a
participant-directed qualified retirement plan described in Code Section 401(a),
a participant-directed non-qualified deferred compensation plan described in
Code Section 457 or a participant-directed qualified retirement plan described
in Code Section 403(b)(7) which is not sponsored by a K-12 school district,
provided in each case that such plan has not less than 200 eligible employees
(the "Large Order NAV Purchase Privilege"). Redemption within two years of the
purchase of shares purchased under the Large Order NAV Purchase Privilege may be
subject to a contingent deferred sales charge. See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Large Order NAV Purchase
Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a
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calendar year basis for sales of shares pursuant to the Large Order NAV Purchase
Privilege to employer-sponsored employee benefit plans using the subaccount
recordkeeping system made available through Kemper Service Company. For purposes
of determining the appropriate commission percentage to be applied to a
particular sale, KDI will consider the cumulative amount invested by the
purchaser in the Fund and other Zurich Scudder Mutual Fund listed under "Special
Features -- Class A Shares -- Combined Purchases," including purchases pursuant
to the "Combined Purchases," "Letter of Intent" and "Cumulative Discount"
features referred to above. The privilege of purchasing Class A shares of the
Fund at net asset value under the Large Order NAV Purchase Privilege is not
available if another net asset value purchase privilege also applies.
Class A shares of the Fund or of any other Zurich Scudder Mutual Fund listed
under "Special Features -- Class A Shares -- Combined Purchases" may be
purchased at net asset value in any amount by members of the plaintiff class in
the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten-year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may in its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the Fund at net asset value under this privilege is not available if another net
asset value purchase privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, employees (including retirees) and sales representatives of the Fund,
its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) any trust, pension,
profit-sharing or other benefit plan for only such persons; (d) persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms
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<PAGE>
who as part of their usual duties provide services related to transactions in
Fund shares may purchase Fund Class A shares at net asset value hereunder. Class
A shares may be sold at net asset value in any amount to unit investment trusts
sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
programs described in the prospectuses of such trusts that have such programs.
Class A shares of the Fund may be sold at net asset value through certain
investment advisors registered under the 1940 Act and other financial services
firms acting solely as agent for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
advisor or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another investment company, or
to shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share of the Class B shares. The purpose of the conversion feature is to relieve
holders of Class B shares from the distribution services fee when they have been
outstanding long enough for KDI to have been compensated for distribution
related expenses. For purposes of conversion to Class A shares, shares purchased
through the reinvestment of dividends and other distributions paid with respect
to Class B shares in a shareholder's Fund account will be converted to Class A
shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares." KDI currently advances to firms the first year distribution fee
at a rate of 0.75% of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
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Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this decision, investors should review their particular circumstances carefully
with their financial representative. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than six years might consider Class B shares. Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might consider Class C shares. KDI has established the following procedures
regarding the purchase of Class A, Class B and Class C shares. These procedures
do not reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $500,000 or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value where the combined
subaccount value in a Fund or other Kemper Mutual Funds listed under "Special
Features - Class A Shares - Combined Purchases" is in excess of $1 million for
Class B shares or $5 million for Class C shares including purchases pursuant to
the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features." KemFlex Plans that on May 1, 2000 have in
excess of $1 million invested in Class B shares of Kemper Mutual Funds, or have
in excess of $850,000 invested in Class B shares of Kemper Mutual Funds and are
able to qualify for the purchase of Class A shares at net asset value (e.g.,
pursuant to a Letter of Intent), will have future investments made in Class A
shares and will have the option to covert their holdings in Class B shares to
Class A shares free of any contingent deferred sales charge on May 1, 2002. For
more information about the three sales arrangements, consult your financial
representative or the Shareholder Service Agent. Financial services firms may
receive different compensation depending upon which class of shares they sell.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. KDI does not believe
that termination of a relationship with a bank would result in any material
adverse consequences to the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to tome, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other Funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of the Fund next determined after receipt in good order
by KDI of the order accompanied by payment. However, orders received by dealers
or other financial services firms prior to the determination of net asset value
(see "Net Asset Value") and received in good order by KDI prior to the close of
its business day will be confirmed at a price based on the net asset value
effective on that day ("trade date"). The Fund reserves the right to determine
the net asset value more frequently than once a day if deemed desirable. Dealers
and other financial services firms
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<PAGE>
are obligated to transmit orders promptly. Collection may take significantly
longer for a check drawn on a foreign bank than for a check drawn on a domestic
bank. Therefore, if an order is accompanied by a check drawn on a foreign bank,
funds must normally be collected before shares will be purchased. See "Purchase
and Redemption of Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders for any reason. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper Funds, Attention: Redemption Department, P.O.
Box 219153, Kansas City, Missouri 64141-9153. When certificates for shares have
been issued, they must be mailed to or deposited with the Shareholder Service
Agent, along with a duly endorsed stock power and accompanied by a written
request for redemption. Redemption requests and a stock power must be endorsed
by the account holder with signatures guaranteed by a commercial bank, trust
company, savings and loan association, federal savings bank, member firm of a
national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed exactly as the account is
registered including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
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The redemption price for shares of a class of the Fund will be the net asset
value per share of that class of the Fund next determined following receipt by
the Shareholder Service Agent of a properly executed request with any required
documents as described above. Payment for shares redeemed will be made in cash
as promptly as practicable but in no event later than seven days after receipt
of a properly executed request accompanied by any outstanding share certificates
in proper form for transfer. When the Fund is asked to redeem shares for which
it may not have yet received good payment (i.e., purchases by check,
EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of redemption
proceeds until it has determined that collected funds have been received for the
purchase of such shares, which will be up to 10 days from receipt by the Fund of
the purchase amount. The redemption within two years of Class A shares purchased
at net asset value under the Large Order NAV Purchase Privilege may be subject
to a contingent deferred sales charge (see "Purchase of Shares -- Initial Sales
Charge Alternative -- Class A Shares"), the redemption of Class B shares within
six years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge -- Class B Shares" below), and the redemption of Class C
shares within the first year following purchase may be subject to a contingent
deferred sales charge (see "Contingent Deferred Sales Charge -- Class C Shares"
below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $800 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer-sponsored employee benefit plans
using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge
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customary commissions for their services. Dealers and other financial services
firms are obligated to transmit orders promptly. The repurchase price will be
the net asset value of the Fund next determined after receipt of a request by
KDI. However, requests for repurchases received by dealers or other firms prior
to the determination of net asset value (see "Net Asset Value") and received by
KDI prior to the close of KDI's business day will be confirmed at the net asset
value effective on that day. The offer to repurchase may be suspended at any
time. Requirements as to stock powers, certificates, payments and delay of
payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the discretionary commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
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First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in IRC
Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions to satisfy
required minimum distributions after age 70 1/2 from an IRA account (with the
maximum amount subject to this waiver being based only upon the shareholder's
Kemper IRA accounts). The contingent deferred sales charge will also be waived
in connection with the following redemptions of shares held by employer
sponsored employee benefit plans maintained on the subaccount record keeping
system made available by the Shareholder Service Agent: (a) redemptions to
satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the IRC and (d) redemptions
representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to, substantially equal periodic payments described in IRC Section
72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to satisfy required
minimum distributions after age 70 1/2 from an IRA account (with the maximum
amount subject to this waiver being based only upon the shareholder's Kemper IRA
accounts), (f) for any participant-directed redemption of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent (g) redemption of
shares by an employer sponsored employee benefit plan that offers funds in
addition to Kemper Funds and whose dealer of record has waived the advance of
the first year administrative service and distribution fees applicable to such
shares and agrees to receive such fees quarterly, and (g) redemption of shares
purchased through a dealer-sponsored asset allocation program maintained on an
omnibus record-keeping system provided the dealer of record had waived the
advance of the first year administrative services and distribution fees
applicable to such shares and has agreed to receive such fees quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of 3% ($300) because it was in the second year after the purchase was
made.
44
<PAGE>
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in March
1998 will be eligible for the second year's charge if redeemed on or after March
1, 1999. In the event no specific order is requested when redeeming shares
subject to a contingent deferred sales charge, the redemption will be made first
from shares representing reinvested dividends and then from the earliest
purchase of shares. KDI receives any contingent deferred sales charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Zurich Scudder Mutual Fund listed under "Special Features --
Class A Shares -- Combined Purchases" (other than shares of the Kemper Cash
Reserves Fund purchased directly at net asset value) may reinvest up to the full
amount redeemed at net asset value at the time of the reinvestment in Class A
shares of the Fund or of the other listed Zurich Scudder Mutual Funds. A
shareholder of the Fund or other Kemper Funds who redeems Class A shares
purchased under the Large Order NAV Purchase Privilege (see "Purchase of Shares
-- Initial Sales Charge Alternative -- Class A Shares") or Class B shares or
Class C shares and incurs a contingent deferred sales charge may reinvest up to
the full amount redeemed at net asset value at the time of the reinvestment, in
the same class of shares as the case may be, of the Fund or of other Kemper
Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost and purchase
date for purposes of the contingent deferred sales charge schedule. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Fund or of the other Zurich Scudder Mutual Funds listed
under "Special Features -- Class A Shares -- Combined Purchases." Purchases
through the reinvestment privilege are subject to the minimum investment
requirements applicable to the shares being purchased and may only be made for
Kemper Funds available for sale in the shareholder's state of residence as
listed under "Special Features -- Exchange Privilege." The reinvestment
privilege can be used only once as to any specific shares and reinvestment must
be effected within six months of the redemption. If a loss is realized on the
redemption of shares of the Fund, the reinvestment in shares of the Fund may be
subject to the "wash sale" rules if made within 30 days of the redemption,
resulting in a postponement of the recognition of such loss for federal income
tax purposes. The reinvestment privilege may be terminated or modified at any
time.
Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same value used to
determine net asset value, and selecting the securities in such manner as the
Board of Trustees may deem fair and equitable. If such a distribution occurred,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Trust has elected, however, to be governed by Rule 18f-1
under the 1940 Act, as a result of which the Fund is obligated to redeem shares,
with respect to any one shareholder during any 90-day period, solely in cash up
to the lesser of $250,000 or 1% of the net asset value of a Share at the
beginning of the period.
SPECIAL FEATURES
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Strategic Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash
Reserves Fund (available only upon exchange or conversion from Class A shares of
another Kemper Fund), Kemper U.S. Mortgage Fund, Kemper Short-Intermediate
Government Fund, Kemper Value Plus Growth Fund, Kemper Horizon Fund, Kemper New
Europe Fund, Inc., Kemper Asian
45
<PAGE>
Growth Fund, Kemper Aggressive Growth Fund, Kemper Global/International Series,
Inc., Kemper Equity Trust and Kemper Securities Trust, Scudder 21st Century
Growth Fund, The Japan Fund, Inc., Scudder High Yield Tax Free Fund, Scudder
Pathway Series -Moderate Portfolio, Scudder Pathway Series - Conservative
Portfolio, Scudder Pathway Series - Growth Portfolio, Scudder International
Fund, Scudder Growth and Income Fund, Scudder Large Company Growth Fund, Scudder
Health Care Fund, Scudder Technology Innovation Fund, Global Discovery Fund,
Value Fund, and Classic Growth Fund ("Zurich Scudder Mutual Funds"). Except as
noted below, there is no combined purchase credit for direct purchases of shares
of Zurich Money Funds, Cash Equivalent Fund, Tax-Exempt California Money Market
Fund, Cash Account Trust, Investor's Municipal Cash Fund or Investors Cash Trust
("Money Market Funds"), which are not considered a "Zurich Scudder Mutual Fund"
for purposes hereof. For purposes of the Combined Purchases feature described
above as well as for the Letter of Intent and Cumulative Discount features
described below, employer sponsored employee benefit plans using the subaccount
record keeping system made available through the Shareholder Service Agent may
include: (a) Money Market Funds as "Kemper Mutual Funds", (b) all classes of
shares of any Kemper Fund and (c) the value of any other plan investments, such
as guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Zurich Scudder Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Funds held of record as of the initial purchase date under the
Letter as an "accumulation credit" toward the completion of the Letter, but no
price adjustment will be made on such shares. Only investments in Class A shares
are included for this privilege.
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Zurich Scudder Mutual Funds (computed at the maximum
offering price at the time of the purchase for which the discount is applicable)
already owned by the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Zurich Scudder Mutual Funds and shares of
the Money Market Funds listed under "Special Features -- Class A Shares --
Combined Purchases" above may be exchanged for each other at their relative net
asset values. Shares of Money Market Funds and the Kemper Cash Reserves Fund
that were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. Series of
Kemper Target Equity Fund are available on exchange only during the Offering
Period for such series as described in the applicable prospectus. Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash
46
<PAGE>
Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of calculating the contingent deferred sales charge.
Class B Shares. Class B shares of the Fund and Class B shares of any other
Zurich Scudder Mutual Fund listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class B shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of calculating the
contingent deferred sales charge that may be imposed upon the redemption of the
Class B shares received on exchange, amounts exchanged retain their original
cost and purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Zurich Scudder Mutual Fund listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class C shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of determining
whether there is a contingent deferred sales charge that may be imposed upon the
redemption of the Class C shares received by exchange, they retain the cost and
purchase date of the shares that were originally purchased and exchanged.
General. Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange through another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15-Day Hold Policy"). In addition, shares of a Kemper
fund with a value of $1,000,000 or less (except Kemper Cash Reserves Fund)
acquired by exchange from another Kemper fund, or from a money market fund, may
not be exchanged thereafter until they have been owned for 15 days, if, in the
Advisor's judgment, the exchange activity may have an adverse effect on the
fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Kemper fund and therefore may be
subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including, without limitation, accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged must
at least equal the minimum investment requirement of the Kemper Fund into which
they are being exchanged. Exchanges are made based on relative dollar values of
the shares involved in the exchange. There is no service fee for an exchange;
however, dealers or other firms may charge for their services in effecting
exchange transactions. Exchanges will be effected by redemption of shares of the
fund held and purchase of shares of the other fund. For federal income tax
purposes, any such exchange constitutes a sale upon which a gain or loss may be
realized, depending upon whether the value of the shares being exchanged is more
or less than the shareholder's adjusted cost basis of such shares. Shareholders
interested in exercising the exchange privilege may obtain prospectuses of the
other Funds from dealers, other firms or KDI. Exchanges may be accomplished by a
written request to Kemper Service Company, Attention: Exchange Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the shareholder
has given authorization. Once the authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048, subject to the
limitations on liability under "Redemption or Repurchase of Shares -- General."
Any share certificates must be deposited prior to any exchange of such shares.
During periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone exchange privilege. The
exchange privilege is not a right and may be suspended, terminated or modified
at any time. Exchanges may only be made for Funds that are available for sale in
the shareholder's state of residence. Currently, Tax-Exempt California Money
Market Fund is available for sale only in California and Investors Municipal
Cash Fund is available for sale only in certain states. Except as
47
<PAGE>
otherwise permitted by applicable regulations, 60 days' prior written notice of
any termination or material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Kemper Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($50 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the shareholder or the Kemper Fund terminates the privilege.
Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated ClearingHouse System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (minimum $50
and maximum $50,000) from the shareholder's account at a bank, savings and loan
or credit union into the shareholder's Fund account. By enrolling in Bank Direct
Deposit, the shareholder authorizes the Fund and its agents to either draw
checks or initiate Automated ClearingHouse debits against the designated account
at a bank or other financial institution. This privilege may be selected by
completing the appropriate section on the Account Application or by contacting
the Shareholder Service Agent for appropriate forms. A shareholder may terminate
his or her Plan by sending written notice to Kemper Service Company, P.O. Box
419415, Kansas City, Missouri 64141-6415. Termination by a shareholder will
become effective within thirty days after the Shareholder Service Agent has
received the request. The Fund may immediately terminate a shareholder's Plan in
the event that any item is unpaid by the shareholder's financial institution.
The Fund may terminate or modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $50. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares
48
<PAGE>
are redeemed so that the payee will receive payment approximately the first of
the month. Any income and capital gain dividends will be automatically
reinvested at net asset value. A sufficient number of full and fractional shares
will be redeemed to make the designated payment. Depending upon the size of the
payments requested and fluctuations in the net asset value of the shares
redeemed, redemptions for the purpose of making such payments may reduce or even
exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts
("IRAs"). This includes Savings Incentive Match Plan for Employees of
Small Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP")
IRA accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to
employees of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be
adopted by employers. The maximum annual contribution per participant
is the lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the Exchange is closed other than customary
weekend and holiday closings or during any period in which trading on the
Exchange is restricted, (b) during any period when an emergency exists as a
result of which (i) disposal of the Fund's investments is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund to determine
the value of its net assets, or (c) for such other periods as the SEC may by
order permit for the protection of the Fund's shareholders.
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the IRS or other
assurance acceptable to the Fund to the effect that (a) the assessment of the
distribution services fee with respect to Class B Shares and not Class A Shares
does not result in the Fund's dividends constituting "preferential dividends"
under the IRC, and (b) that the conversion of Class B Shares to Class A Shares
does not constitute a taxable event under the IRC. The conversion of Class B
Shares to Class A Shares may be suspended if such assurance is not available. In
that event, no further conversions of Class B Shares would occur, and Shares
might continue to be subject to the distribution services fee for an indefinite
period that may extend beyond the proposed conversion date as described in the
prospectus.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their ages, their principal occupations
and their affiliations, if any, with the Advisor, and Kemper Distributors, Inc.,
are as follows:
49
<PAGE>
<TABLE>
<CAPTION>
------------------------------------- ------------------------ -------------------------------- ----------------------------
Position with Underwriter,
Name, Age, and Address Position with Fund Principal Occupation** Kemper Distributors, Inc.
---------------------- ------------------ -------------------- -------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational --
WGBH Foundation
125 Western Avenue
Allston, MA 02134
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Linda C. Coughlin (48)+* Trustee and President Managing Director of Zurich Director and Vice Chairman
Scudder Investments, Inc.
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for --
4909 SW 9th Place Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates (consulting firm)
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic --
50023 Brogden Counselor, The Conference
Chapel Hill, NC Board, Inc. (not-for-profit
business research organization)
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Keith R. Fox (45) Trustee Private Equity Investor, --
10 East 53rd Street General Partner, Exeter Group
New York, NY 10022 of Funds
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Joan E. Spero (55) Trustee President, Doris Duke --
Doris Duke Charitable Foundation Charitable Foundation;
650 Fifth Avenue Department of State -
New York, NY 10128 Undersecretary of State for
Economic, Business and
Agricultural Affairs (March
1993 to January 1997)
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Jean Gleason Stromberg (56) Trustee Consultant; Director, --
3816 Military Road, NW Financial Institutions Issues,
Washington, D.C. U.S. General Accounting Office
(1996-1997); Partner,
Fulbright & Jaworski (law firm
(1978-1996)
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Jean C. Tempel (56) Trustee Managing Director, First --
One Boston Place 23rd Floor Light Capital, LLC (venture
Boston, MA 02108 capital firm)
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Steven Zaleznick (45)* Trustee President and CEO, AARP --
601 E Street Services, Inc.
Washington, D.C. 20004
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
50
<PAGE>
------------------------------------- ------------------------ -------------------------------- ----------------------------
Position with Underwriter,
Name, Age, and Address Position with Fund Principal Occupation** Kemper Distributors, Inc.
---------------------- ------------------ -------------------- -------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Thomas V. Bruns (43)# Vice President Managing Director of Zurich President
Scudder Investments, Inc.
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
William F. Glavin (41)# Vice President Managing Director of Zurich Managing Director
Scudder Investments, Inc.
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
James E. Masur (40)+ Vice President Senior Vice President of --
Zurich Scudder Investments,
Inc.
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Kathryn L. Quirk (47)+ Vice President and Managing Director of Zurich Director, Secretary, Chief
Assistant Secretary Scudder Investments, Inc. Legal Officer and Vice
President
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Howard S. Schneider (43)# Vice President Managing Director of Zurich --
Scudder Investments, Inc.
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
John R. Hebble (42)+ Treasurer Senior Vice President of --
Zurich Scudder Investments,
Inc.
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of --
Zurich Scudder Investments,
Inc.
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of --
Zurich Scudder Investments,
Inc.; Associate, Dechert Price
& Rhoads (law firm) 1989 - 1997
------------------------------------- ------------------------ -------------------------------- ----------------------------
------------------------------------- ------------------------ -------------------------------- ----------------------------
John Millette (37)+ Vice President and Vice President of Zurich --
Secretary Scudder Investments, Inc.
------------------------------------- ------------------------ -------------------------------- ----------------------------
ADDITIONAL OFFICERS
------------------------------------ ------------------------- -------------------------------- ----------------------------
Valerie F. Malter (41)++ Vice President Managing Director of Zurich --
Scudder Investments, Inc.
------------------------------------ ------------------------- -------------------------------- ----------------------------
------------------------------------ ------------------------- -------------------------------- ----------------------------
Kathleen T. Millard (39)+ Vice President Managing Director, Zurich --
Scudder Investments, Inc.
------------------------------------ ------------------------- -------------------------------- ----------------------------
------------------------------------ ------------------------- -------------------------------- ----------------------------
51
<PAGE>
------------------------------------ ------------------------- -------------------------------- ----------------------------
William F. Gadsden (45) ++ Vice President Managing Director of Zurich --
Scudder Investments, Inc.
------------------------------------ ------------------------- -------------------------------- ----------------------------
------------------------------------ ------------------------- -------------------------------- ----------------------------
James M. Eysenbach (38)@ Vice President Managing Director of Zurich --
Scudder Investments, Inc.
------------------------------------ ------------------------- -------------------------------- ----------------------------
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and
its counsel to be persons who are "interested persons" of the
Advisor or of the Trust, within the meaning of the 1940 Act.
** 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
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
The Trustees and Officers of the Trusts also serve in similar
capacities with respect to other Scudder Funds.
As of November 30, 2000, all Trustees and Officers of the 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 of
any class of the Fund.
Certain accounts for which Scudder Kemper acts as investment adviser
owned 1,176,802 shares in the aggregate, or 5.71% of the outstanding shares of
Class S shares of the fund. Scudder Kemper may be deemed to be the beneficial
owner of such shares, but disclaims any beneficial ownership in such shares.
To the knowledge of the Fund, as of November 30, 2000, no person owned
beneficially more than 5% of the outstanding shares of the fund.
Remuneration
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees of the Trust is responsible for the general oversight of
the Fund's business. A majority of the Board's members are not affiliated with
Zurich Scudder Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund of the Trust and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to Scudder and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by Scudder and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee of Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Fund's independent public accountants and
reviews accounting policies and controls. In addition, Independent Trustees from
time to
52
<PAGE>
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 of the Fund
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 service. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' conferences or service on special
trustee task forces or subcommittees. Independent Trustees do not receive any
employee benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation.
The Independent Trustees also serve in the same capacity for other funds managed
by the Advisor. These funds differ broadly in type and complexity and in some
cases have substantially different Trustee fee schedules. The following table
shows the aggregate compensation received by each Independent Trustee during
1999 from each Trust and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
-------------------------------- --------------------------- --------------------------
NAME INVESTMENT TRUST* ALL SCUDDER FUNDS
-------------------------------- --------------------------- --------------------------
<S> <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>
* Investment Trust consists of seven funds: Scudder Large Company Growth
Fund, Classic Growth Fund, Scudder Capital Growth Fund, Scudder
Dividend & Growth Fund, Scudder Growth and Income Fund, Scudder S&P 500
Index Fund and Scudder Small Company Stock Fund.
** Newly elected Trustee. On July 13, 2000, shareholders of the Fund
elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly-constituted Board of Trustees.
+ 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 Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
SHAREHOLDER RIGHTS
The 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 again 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 seven series: Scudder Growth and Income Fund, Scudder
Large Company Growth Fund, Classic Growth Fund, Scudder S&P 500 Index Fund,
Scudder Small Company Stock Fund, Scudder Capital Growth Fund and Scudder
Dividend & Growth Fund. The Fund's shares are currently divided into five
classes of shares: Class AARP, Class S, Class A (formerly known as Class R),,
Class B and Class C shares.
53
<PAGE>
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 the Fund has equal rights with each other share of the 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
Statement of Additional Information and in the Fund's prospectus.
The assets of the Trust received for the issue or sale of the shares of each
series and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon only by shareholders of the series involved. Additionally, approval of the
investment advisory agreement is a matter to be determined separately by each
series. Approval by the shareholders of one series is effective as to that
series whether or not enough votes are received from the shareholders of the
other series to approve such agreement as to other series.
The Fund's activities are supervised by the Trust's Board of Trustees. The Trust
has adopted a plan pursuant to Rule 18f-3 (the "Plan") under the 1940 Act to
permit the Trust to establish a multiple class distribution system.
Under the Plan, each class of shares will represent interests in the same
portfolio of investments of the Series, and be identical in all respects to each
other class, except as set forth below. The only differences among the various
classes of shares of the Series will relate solely to: (a) different
distribution fee payments or service fee payments associated with any Rule 12b-1
Plan for a particular class of shares and any other costs relating to
implementing or amending such Rule 12b-1 Plan (including obtaining shareholder
approval of such Rule 12b-1 Plan or any amendment thereto) which will be borne
solely by shareholders of such class; (b) different service fees; (c) different
account minimums; (d) the bearing by each class of its Class Expenses, as
defined in Section 2(b) below; (e) the voting rights related to any Rule 12b-1
Plan affecting a specific class of shares; (f) separate exchange privileges; (g)
different conversion features and (h) different class names and designations.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class and certain securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or fraction
thereof in respect of a fractional share) on matters that such shares (or class
of shares) shall be entitled to vote. Shareholders of the Fund shall vote
together on any matter, except to the extent otherwise required by the 1940 Act,
or when the Board of Trustees has determined that the matter affects only the
interest of shareholders of one or more classes of the
54
<PAGE>
Fund, in which case only the shareholders of such class or classes of the Fund
shall be entitled to vote thereon. Any matter shall be deemed to have been
effectively acted upon with respect to the Fund if acted upon as provided in
Rule 18f-2 under the 1940 Act, or any successor rule, and in the Fund's
Declaration of Trust. As used in the Prospectus and in this Statement of
Additional Information, the term "majority", when referring to the approvals to
be obtained from shareholders in connection with general matters affecting the
Trust and all additional portfolios (e.g., election of directors), means the
vote of the lesser of (i) 67% of the Trust's shares represented at a meeting if
the holders of more than 50% of the outstanding shares are present in person or
by proxy, or (ii) more than 50% of the Fund's outstanding shares. The term
"majority", when referring to the approvals to be obtained from shareholders in
connection with matters affecting a single Fund or any other single portfolio
(e.g., annual approval of investment management contracts), means the vote of
the lesser of (i) 67% of the shares of the portfolio represented at a meeting if
the holders of more than 50% of the outstanding shares of the portfolio are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the portfolio. Shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held.
The Declaration of Trust provides that obligations of the Fund are not binding
upon the Trustees individually but only upon the property of the Fund, that the
Trustees and officers will not be liable for errors of judgment or mistakes of
fact or law and that the Fund will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the 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 the 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.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. The Declaration of Trust contains an express disclaimer of shareholder
liability in connection with the Fund property or the acts, obligations or
affairs of the Fund. The Declaration of Trust also provides for indemnification
out of the Fund property of any shareholder held personally liable for the
claims and liabilities to which a shareholder may become subject by reason of
being or having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations.
Additional Information
Other Information
The CUSIP numbers of the classes are:
Class A: 460965-627
Class B: 460965-619
Class C: 460965-593
The Fund has a fiscal year ending September 30, 2000. On February 7, 2000, the
Board of the Fund changed the fiscal year end from December 31 to September 30.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Advisor in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert is counsel to the Fund.
55
<PAGE>
The name "Scudder Growth and Income Fund" is the designation of the Trust for
the time being under a Declaration of Trust dated September 20, 1984, as amended
from time to time, and all persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents, shareholders nor other series of the
Trust assume any personal liability for obligations entered into on behalf of
the Fund. No other series of the Trust assumes any liabilities for obligations
entered into on behalf of the Fund. Upon the initial purchase of shares, the
shareholder agrees to be bound by the Fund's Declaration of Trust, as amended
from time to time. The Declaration of Trust is on file at the Massachusetts
Secretary of State's Office in Boston, Massachusetts.
The Fund's Shares prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Fund has filed with the SEC under the 1933 Act and reference is hereby
made to the Registration Statement for further information with respect to the
Fund and the securities offered hereby. The Registration Statement and its
amendments are available for inspection by the public at the SEC in Washington,
D.C.
Financial Statements
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated September 30, 2000, are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.
56
<PAGE>
Standard & Poor's Earnings and Dividend Rankings for Common Stocks
The investment process involves assessment of various factors -- such as product
and industry position, corporate resources and financial policy -- with results
that make some common stocks more highly esteemed than others. In this
assessment, Standard & Poor believes that earnings and dividend performance is
the end result of the interplay of these factors and that, over the long run,
the record of this performance has a considerable bearing on relative quality.
The rankings, however, do not pretend to reflect all of the factors, tangible or
intangible, that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of protection for
principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements in
establishing Standard & Poor's earnings and dividend rankings for common stocks,
which are designed to capsulize the nature of this record in a single symbol. It
should be noted, however, that the process also takes into consideration certain
adjustments and modifications deemed desirable in establishing such rankings.
The point of departure in arriving at these rankings is a computerized scoring
system based on per-share earnings and dividend records of the most recent ten
years -- a period deemed long enough to measure significant time segments of
secular growth, to capture indications of basic change in trend as they develop,
and to encompass the full peak-to-peak range of the business cycle. Basic scores
are computed for earnings and dividends, then adjusted as indicated by a set of
predetermined modifiers for growth, stability within long-term trend, and
cyclicality. Adjusted scores for earnings and dividends are then combined to
yield a final score.
Further, the ranking system makes allowance for the fact that, in general,
corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix determined
by analysis of the scores of a large and representative sample of stocks. The
range of scores in the array of this sample has been aligned with the following
ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the stock is not
amenable to the ranking process.
The positions as determined above may be modified in some instances by special
considerations, such as natural disasters, massive strikes, and non-recurring
accounting adjustments.
A ranking is not a forecast of future market price performance, but is basically
an appraisal of past performance of earnings and dividends, and relative current
standing. These rankings must not be used as market recommendations; a
high-score stock may at times be so overpriced as to justify its sale, while a
low-score stock may be attractively priced for purchase. Rankings based upon
earnings and dividend records are no substitute for complete analysis. They
cannot take into account potential effects of management changes, internal
company policies not yet fully reflected in the earnings and dividend record,
public relations standing, recent competitive shifts, and a host of other
factors that may be relevant to investment status and decision.
57
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
Scudder Capital Growth Fund (Class A, B, C and Class I Shares)
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, Class B, Class C and Class I
shares (the "Shares") of Scudder Capital Growth Fund (the "Fund"), a diversified
series of Investment Trust (the "Trust"), an open-end management investment
company. It should be read in conjunction with the prospectus of the Shares
dated December 29, 2000. The prospectus may be obtained without charge from the
Fund at the address or telephone number on this cover or the firm from which
this Statement of Additional Information was received.
Scudder Capital Growth Fund offers the following classes of shares: Class
S, Class AARP, Class A, Class B, Class C and Class I shares (the "Shares"). Only
Class A, Class B, Class C and Class I shares of Scudder Capital Growth Fund are
offered herein.
TABLE OF CONTENTS
Investment Restrictions.......................................................2
Investment Policies and Techniques............................................4
Dividends, Distributions and Taxes...........................................22
Performance..................................................................27
Investment Manager and Underwriter...........................................30
Portfolio Transactions.......................................................36
Net Asset Value..............................................................37
Purchase, Repurchase and Redemption of Shares................................39
Purchase of Shares...........................................................39
Redemption or Repurchase of Shares...........................................44
Special Features.............................................................48
Officers and Trustees........................................................52
Shareholder Rights...........................................................56
Zurich Scudder Investments, Inc. (the "Advisor") serves as the Fund's investment
manager.
The financial statements appearing in the Fund's September 30, 2000 Annual
Report to Shareholders are incorporated herein by reference. The Annual Report
for the Fund accompanies this document.
<PAGE>
Investment Restrictions
Unless specified to the contrary, the following fundamental restrictions may not
be changed without the approval of a majority of the outstanding voting
securities of the Fund involved which, under the Investment Company Act of 1940,
as amended (the "1940 Act") and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (1) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities of the Fund are present or represented by
proxy, or (2) more than 50% of the outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified series of an open-end
investment company. In addition, as a matter of fundamental policy, the Fund
will not:
(1) borrow money, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(2) issue senior securities, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(3) concentrate its investments in a particular industry, as that term is
used in the 1940 Act, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(4) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
(5) purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured
by real estate or interests therein, except that the Fund reserves
freedom of action to hold and to sell real estate acquired as a result
of the Fund's ownership of securities;
(6) purchase physical commodities or contracts related to physical
commodities; or
(7) make loans except as permitted under the 1940 Act, and as interpreted
or modified by regulatory authority having jurisdiction, from time to
time.
Other Investment Policies. The Trustees of the Trust have voluntarily adopted
policies and restrictions which are observed in the conduct of the Fund's
affairs. These represent intentions of the Trustees based upon current
circumstances. They differ from fundamental investment policies in that they may
be changed or amended by action of the Trustees without prior notice to or
approval of shareholders.
Nonfundamental policies of the Fund may be changed by the Trustees of the Trust
and without shareholder approval. As a matter of nonfundamental policy, the Fund
does not currently intend to:
(1) borrow money in an amount greater than 5% of its total assets, except
(i) for temporary or emergency purposes and (ii) by engaging in reverse
repurchase agreements, dollar rolls, or other investments or
transactions described in the Fund's registration statement which may
be deemed to be borrowings;
2
<PAGE>
(2) enter into either of reverse repurchase agreements or dollar rolls in
an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage transactions,
(iii) for margin deposits in connection with futures contracts, options
or other permitted investments, (iv) that transactions in futures
contracts and options shall not be deemed to constitute selling
securities short, and (v) that the Fund may obtain such short-term
credits as may be necessary for the clearance of securities
transactions;
(4) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of the
obligations underlying such put options would exceed 50% of its total
assets;
(5) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf of
the Fund and the premiums paid for such options on futures contracts
does not exceed 5% of the fair market value of the Fund's total assets;
provided that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in computing the
5% limit;
(6) purchase warrants if as a result, such securities, taken at the lower
of cost or market value, would represent more than 5% of the value of
the Fund's total assets (for this purpose, warrants acquired in units
or attached to securities will be deemed to have no value); or
(7) lend portfolio securities in an amount greater than 5% of its total
assets.
Master/feeder Fund Structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Fund while investing in a master
fund in a master/feeder fund structure as described below. A master/feeder fund
structure is one in which a fund (a "feeder fund"), instead of investing
directly in a portfolio of securities, invests most or all of its investment
assets in a separate registered investment company (the "master fund") with
substantially the same investment objective and policies as the feeder fund.
Such a structure permits the pooling of assets of two or more feeder funds,
preserving separate identities or distribution channels at the feeder fund
level. Based on the premise that certain of the expenses of operating an
investment portfolio are relatively fixed, a larger investment portfolio may
eventually achieve a lower ratio of operating expenses to average net assets. An
existing investment company is able to convert to a feeder fund by selling all
of its investments, which involves brokerage and other transaction costs and
realization of a taxable gain or loss, or by contributing its assets to the
master fund and avoiding transaction costs and, if proper procedures are
followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the Securities and Exchange Commission (the "SEC") that permits the Fund to
participate in an interfund lending program among certain investment companies
advised by the Advisor. 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
3
<PAGE>
bank at a higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to a lending fund could result in a lost investment
opportunity or additional costs. The program is subject to the oversight and
periodic review of the Boards of the participating funds. To the extent the Fund
is actually engaged in borrowing through the interfund lending program, the
Fund, as a matter of non-fundamental policy, may not borrow for other than
temporary or emergency purposes (and not for leveraging), except that the Fund
may engage in reverse repurchase agreements and dollar rolls for any purpose.
Investment Policies and Techniques
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. The net asset value of the Fund's shares will increase or
decrease with changes in the market price of the Fund's investments, and there
can be no assurance that the Fund's objective will be met.
The Fund is an open-end management investment company which continuously offers
and redeems shares at net asset value. The Fund is a company of the type
commonly known as a mutual fund.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage (such as hedging,
etc.) or a financial instrument which the Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that the Advisor, in its discretion, might, but is not required to,
use in managing the Fund's portfolio assets. The Advisor may, in its discretion,
at any time employ such practice, technique or instrument for the Fund, but not
for all funds advised by it. Furthermore, it is possible that certain types of
financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of the Fund, but, to the extent employed, could from
time to time have a material impact on the Fund's performance.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
Scudder Capital Growth Fund, a diversified series of Investment Trust, seeks 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.
4
<PAGE>
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.
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.
Investments
Common stocks. Under normal circumstances, the Fund invests primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies. For example, the Fund may invest in a variety of
investment companies which seek to track the composition and performance of
specific indexes or a specific portion of an index. These index-based
investments hold substantially all of their assets in securities representing
their specific index. Accordingly, the main risk of investing in index-based
investments is the same as investing in a portfolio of equity securities
comprising the index. The market prices of index-based investments will
fluctuate in accordance with both changes in the market value of their
underlying portfolio securities and due to supply and demand for the instruments
on the exchanges on which they are traded (which may result in their trading at
a discount or premium to their NAVs). Index-based investments may not replicate
exactly the performance of their specified index because of transaction costs
and because of the temporary unavailability of certain component securities of
the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
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Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Dollar Roll Transactions. Dollar roll transactions consist of the sale by the
Fund to a bank or broker/dealers (the "counterparty") of GNMA certificates or
other mortgage-backed securities together with a commitment to purchase from the
counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The Fund
receives a fee from the counterparty as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed over a period of several
months with a different purchase and repurchase price fixed and a cash
settlement made at each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which the Fund agrees to buy a security on a future date.
The Fund will not use 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. The
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 Fund
because they involve the sale of a security coupled with an agreement to
repurchase. Like all borrowings, a dollar roll involves costs to the Fund. For
example, while the Fund receives a fee as consideration for agreeing to
repurchase the security, the Fund forgoes the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Fund, thereby effectively
charging the Fund interest on its borrowing. Further, although the Fund can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of the Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are different
from those related to the securities underlying the transactions. For example,
if the counterparty becomes insolvent, the Fund's right to purchase from the
counterparty might be restricted. Additionally, the value of such securities may
change adversely before the Fund is able to purchase them. Similarly, the Fund
may be required to purchase securities in connection with a dollar roll at a
higher price than may otherwise be available on the open market. Since, as noted
above, the counterparty is required to deliver a similar, but not identical
security to the Fund, the security that the Fund is required to buy under the
dollar roll may be worth less than an identical security. Finally, there can be
no assurance that the Fund's use of the cash that they receive from a dollar
roll will provide a return that exceeds borrowing costs.
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
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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 Fund 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.
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.
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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
Fund's 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 Fund. Thus, such an issue
may not be said to be publicly offered. Unlike the equity securities of
operating 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 the 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 Fund believes
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 Fund's 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 Fund of Trust Preferred Securities are typically used to purchase a junior
subordinated debenture, and distributions from the Special Trust are funded by
the payments of principal and interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by
the Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount obligations for the remainder of their term.
As a result, holders of Trust Preferred Securities, such as the Fund, 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 Fund receives any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Fund, to sell their holdings.
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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.
The 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. The 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 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 the 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 the Fund's original investment.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of the Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by the 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 the Fund.
The Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide the Fund with the right to a pro rata undivided interest
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in the underlying municipal lease obligations. In addition, such participations
generally provide the 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. The 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. The Fund 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 the 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 1940 Act a repurchase agreement is deemed to be a
loan to the seller of the Obligation and is therefore covered by the Fund's
investment restriction applicable to loans. Each repurchase agreement entered
into by the Fund requires that if the market value of the Obligation becomes
less than the repurchase price (including interest), the 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 to the repurchase agreement will
equal or exceed the repurchase price. In the event that the 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, the Fund may encounter
delay and incur costs before being able to sell the security. Delays may involve
loss of interest or decline in price of the Obligation. 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.
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
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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 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.
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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 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,
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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 Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Fund understand that the staff of the SEC no longer considers
such privately stripped obligations to be U.S. Government securities, as defined
in the Investment Company Act of 1940; therefore, the Fund 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 Fund is
"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 the 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
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fund's investment advisor considers all relevant factors and circumstances
including the creditworthiness of the borrower. The Fund has 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 the Fund's investment objectives and policies
may be deemed to be loans.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts. 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, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors, collars, currency forward contracts, currency futures contracts,
currency swaps or options on currencies, or currency futures and various other
currency transactions (collectively, all the above are called "Strategic
Transactions"). In addition, strategic transactions may also include new
techniques, instruments or strategies that are permitted as regulatory changes
occur. Strategic Transactions may be used without limit (subject to certain
limitations imposed by the 1940 Act) to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Advisor's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting
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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 the 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, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the
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Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Advisor. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
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 the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
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The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of,
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or
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sale of its portfolio securities or the receipt of income therefrom. Position
hedging is entering into a currency transaction with respect to portfolio
security positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Advisor, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Advisor'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.
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Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Advisor and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Advisor. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent the 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 the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation
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must be segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by the
Fund will require the Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate cash or liquid assets sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by the Fund
on an index will require the Fund to own portfolio securities which correlate
with the index or to segregate cash or liquid assets equal to the excess of the
index value over the exercise price on a current basis. A put option written by
the Fund requires the Fund to segregate cash or liquid assets equal to the
exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid assets
denominated in that currency equal to the Fund's obligations or to segregate
cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and, in connection with such
options, the Fund will segregate an amount of cash or liquid assets equal to the
full value of the option. OTC options settling with physical delivery, or with
an election of either physical delivery or cash settlement will be treated the
same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash or liquid assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, if the Fund held a futures or forward contract
instead of segregating cash or liquid assets, it could purchase a put option on
the same futures or forward contract with a strike price as high or higher than
the price of the contract held. Other Strategic Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction no segregation is required, but if it terminates
prior to such time, cash or liquid assets equal to any remaining obligation
would need to be segregated.
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.
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Foreign Securities. The Fund 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 Fund's performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the 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 Fund 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
Fund's 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 Fund 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 the
Fund seeks to mitigate the risks associated with these considerations through
diversification and active professional management.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, the Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which Zurich Scudder Investments acts as trustee
or investment advisor that operate as cash management investment vehicles and
that are excluded from the definition of investment company pursuant to section
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (collectively, the
"Central Funds") in excess of the limitations of Section 12(d)(1) of the
Investment Company Act. Investment by the Fund in shares of the Central Funds
will be in accordance with the Fund's investment policies and restrictions as
set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
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The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
Dividends, Distributions and Taxes
Dividends and Capital Gains Distributions
The Fund intends to follow the practice of distributing all of its investment
company taxable income, which includes any excess of net realized short-term
capital gains over net realized long-term capital losses. The Fund may follow
the practice of distributing the entire excess of net realized long-term capital
gains over net realized short-term capital losses. However, the Fund may retain
all or part of such gain for reinvestment after paying the related federal
income taxes for which the shareholders may then be asked to claim a credit
against their federal income tax liability. (See "Taxes.")
If the Fund does not distribute an amount of capital gain and/or ordinary income
required to be distributed by an excise tax provision of the Code, it may be
subject to such tax. In certain circumstances, the Fund may determine that it is
in the interest of shareholders to distribute less than such an amount.
Distributions of investment company taxable income and net realized capital
gains are taxable (See "Taxes"), whether made in shares or cash.
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
dividend paid deduction on its federal tax return.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Additional distributions
for the Fund may be made if necessary. Both types of distributions will be made
in shares of the Fund and confirmations will be mailed to each shareholder
unless a shareholder has elected to receive cash, in which case a check will be
sent.
The Fund intends to distribute investment company taxable income in December
each year. The Fund intends to declare in December any net realized capital
gains resulting from its investment activity. The Fund intends to distribute the
December dividends and capital gains either in December or in the following
January.
Dividends paid by the Fund with respect to each class of its shares will be
calculated in the same manner, at the same time and on the same day. The level
of income dividends per share (as a percentage of net asset value) will be lower
for Class B and Class C Shares than for Class A Shares primarily as a result of
the distribution services fee applicable to Class B and Class C Shares.
Distributions of capital gains, if any, will be paid in the same proportion for
each class.
Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value on the reinvestment date, except that, upon written request
to the Shareholder Service Agent, a shareholder may select one of the following
options:
1. To receive income and short-term capital gain dividends in
cash and long-term capital gain dividends in shares of the
same class at net asset value; or
2. To receive income and capital gain dividends in cash.
Dividends will be reinvested in Shares of the same class of the Fund unless
shareholders indicate in writing that they wish to receive them in cash or in
shares of other Scudder Funds with multiple classes of shares or Kemper
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Funds as provided in the prospectus. See "Special Features -- Class A Shares --
Combined Purchases" for a list of such other Funds. To use this privilege of
investing dividends of the Fund in shares of another Scudder or Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Fund will reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions of the Fund in the aggregate
amount of $10 or less are automatically reinvested in shares of the Fund unless
the shareholder requests that such policy not be applied to the shareholder's
account.
Taxes
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code or a predecessor statute, and has qualified as such
since its inception. It intends to continue to qualify for such treatment. Such
qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code.
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of the Fund's
earnings and profits, and would be eligible for the dividends received deduction
in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income 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 the Fund. Presently, the Fund has
no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, the Fund intends to elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a relative share of federal income taxes paid by the 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 the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the deduction for dividends received by corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the shares of the Fund
with respect to which the dividends are received are treated as debt-financed
under federal income tax law, and is eliminated if either those shares or the
shares of the Fund are deemed to have been held by the Fund or the 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.
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<PAGE>
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gain, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends 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 for 2001 ($53,000 for married individuals filing a
joint return, with a phase-out of the deduction for adjusted gross income
between $53,000 and $63,000; $33,000 for a single individual, with a phase-out
for adjusted gross income between $33,000 and $43,000). However, an individual
not permitted to make a deductible contribution to an IRA for any such taxable
year may nonetheless make nondeductible contributions up to $2,000 to an IRA (up
to $2,000 per individual for married couples if only one spouse has earned
income) for that year. There are special rules for determining how withdrawals
are to be taxed if an IRA contains both deductible and nondeductible amounts. In
general, a proportionate amount of each withdrawal will be deemed to be made
from nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
In some cases, shareholders of the Fund will not be permitted to take all or a
portion of their sales loads into account for purposes of determining the amount
of gain or loss realized on the disposition of their shares. This prohibition
generally applies where (1) the shareholder incurs a sales load in acquiring the
shares of the Fund, (2) the shares are disposed of before the 91st day after the
date on which they were acquired, and (3) the shareholder subsequently acquires
shares in the Fund or another regulated investment company and the otherwise
applicable sales charge is reduced under a "reinvestment right" received upon
the initial purchase of Fund shares. The term " reinvestment right" means any
right to acquire shares of one or more regulated investment companies without
the payment of a sales load or with the payment of a reduced sales charge. Sales
charges affected by this rule are treated as if they were incurred with respect
to the shares acquired under the reinvestment right. This provision may be
applied to successive acquisitions of fund shares.
The Fund may invest in shares of certain foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). If
the Fund receives a so-called "excess distribution" with respect to
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<PAGE>
PFIC stock, the Fund itself may be subject to a tax on a portion of the excess
distribution. Certain distributions from a PFIC as well as gains from the sale
of the PFIC shares are treated as "excess distributions." In general, under the
PFIC rules, an excess distribution is treated as having been realized ratably
over the period during which the Fund held the PFIC shares. The Fund will be
subject to tax on the portion, if any, of an excess distribution that is
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Excess
distributions allocated to the current taxable year are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares; any
mark to market losses and any loss from an actual disposition of shares would be
deductible as ordinary 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.
Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the 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 the Fund's portfolio. If
the 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
the Fund is not a taxable transaction for the Fund.
Many futures contracts and certain foreign currency forward contracts entered
into by the Fund and all listed non-equity options written or purchased by the
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 the Fund's fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e., treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts and similar financial instruments
entered into or acquired by the Fund will be treated as ordinary income or loss.
Under certain circumstances, entry into a futures contract to sell a security
may constitute a short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying security or a substantially
identical security in the Fund's portfolio.
If the Fund writes a covered call option on portfolio stock, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
Positions of the Fund which consist of at least one stock and at least one other
position with respect to a related security which substantially diminishes the
Fund's risk of loss with respect to such stock could be treated as a "straddle"
which is governed by Section 1092 of the Code, the operation of which may cause
deferral of losses, adjustments in the holding periods of 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 the Fund.
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<PAGE>
Positions of the Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or non-equity option
governed by Section 1256 which substantially diminishes the Fund's risk of loss
with respect to such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of Section 1092 of
the Code, certain tax elections exist for them which reduce or eliminate the
operation of these rules. The 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 the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
A portion of the difference between the issue price of zero coupon securities
and their face value ("original issue discount") is considered to be income to
the Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount imputed income will comprise
a part of the investment company taxable income of the Fund, which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the Fund's
level.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables, or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain options, futures contracts and
forward contracts, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract and
the date of disposition are also treated as ordinary gain or loss. These gains
or losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
The 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 the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
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<PAGE>
The 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 the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Dividend and interest income received by the Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders should consult their tax advisors about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
Performance
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Performance information will be computed separately for each class.
Class A, B and C shares are newly offered and therefore have no available
performance information.
Performance figures for Class A, B and C shares are derived from the historical
performance of Class AARP shares, adjusted to reflect the higher gross total
annual operating expenses applicable to Class A, B and C shares, which may be
higher or lower than those of Class S shares. The performance figures are also
adjusted to reflect the maximum sales charge of 5.75]% for Class A shares and
the maximum current contingent deferred sales charge of 4% for Class B shares
and 1% for Class C shares.
The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of the Class A, B and C shares of the Fund as described
above; they do not guarantee future results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
Average Annual Total Return
Average annual total return is the average annual compound rate of return for
the periods of one year, five years and ten years (or such shorter periods as
may be applicable dating from the commencement of the Fund's operations), all
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by
computing the average annual compound rates of return of a hypothetical
investment over such periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the
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applicable period.
Average Annual Total Returns for the Period Ended
September 30, 2000 ^(1)^(2)^(3)
1 Year 5 Years 10 Years
Scudder Capital Growth Fund - Class 18.43% 21.38% 18.91%
A
Scudder Capital Growth Fund - Class 20.92% 21.60% 18.66%
B
Scudder Capital Growth Fund -- 24.69% 21.88% 18.69%
Class C
(1) Because Class A, Class B and C shares were not introduced until
December 29, 2000, the returns for Class B and C shares for the period
prior to their introduction are based upon the performance of Class
AARP shares as described above.
(2) On July 17, 2000, the Fund was reorganized from AARP Growth Trust into
a newly created series of Investment Trust.
(3) As described above, average annual total return is based on historical
earnings and is not intended to indicate future performance. Average
annual total return for the Fund or class 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, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by computing the cumulative
rates of return of a hypothetical investment over such periods, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $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 September 30, 2000 ^(1)^(2)
1 Year 5 Years 10 Years
Scudder Capital Growth Fund --
Class A 18.43% 163.47% 465.24%
Scudder Capital Growth Fund --
Class B 20.92% 165.89% 453.59%
Scudder Capital Growth Fund --
Class C 24.69% 168.92% 454.97%
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class A, B and C shares for the period prior to
their introduction are based upon the performance of Class AARP shares.
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(2) On July 17, 2000, the Fund was reorganized from AARP Growth Trust into
a newly created series of Investment Trust.
Total Return
Total return is the rate of return on an investment for a specified period of
time calculated in the same manner as cumulative total return. From time to
time, in advertisements, sales literature, and reports to shareholders or
prospective investors, figures relating to the growth in the total net assets of
the Fund apart from capital appreciation will be cited, as an update to the
information in this section, including, but not limited to: net cash flow, net
subscriptions, gross subscriptions, net asset growth, net account growth, and
subscription rates. Capital appreciation generally will be covered by marketing
literature as part of the Fund's and classes' performance data.
Quotations of a Fund's performance are based on historical earnings, show the
performance of a hypothetical investment, and are not intended to indicate
future performance of the Fund. An investor's shares when redeemed may be worth
more or less than their original cost. Performance of a Fund will vary based on
changes in market conditions and the level of the Fund's expenses.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Historical information on the value of the dollar versus foreign currencies may
be used from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which the Fund invests.
From time to time, in advertising and marketing literature, the Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, members of the Board
and officers of the Fund, the Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Fund. In addition, the amount of assets that the Advisor has under
management in various geographical areas may be quoted in advertising and
marketing materials.
The Fund may be advertised as an investment choice in Scudder's college planning
program.
Marketing and other Fund literature may include a description of the potential
risks and rewards associated with an investment in the Fund. The description may
include a "risk/return spectrum" which compares the Fund to other Scudder funds
or broad categories of funds, such as money market, bond or equity funds, in
terms of potential risks and returns. Money market funds are designed to
maintain a constant $1.00 share price and have a fluctuating yield. Share price,
yield and total return of a bond fund will fluctuate. The share price and return
of an equity fund also will fluctuate. The description may also compare the Fund
to bank products, such as certificates of deposit. Unlike mutual funds,
certificates of deposit are insured up to $100,000 by the U.S. government and
offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and money
market funds seek stability of principal, these investments are considered to be
less risky than investments in either bond or equity funds, which may involve
the loss of principal. However, all long-term investments, including investments
in bank products, may be subject to inflation risk, which is the risk of erosion
of the value of an investment as prices increase over a long time period. The
risks/returns associated with an investment in bond or equity funds depend upon
many
29
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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 the Fund,
including reprints of, or selections from, editorials or articles about the
Fund.
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Zurich Scudder Investments, Inc., Two International Place,
Boston, Massachusetts, an investment counsel firm, acts as investment advisor to
the Fund. This organization, the predecessor of which is Scudder, Stevens &
Clark, Inc., ("Scudder") 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
Advisor introduced Scudder International Fund, Inc., the first mutual fund
available in the U.S. investing internationally in securities of issuers in
several foreign countries. The predecessor firm reorganized from a partnership
to a corporation on June 28, 1985. On June 26, 1997, Scudder entered into an
agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder and
Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc. 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. On October
17, 2000, the dual holding company structure of Zurich Financial Services Group,
comprised of Allied Zurich p.l.c. in the United Kingdom and Zurich Allied A.G.
in Switzerland, was unified into a single Swiss holding company, Zurich
Financial Services. The Advisor changed its name from Scudder Kemper
Investments, Inc. to Zurich Scudder Investments, Inc. The Advisor manages the
Fund's daily investment and business affairs subject to the policies established
by the Trust's Board of Trustees. The Trustees have overall responsibility for
the management of the Fund under Massachusetts law.
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.
Pursuant to an investment management agreement with the Fund, the Advisor acts
as the Fund's investmentadvisor, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions.
The principal source of the Advisor's income is professional fees received from
providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today it provides investment counsel
for many individuals and institutions, including insurance companies, industrial
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<PAGE>
corporations, and financial and banking organizations, as well as providing
investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor 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
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world researching hundreds of companies.
In selecting securities in which the Fund may invest, the conclusions and
investment decisions of the Advisor with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Advisor. Investment decisions for the Fund and other clients are
made with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to the Fund.
The present investment management agreement (the "Agreement") was approved by
the Trustees on February 7, 2000. The Agreement was subsequently amended and
restated by the Trustees on October 10, 2000. The Agreement will continue in
effect until September 30, 2001 and from year to year thereafter only if its
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreement or interested persons of the Advisor or the
Fund, cast in person at a meeting called for the purpose of voting on such
approval, and either by a vote of the Trust's Trustees or of a majority of the
outstanding voting securities of the Fund. The Agreement may be terminated at
any time without payment of penalty by either party on sixty days' written
notice and automatically terminates in the event of its assignment.
Under the Agreement, the Advisor regularly provides the Fund with continuing
investment management for the Fund's portfolio consistent with the Fund's
investment objective, policies and restrictions and determines what securities
shall be purchased, held or sold and what portion of the Fund's assets shall be
held uninvested, subject to the Trust's Declaration of Trust, By-Laws, the 1940
Act, the Code and to the Fund's investment objective, policies and restrictions,
and subject, further, to such policies and instructions as the Board of Trustees
of the Trust may from time to time establish. The Advisor 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 Fund.
Under the Agreement, the Advisor renders significant administrative services
(not otherwise provided by third parties) necessary for the Fund's operations as
an open-end investment company including, but not limited to, preparing reports
and notices to the Trustees and shareholders; supervising, negotiating
contractual arrangements with, and monitoring various third-party service
providers to the Fund (such as the Fund's transfer agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of the
Fund's federal, state and local tax returns; preparing and filing the Fund's
federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends; and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
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<PAGE>
The Advisor pays the compensation and expenses of all Trustees, officers and
executive employees (except expenses incurred attending Board and committee
meetings outside New York, New York; Boston, Massachusetts and Chicago,
Illinois) of the Fund affiliated with the Advisor and makes available, without
expense to the Trust, the services of such Trustees, officers and employees of
the Advisor as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities.
For these services the Fund pays the Advisor 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 Advisor 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 the Fund was considered an "AARP Fund", and for
investment management services the Fund paid the Advisor 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 the Fund. The individual Fund fees for AARP Capital Growth
Fund were 0.32%.
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 the Fund: $6,053,108, $7,953,203 and $9,574,273,
respectively.
Under the Agreement the Fund is responsible for all of its other expenses
including: organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the Transfer Agent; 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
Advisor; the cost of printing and distributing reports and notices to
stockholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses of shareholders' meetings, the cost of responding to shareholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees of the Fund with respect thereto.
The Agreement identifies the Advisor as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Scudder Kemper Investments, Inc." and
"Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this
license, the Trust, with respect to the Fund, has the non-exclusive right to use
and sublicense the Scudder name and marks as part of its name, and to use the
Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the Advisor
concerning such Agreement, the Trustees of the Trust who are not "interested
persons" of the Advisor are represented by independent counsel at the Fund's
expense.
The Agreement provides that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss
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resulting from willful misfeasance, bad faith or gross negligence on the part of
the Advisor in the performance of its duties or from reckless disregard by the
Advisor of its obligations and duties under the Agreement. Officers and
employees of the Advisor from time to time may have transactions with various
banks, including the Fund's custodian bank. It is the Advisor's opinion that the
terms and conditions of those transactions which have occurred were not
influenced by existing or potential custodial or other Fund relationships. The
Advisor may serve as advisor to other funds with investment objectives and
policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the Fund as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of Shares of the Fund.
The term Scudder Investments is the designation given to the services provided
by Zurich Scudder Investments, Inc. and its affiliates to the Scudder Family of
Funds.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor 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 Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
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 advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (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 Fund, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Trust and employees of the Advisor and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Advisor's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Advisor'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
Advisor's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, is the principal underwriter and distributor for the Class A, B and C
shares of the Fund and acts as agent of the Fund in the continuous offering of
its Shares. KDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. The Fund pays
the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI, as principal underwriter, pays for
the printing and distribution of copies thereof used in connection with the
offering of Shares to prospective investors. KDI also pays for supplementary
sales literature and advertising costs.
The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of the Fund, including the Trustees who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The
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agreement automatically terminates in the event of its assignment and may be
terminated for a class at any time without penalty by the Fund or by KDI upon 60
days' notice. Termination by the Fund with respect to a class may be by vote of
a majority of the Board of Trustees or a majority of the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the distribution agreement or a "majority of the outstanding voting
securities" of the class of the Fund, as defined under the 1940 Act. The
distribution agreement may not be amended for a class to increase the fee to be
paid by the Fund with respect to such class without approval by a majority of
the outstanding voting securities of such class of the Fund, and all material
amendments must in any event be approved by the Board of Trustees in the manner
described above with respect to the continuation of the distribution agreement.
Class B Shares and Class C Shares. The Fund has adopted a plan under Rule 12b-1
(the "Rule 12b-1 Plan") that provides for fees payable as an expense of the
Class B shares and Class C shares that are used by KDI to pay for distribution
and services for those classes. Because 12b-1 fees are paid out of fund assets
on an ongoing basis they will, over time, increase the cost of an investment and
cost more than other types of sales charges.
Rule 12b-1 Plan. Since the distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class B shares. This fee is accrued daily as an
expense of Class B shares. KDI also receives any contingent deferred sales
charges. KDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class C shares. This fee is accrued daily as an
expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or the Fund. KDI also receives any
contingent deferred sales charges.
Administrative Fee. The Fund has entered into an administrative services
agreement with Scudder Kemper (the "Administration Agreement"), pursuant to
which Scudder Kemper will provide or pay others to provide substantially all of
the administrative services required by the Fund (other than those provided by
Scudder Kemper under its investment management agreement with the Fund, as
described above) in exchange for the payment by the Fund of an administrative
services fee (the "Administrative Fee") of 0.325 % for Class A, 0.375% for Class
B and 0.350% for Class C. One effect of these arrangements is to make the 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 Fund
pursuant to separate agreements with the Fund. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Fund and maintains its accounting records. Kemper Service Company is the
transfer, shareholder servicing and dividend-paying agent for the shares of the
Fund. As custodian, State Street Bank and Trust Company holds the portfolio
securities of the Fund, pursuant to a custodian agreement.
PricewaterhouseCoopers LLP audits the financial statements of the Fund and
provides other audit, tax, and related services. Dechert acts as general counsel
for the Fund.
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<PAGE>
Scudder Kemper will pay the Service Providers for the provision of their
services to the Fund and will pay other Fund's expenses, including insurance,
registration, printing and postage fees. In return, the Fund will pay Scudder
Kemper an Administrative Fee.
The Administration Agreement has an initial term of three years, subject to
earlier termination by the Fund's Board. The fee payable by the Fund to Scudder
Kemper pursuant to the Administration Agreement is reduced by the amount of any
credit received from the Fund's custodian for cash balances.
Certain expenses of the Fund will not be borne by Scudder Kemper under the
Administration Agreement, 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, the Fund will
continue to pay the fees required by its investment management agreement with
Scudder Kemper.
For the Fund, for the period July 17, 2000 through September 30, 2000, the
Administration Agreement expense amounted to $1,572,375, of which $642,634 was
unpaid at September 30, 2000.
Administrative Services. Administrative services are provided to the Fund on
behalf of Class A, B and C shareholders under an administrative services
agreement ("administrative agreement") with KDI. KDI bears all its expenses of
providing services pursuant to the administrative agreement between KDI and the
Fund, including the payment of service fees. The Fund pays KDI an administrative
services fee, payable monthly, at an annual rate of up to 0.25% of the average
daily net assets of each class.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms") that provide services and facilities
for their customers or clients who are investors in the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A Shares, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to 0.25% of the net assets in Fund accounts that it maintains
and services attributable to Class A Shares, commencing with the month after
investment. With respect to Class B and Class C Shares, KDI currently advances
to firms the first-year service fee at a rate of up to 0.25% of the purchase
price of such Shares. For periods after the first year, KDI currently intends to
pay firms a service fee at a rate of up to 0.25% (calculated monthly and paid
quarterly) of the net assets attributable to Class B and Class C Shares
maintained and serviced by the firm. After the first year, a firm becomes
eligible for the quarterly service fee and the fee continues until terminated by
KDI or the Fund. Firms to which service fees may be paid include affiliates of
KDI. In addition KDI may, from time to time, from its own resources pay certain
firms additional amounts for ongoing administrative services and assistance
provided to their customers and clients who are shareholders of the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of 0.25%
based upon Fund assets in accounts for which a firm provides administrative
services and at the annual rate of 0.15% based upon Fund assets in accounts for
which there is no firm of record (other than KDI) listed on the Fund's records.
The effective administrative services fee rate to be charged against all assets
of the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services. The Board of Trustees of the Fund, in its discretion,
may approve basing the fee to KDI at the annual rate of 0.25% on all Fund assets
in the future.
Certain trustees or officers of the Fund are also directors or officers of the
Advisor or KDI, as indicated under "Officers and Trustees."
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, a subsidiary of the Advisor,
computes net asset value for the Fund. Prior to the implementation of the
Administration Agreement, the Fund paid SFAC an annual fee equal to 0.025% on
the first
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<PAGE>
$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 the 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 the Fund $129,318 and $110,317, respectively. For the
fiscal year ended September 30, 2000, SFAC's fee was $142,859, of which $6,956
was unpaid at September 30, 2000.
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company (the "Custodian"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian has custody of all securities and cash of the Fund held
outside the United States. The Custodian attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Fund. Kemper Service Company ("KSVC"), 811 Main Street, Kansas City,
Missouri 64105-2005, an affiliate of the Advisor, is the Fund's transfer agent,
dividend-paying agent and shareholder service agent for the Fund's Class A, B
and C shares. Prior to the implementation of the Administration Agreement, KSVC
received as transfer agent, annual account fees of $5 per account, transaction
and maintenance charges, annual fees associated with the contingent deferred
sales charge (Class B shares only) and out-of-pocket expense reimbursement.
Independent Accountants and Reports to Shareholders. The financial highlights of
the Fund included in the Fund's prospectus and the Financial Statements
incorporated by reference in this Statement of Additional Information have been
so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. PricewaterhouseCoopers LLP audits the financial
statements of the Fund and provides other audit, tax and related services.
Shareholders will receive annual audited financial statements and semi-annual
unaudited financial statements.
PORTFOLIO TRANSACTIONS
Brokerage Commissions. Allocation of brokerage may be placed by the Advisor.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for the Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Adviser seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others. The Adviser
routinely reviews commission rates, execution and settlement services performed
and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Advisor is authorized when placing portfolio
36
<PAGE>
transactions, if applicable, for the Fund to pay a brokerage commission in
excess of that which another broker might charge for executing the same
transaction on account of execution services and the receipt of research
services. The Advisor 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 Advisor or the Fund in
exchange for the direction by the Advisor of brokerage transactions to the
broker/dealer. These arrangements regarding receipt of research services
generally apply to equity security transactions. The Advisor will not place
orders with a broker/dealer on the basis that the broker/dealer has or has not
sold shares of the Fund. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Advisor, it is the opinion
of the Advisor that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than the Fund and not all such information is used by
the Advisor in connection with the Fund. Conversely, such information provided
to the Advisor by broker/dealers through whom other clients of the Advisor
effect securities transactions may be useful to the Advisor in providing
services to the Fund.
The Trustees of the Fund review, from time to time, whether the recapture for
the benefit of the Fund of some portion of the brokerage commissions or similar
fees paid by the Fund on portfolio transactions is legally permissible and
advisable.
For each year of the fiscal years ended September 30, 1998, 1999 and 2000, the
Fund (formerly AARP Capital Growth Fund) paid total brokerage commissions of
$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 Advisor. 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.
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<PAGE>
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 year ended September 30, 2000, $_________ (____%) 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 Advisor. The amount of such transactions
aggregated $___________, of which $___________ (____% 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
The Fund's (formerly AARP Capital Growth Fund) 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, 1999 and 2000 was 68.10% and 66%.
A higher rate involves greater brokerage and transaction expenses to the Fund
and may result in the realization of net capital gains, which would be taxable
to shareholders when distributed. Purchases and sales are made for the Fund's
portfolio whenever necessary, in management's opinion, to meet the Fund's
objective.
NET ASSET VALUE
The net asset value of shares of each class of the Fund is computed as of the
close of regular trading on the Exchange on each day the Exchange is open for
trading. The Exchange is scheduled to be closed on the following holidays: New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. Net asset value per share of each class of the
Fund is determined by dividing the value of the total assets attributable to
shares of a class of the Fund, less all liabilities attributable to shares of a
class, by the total number of shares outstanding of that class. The per share
net asset value of the Class B and Class C Shares of the Fund will generally be
lower than that of the Class A Shares of the Fund because of the higher expenses
borne by the Class B and Class C Shares.
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. Lacking
a Calculated Mean quotation, the security is valued at the most recent bid
quotation as of the Value Time.
Debt securities, other than short-term securities, are valued at prices supplied
by the Fund's pricing agent(s) which reflect broker/dealer supplied valuations
and electronic data processing techniques. Short-term securities with remaining
maturities of sixty days or less are valued by the amortized cost method, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the Advisor 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
38
<PAGE>
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 Fund's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Fund Shares are sold at their public offering price, which is the net asset
value per such shares next determined after an order is received in proper form
plus, with respect to Class A Shares, an initial sales charge. The minimum
initial investment for Class A, B or C is $1,000 and the minimum subsequent
investment is $100 but such minimum amounts may be changed at any time. The Fund
may waive the minimum for purchases by trustees, directors, officers or
employees of the Fund or the Advisor and its affiliates. An order for the
purchase of Shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
PURCHASE OF SHARES
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution/services fees. These differences are summarized in the table below.
Each class has distinct advantages and disadvantages for different investors,
and investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees (1)
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
39
<PAGE>
<S> <C> <C> <C>
Class A Maximum initial sales charge of 0.25% Initial sales charge
5.75% of the public offering waived or reduced for
price(2) certain purchases
Class B Maximum contingent deferred sales 1.00% Shares convert to Class A
charge of 4% of redemption shares six years after
proceeds; declines to zero after issuance
six years
Class C Contingent deferred sales charge of 1.00% No conversion feature
1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
(1) There is a service fee of 0.25% for each class.
(2) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales
charge if redeemed within one year of purchase and a 0.50% contingent
deferred sales charge if redeemed within the second year of purchase.
The minimum initial investment for each of Class A, B and C of the Fund is
$1,000 and the minimum subsequent investment is $100. The minimum initial
investment for an Individual Retirement Account is $250 and the minimum
subsequent investment is $50. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of As a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over .00** .00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI, the
Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has
40
<PAGE>
sales agreements, KDI may re-allow to dealers up to the full applicable sales
charge, as shown in the above table, during periods and for transactions
specified in such notice and such re-allowances may be based upon attainment of
minimum sales levels. During periods when 90% or more of the sales charge is
re-allowed, such dealers may be deemed to be underwriters as that term is
defined in the Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Scudder
Kemper Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" totals at least $1,000,000 including purchases of Class A shares
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features"; or (b) a
participant-directed qualified retirement plan described in Code Section 401(a),
a participant-directed non-qualified deferred compensation plan described in
Code Section 457 or a participant-directed qualified retirement plan described
in Code Section 403(b)(7) which is not sponsored by a K-12 school district,
provided in each case that such plan has not less than 200 eligible employees
(the "Large Order NAV Purchase Privilege"). Redemption within two years of the
purchase of shares purchased under the Large Order NAV Purchase Privilege may be
subject to a contingent deferred sales charge. See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Large Order NAV Purchase
Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer-sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
cumulative amount invested by the purchaser in the Fund and other Scudder Kemper
Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases," including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features referred to above. The privilege of
purchasing Class A shares of the Fund at net asset value under the Large Order
NAV Purchase Privilege is not available if another net asset value purchase
privilege also applies.
Class A shares of the Fund or of any other Scudder Kemper Mutual Fund listed
under "Special Features -- Class A Shares -- Combined Purchases" may be
purchased at net asset value in any amount by members of the plaintiff class in
the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten-year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may in its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the Fund at net asset value under this privilege is not available if another net
asset value purchase privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Scudder Kemper Mutual Funds
pursuant to personal services contracts with KDI, for themselves or members of
their families. KDI in its discretion may compensate financial services firms
for sales of Class A shares under this privilege at a commission rate of 0.50%
of the amount of Class A shares purchased.
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<PAGE>
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, employees (including retirees) and sales representatives of the Fund,
its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) any trust, pension,
profit-sharing or other benefit plan for only such persons; (d) persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
programs described in the prospectuses of such trusts that have such programs.
Class A shares of the Fund may be sold at net asset value through certain
investment advisors registered under the 1940 Act and other financial services
firms acting solely as agent for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
advisor or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another investment company, or
to shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share of the Class B shares. The purpose of the conversion feature is to relieve
holders of Class B shares from the distribution services fee when they have been
outstanding long enough for KDI to have been compensated for distribution
related expenses. For purposes of conversion to Class A
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<PAGE>
shares, shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's Fund
account will be converted to Class A shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares." KDI currently advances to firms the first year distribution fee
at a rate of 0.75% of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Purchase of Class I Shares. Class I shares are offered at net asset value
without an initial sales charge and are not subject to a contingent deferred
sales charge or a Rule 12b-1 distribution fee. Also, there is no administration
services fee charged to Class I shares. As a result of the relatively lower
expenses for Class I shares, the level of income dividends per share (as a
percentage of net asset value) and, therefore, the overall investment value,
will typically be higher for Class I shares than for Class A, Class B, or Class
C shares.
Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Zurich
Scudder Investments, Inc. and its affiliates and rollover accounts from those
plans; (2) the following investment advisory clients of Zurich Scudder and its
investment advisory affiliates that invest at least $1 million in a Fund:
unaffiliated benefit plans, such as qualified retirement plans (other than
individual retirement accounts and self-directed retirement plans); unaffiliated
banks and insurance companies purchasing for their own accounts; and endowment
funds of unaffiliated non-profit organizations; (3) investment-only accounts for
large qualified plans, with at least $50 million in total plan assets or at
least 1000 participants; (4) trust and fiduciary accounts of trust companies and
bank trust departments providing fee based advisory services that invest at
least $1 million in a Fund on behalf of each trust; (5) policy holders under
Zurich-American Insurance Group's collateral investment program investing at
least $200,000 in a Fund; and (6) investment companies managed by Zurich Scudder
that invest primarily in other investment companies. Class I shares currently
are available for purchase only from Kemper Distributors, Inc. ("KDI"),
principal underwriter for the Fund, and, in the case of category (4) above,
selected dealers authorized by KDI. Share certificates are not available for
Class I shares.
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this decision, investors should review their particular circumstances carefully
with their financial representative. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than six years might consider Class B shares. Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might consider Class C shares. KDI has established the following procedures
regarding the purchase of Class A, Class B and Class C shares. These procedures
do not reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $500,000 or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value where the combined
subaccount value in a Fund or other Kemper Mutual Funds listed under "Special
Features - Class A Shares - Combined Purchases" is in excess of $1 million for
Class B shares or $5 million for Class C shares including purchases pursuant to
the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features." KemFlex Plans that on May 1, 2000 have in
excess of $1 million invested in Class B shares of Kemper Mutual Funds, or have
in excess of $850,000 invested in Class B shares of Kemper Mutual Funds and are
able to qualify for the purchase of Class A shares at net asset value (e.g.,
pursuant to a Letter of Intent), will have future investments made in Class A
shares and will have the option to convert their
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holdings in Class B shares to Class A shares free of any contingent deferred
sales charge on May 1, 2002. For more information about the three sales
arrangements, consult your financial representative or the Shareholder Service
Agent. Financial services firms may receive different compensation depending
upon which class of shares they sell. Class I shares are available only to
certain institutional investors.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. KDI does not believe
that termination of a relationship with a bank would result in any material
adverse consequences to the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to tome, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other Funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of the Fund next determined after receipt in good order
by KDI of the order accompanied by payment. However, orders received by dealers
or other financial services firms prior to the determination of net asset value
(see "Net Asset Value") and received in good order by KDI prior to the close of
its business day will be confirmed at a price based on the net asset value
effective on that day ("trade date"). The Fund reserves the right to determine
the net asset value more frequently than once a day if deemed desirable. Dealers
and other financial services firms are obligated to transmit orders promptly.
Collection may take significantly longer for a check drawn on a foreign bank
than for a check drawn on a domestic bank. Therefore, if an order is accompanied
by a check drawn on a foreign bank, funds must normally be collected before
shares will be purchased. See "Purchase and Redemption of Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders for any reason. Also, from time to
time, the Fund may temporarily suspend the offering of any
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class of its shares to new investors. During the period of such suspension,
persons who are already shareholders of such class of such Fund normally are
permitted to continue to purchase additional shares of such class and to have
dividends reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
Redemption or Repurchase of Shares
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Scudder Kemper Mutual Funds, Attention: Redemption
Department, P.O. Box 219153, Kansas City, Missouri 64141-9153. When certificates
for shares have been issued, they must be mailed to or deposited with the
Shareholder Service Agent, along with a duly endorsed stock power and
accompanied by a written request for redemption. Redemption requests and a stock
power must be endorsed by the account holder with signatures guaranteed by a
commercial bank, trust company, savings and loan association, federal savings
bank, member firm of a national securities exchange or other eligible financial
institution. The redemption request and stock power must be signed exactly as
the account is registered including any special capacity of the registered
owner. Additional documentation may be requested, and a signature guarantee is
normally required, from institutional and fiduciary account holders, such as
corporations, custodians (e.g., under the Uniform Transfers to Minors Act),
executors, administrators, trustees or guardians.
The redemption price for shares of a class of the Fund will be the net asset
value per share of that class of the Fund next determined following receipt by
the Shareholder Service Agent of a properly executed request with any required
documents as described above. Payment for shares redeemed will be made in cash
as promptly as practicable but in no event later than seven days after receipt
of a properly executed request accompanied by any outstanding share certificates
in proper form for transfer. When the Fund is asked to redeem shares for which
it may not have yet received good payment (i.e., purchases by check,
EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of redemption
proceeds until it has determined that collected funds have been received for the
purchase of such shares, which will be up to 10 days from receipt by the Fund of
the purchase amount. The redemption within two years of Class A shares purchased
at net asset value under the Large Order NAV Purchase Privilege may be subject
to a contingent deferred sales charge (see "Purchase of Shares -- Initial Sales
Charge Alternative -- Class A Shares"), the redemption of Class B shares within
six years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge -- Class B Shares" below), and the redemption of Class C
shares within the first year following purchase may be subject to a contingent
deferred sales charge (see "Contingent Deferred Sales Charge -- Class C Shares"
below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $800 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer-sponsored employee benefit plans
using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of
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fraudulent or unauthorized telephone requests pursuant to these privileges
unless the Fund or its agents reasonably believe, based upon reasonable
verification procedures, that the telephonic instructions are genuine. The
shareholder will bear the risk of loss, including loss resulting from fraudulent
or unauthorized transactions, so long as reasonable verification procedures are
followed. Verification procedures include recording instructions, requiring
certain identifying information before acting upon instructions and sending
written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
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Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the discretionary commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
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Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
(g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Scudder Kemper Mutual Funds and whose dealer of
record has waived the advance of the first year administrative service and
distribution fees applicable to such shares and agrees to receive such fees
quarterly, and (g) redemption of shares purchased through a dealer-sponsored
asset allocation program maintained on an omnibus record-keeping system provided
the dealer of record had waived the advance of the first year administrative
services and distribution fees applicable to such shares and has agreed to
receive such fees quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of 3% ($300) because it was in the second year after the purchase was
made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in March
1998 will be eligible for the second year's charge if redeemed on or after March
1, 1999. In the event no specific order is requested when redeeming shares
subject to a contingent deferred sales charge, the redemption will be made first
from shares representing reinvested dividends and then from the earliest
purchase of shares. KDI receives any contingent deferred sales charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Scudder Kemper Mutual Fund listed under "Special Features --
Class A Shares -- Combined Purchases" (other than shares of the Kemper Cash
Reserves Fund purchased directly at net asset value) may reinvest up to the full
amount redeemed at net asset value at the time of the reinvestment in Class A
shares of the Fund or of the other listed Scudder Kemper Mutual Funds. A
shareholder of the Fund or other Scudder Kemper Mutual Funds who redeems Class A
shares purchased under the Large Order NAV Purchase Privilege (see "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares") or Class B shares
or Class C shares and incurs a contingent deferred sales charge may reinvest up
to the full amount redeemed at net asset value at the time of the reinvestment,
in the same class of shares as the case may be, of the Fund or of other Scudder
Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge schedule.
Also, a holder of Class B shares who has redeemed shares may reinvest up to the
full amount redeemed, less any applicable contingent deferred sales charge that
may have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Fund or of the other Scudder Kemper Mutual Funds listed
under "Special Features -- Class A Shares -- Combined Purchases." Purchases
through the reinvestment privilege are subject to the minimum investment
requirements applicable to the shares being purchased and may only be made for
Scudder Kemper Mutual Funds available for sale in the shareholder's state of
residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
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Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same value used to
determine net asset value, and selecting the securities in such manner as the
Board of Trustees may deem fair and equitable. If such a distribution occurred,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Trust has elected, however, to be governed by Rule 18f-1
under the 1940 Act, as a result of which the Fund is obligated to redeem shares,
with respect to any one shareholder during any 90-day period, solely in cash up
to the lesser of $250,000 or 1% of the net asset value of a Share at the
beginning of the period.
Special Features
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Strategic Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash
Reserves Fund (available only upon exchange or conversion from Class A shares of
another Scudder Kemper Mutual Fund), Kemper U.S. Mortgage Fund, Kemper
Short-Intermediate Government Fund, Kemper Value Plus Growth Fund, Kemper
Horizon Fund, Kemper New Europe Fund, Inc., Kemper Asian Growth Fund, Kemper
Aggressive Growth Fund, Kemper Global/International Series, Inc., Kemper Equity
Trust and Kemper Securities Trust, Scudder 21st Century Growth Fund, The Japan
Fund, Inc., Scudder High Yield Tax Free Fund, Scudder Pathway Series -Moderate
Portfolio, Scudder Pathway Series - Conservative Portfolio, Scudder Pathway
Series - Growth Portfolio, Scudder International Fund, Scudder Growth and Income
Fund, Scudder Large Company Growth Fund, Scudder Health Care Fund, Scudder
Technology Innovation Fund, Global Discovery Fund, Value Fund, and Classic
Growth Fund ("Scudder Kemper Mutual Funds"). Except as noted below, there is no
combined purchase credit for direct purchases of shares of Zurich Money Funds,
Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account
Trust, Investor's Municipal Cash Fund or Investors Cash Trust ("Money Market
Funds"), which are not considered a "Scudder Kemper Mutual Fund" for purposes
hereof. For purposes of the Combined Purchases feature described above as well
as for the Letter of Intent and Cumulative Discount features described below,
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent may include: (a)
Money Market Funds as "Kemper Mutual Funds", (b) all classes of shares of any
Scudder Kemper Mutual Fund and (c) the value of any other plan investments, such
as guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Scudder Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Scudder Kemper Mutual Funds held of record as of the initial purchase
date under the Letter as an "accumulation credit" toward the completion of the
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Letter, but no price adjustment will be made on such shares. Only investments in
Class A shares are included for this privilege.
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Scudder Kemper Mutual Funds (computed at the maximum
offering price at the time of the purchase for which the discount is applicable)
already owned by the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Scudder
Kemper Mutual Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Scudder Kemper Mutual Funds and shares of
the Money Market Funds listed under "Special Features -- Class A Shares --
Combined Purchases" above may be exchanged for each other at their relative net
asset values. Shares of Money Market Funds and the Kemper Cash Reserves Fund
that were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. Series of
Kemper Target Equity Fund are available on exchange only during the Offering
Period for such series as described in the applicable prospectus. Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund and Investors Cash Trust are available on exchange
but only through a financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Scudder Kemper Mutual
Fund or a Money Market Fund under the exchange privilege described above without
paying any contingent deferred sales charge at the time of exchange. If the
Class A shares received on exchange are redeemed thereafter, a contingent
deferred sales charge may be imposed in accordance with the foregoing
requirements provided that the shares redeemed will retain their original cost
and purchase date for purposes of calculating the contingent deferred sales
charge.
Class B Shares. Class B shares of the Fund and Class B shares of any other
Scudder Kemper Mutual Fund listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class B shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of calculating the
contingent deferred sales charge that may be imposed upon the redemption of the
Class B shares received on exchange, amounts exchanged retain their original
cost and purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Scudder Kemper Mutual Fund listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class C shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of determining
whether there is a contingent deferred sales charge that may be imposed upon the
redemption of the Class C shares received by exchange, they retain the cost and
purchase date of the shares that were originally purchased and exchanged.
General. Shares of a Scudder Kemper Mutual Fund with a value in excess of
$1,000,000 (except Kemper Cash Reserves Fund) acquired by exchange through
another Scudder Kemper Mutual Fund, or from a Money Market Fund, may not be
exchanged thereafter until they have been owned for 15 days (the "15-Day Hold
Policy"). In addition, shares of a Scudder Kemper Mutual Fund with a value of
$1,000,000 or less (except Kemper Cash Reserves Fund) acquired by exchange from
another Scudder Kemper Mutual Fund, or from a money market fund, may not be
exchanged thereafter until they have been owned for 15 days, if, in the
Advisor's judgment, the exchange activity may have an adverse effect on the
fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Scudder Kemper Mutual Fund and
therefore may be subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including, without limitation, accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged
50
<PAGE>
must at least equal the minimum investment requirement of the Scudder Kemper
Mutual Fund into which they are being exchanged. Exchanges are made based on
relative dollar values of the shares involved in the exchange. There is no
service fee for an exchange; however, dealers or other firms may charge for
their services in effecting exchange transactions. Exchanges will be effected by
redemption of shares of the fund held and purchase of shares of the other fund.
For federal income tax purposes, any such exchange constitutes a sale upon which
a gain or loss may be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis of
such shares. Shareholders interested in exercising the exchange privilege may
obtain prospectuses of the other Funds from dealers, other firms or KDI.
Exchanges may be accomplished by a written request to Kemper Service Company,
Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri
64141-6557, or by telephone if the shareholder has given authorization. Once the
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048, subject to the limitations on liability under
"Redemption or Repurchase of Shares -- General." Any share certificates must be
deposited prior to any exchange of such shares. During periods when it is
difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to use the telephone exchange privilege. The exchange privilege is not
a right and may be suspended, terminated or modified at any time. Exchanges may
only be made for Funds that are available for sale in the shareholder's state of
residence. Currently, Tax-Exempt California Money Market Fund is available for
sale only in California and Investors Municipal Cash Fund is available for sale
only in certain states. Except as otherwise permitted by applicable regulations,
60 days' prior written notice of any termination or material change will be
provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Scudder Kemper Mutual Fund or Money Market Fund may authorize the
automatic exchange of a specified amount ($50 minimum) of such shares for shares
of the same class of another such Scudder Kemper Mutual Fund. If selected,
exchanges will be made automatically until the shareholder or the Scudder Kemper
Mutual Fund terminates the privilege. Exchanges are subject to the terms and
conditions described above under "Exchange Privilege," except that the $1,000
minimum investment requirement for the Scudder Kemper Mutual Fund acquired on
exchange is not applicable. This privilege may not be used for the exchange of
shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated ClearingHouse System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (minimum $50
and maximum $50,000) from the shareholder's account at a bank, savings and loan
or credit union into the shareholder's Fund account. By enrolling in Bank Direct
Deposit, the shareholder authorizes the Fund and its agents to either draw
checks or initiate Automated ClearingHouse debits against the designated account
at a bank or other financial institution. This privilege may be selected by
completing the appropriate section on the Account Application or by contacting
the Shareholder Service Agent for appropriate forms. A shareholder may terminate
his or her Plan by sending written notice to Kemper Service Company, P.O. Box
419415, Kansas City, Missouri 64141-6415. Termination by a shareholder will
become effective within thirty days after the Shareholder Service Agent has
received the request. The Fund may immediately terminate a shareholder's Plan in
the event that any item is unpaid by the shareholder's financial institution.
The Fund may terminate or modify this privilege at any time.
51
<PAGE>
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $50. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts
("IRAs"). This includes Savings Incentive Match Plan for Employees of
Small Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP")
IRA accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to
employees of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be
adopted by employers. The maximum annual contribution per participant
is the lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the Exchange is closed other than customary
weekend and holiday closings or during any period in which trading on the
Exchange is restricted, (b) during any period when an emergency exists as a
result of which (i) disposal of the Fund's investments is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund to determine
the value of its net assets, or (c) for such other periods as the SEC may by
order permit for the protection of the Fund's shareholders.
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B Shares and
not Class A Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In
52
<PAGE>
that event, no further conversions of Class B Shares would occur, and Shares
might continue to be subject to the distribution services fee for an indefinite
period that may extend beyond the proposed conversion date as described in the
prospectus.
Officers and Trustees
The officers and trustees of the Trust, their ages, their principal occupations
and their affiliations, if any, with the Advisor, and Kemper Distributors, Inc.,
are as follows:
<TABLE>
<CAPTION>
---------------------------------- ----------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ -------------------- ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Linda C. Coughlin (48)+* Trustee and President Managing Director of Zurich Scudder Director and Vice
Investments, Inc. Chairman
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board, Inc.
Chapel Hill, NC (not-for-profit business research
organization)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Keith R. Fox (45) Trustee Private Equity Investor, General --
10 East 53rd Street Partner, Exeter Group of Funds
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)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
53
<PAGE>
---------------------------------- ----------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ -------------------- ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place 23rd Floor Capital, LLC (venture capital firm)
Boston, MA 02108
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Thomas V. Bruns (43)# Vice President Managing Director of Zurich Scudder President
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
William F. Glavin (41)# Vice President Managing Director of Zurich Scudder Managing Director
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
James E. Masur (40)+ Vice President Senior Vice President of Zurich __
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Kathryn L. Quirk (47)+ Vice President and Managing Director of Zurich Scudder Director, Secretary,
Assistant Secretary Investments, Inc. Chief Legal Officer and
Vice President
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Howard S. Schneider (43)# Vice President Managing Director of Zurich Scudder __
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
John R. Hebble (42)+ Treasurer Senior Vice President of Zurich __
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Zurich
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Zurich __
Scudder Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
John Millette (37)+ Vice President and Vice President of Zurich Scudder --
Secretary Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
54
<PAGE>
ADDITIONAL OFFICERS
-------------------
------------------------------------ --------------------- --------------------------------------- -------------------------
James M. Eysenbach (38) @ Vice President Managing Director of Zurich Scudder --
Investments, Inc.
------------------------------------ --------------------- --------------------------------------- -------------------------
------------------------------------ --------------------- --------------------------------------- -------------------------
William F. Gadsden (45) ++ Vice President Managing Director of Zurich Scudder --
Investments, Inc.
------------------------------------ --------------------- --------------------------------------- -------------------------
------------------------------------ --------------------- --------------------------------------- -------------------------
Valerie F. Malter (41)++ Vice President Managing Director of Zurich Scudder --
Investments, Inc.
------------------------------------ --------------------- --------------------------------------- -------------------------
------------------------------------ --------------------- --------------------------------------- -------------------------
Kathleen T. Millard (39)+ Vice President Managing Director of Zurich Scudder --
Investments, Inc.
------------------------------------ --------------------- --------------------------------------- -------------------------
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the
Fund and its counsel to be persons who are "interested
persons" of the Advisor or of the Trust, within the meaning of
the 1940 Act.
** 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
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
The Trustees and Officers of the Trusts also serve in similar capacities with
respect to other Scudder Funds.
[TO BE UPDATED: INSERTION OF SHAREHOLDING INFORMATION]
<TABLE>
<CAPTION>
----------------------- ------------------------------------- ----------------- ------------- ---------------
Fund Shareholder Shares Class Percentage
----------------------- ------------------------------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
Elgin National Industries 27,793 S 6.75%
Capital Growth Master Savings and Profit Sharing
--------------
2001 Butterfield Road
Downers Grove, IL 60515
----------------------- ------------------------------------- ----------------- ------------- ---------------
Intevac Inc. 401K/Profit Sharing 40,677 S 9.88%
Scudder Kemper Inv., Trustee
3560 Bassett Street
Santa Clare, CA 95054
----------------------- ------------------------------------- ----------------- ------------- ---------------
Element 401K/Profit Sharing 21,881 S 19.77%
Scudder Kemper Inv., Trustee
500 Canal View Blvd.
Rochester, NY 14623
----------------------- ------------------------------------- ----------------- ------------- ---------------
State Street Bank & Trust Co. 22,492 S 5.46%
Custodian for AARP Mgd. Investment
Portfolio: Diversified Income
One Heritage Drive
Quincy, MA 02171
----------------------- ------------------------------------- ----------------- ------------- ---------------
State Street Bank & Trust Co. 212,080 S 51.52%
Custodian for AARP Mgd. Investment
Portfolio: Diversified Growth
One Heritage Drive
Quincy, MA 02171
----------------------- ------------------------------------- ----------------- ------------- ---------------
55
<PAGE>
----------------------- ------------------------------------- ----------------- ------------- ---------------
Element K 401K/Profit Sharing 21,626 S 5.25%
Scudder Kemper Inv., Trustee
500 Canal View Blvd.
Rochester, NY 14623
----------------------- ------------------------------------- ----------------- ------------- ---------------
Supply North Central/401K Profit 21,136 S 5.13%
Sharing
Scudder Kemper Inv., Trustee
5161 Jackson Road
Ann Arbor, MI 48103
----------------------- ------------------------------------- ----------------- ------------- ---------------
</TABLE>
Remuneration
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees of the Trust is responsible for the general oversight of
the Fund's business. A majority of the Board's members are not affiliated with
Zurich Scudder Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund of the Trust and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to Scudder and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by Scudder and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee of Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Fund's independent public accountants and
reviews accounting policies and controls. In addition, Independent Trustees from
time to time have established and served on task forces and subcommittees
focusing on particular matters such as investment, accounting and shareholder
service issues.
Compensation of Officers and Trustees of the Fund
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 service. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' conferences or service on special
trustee task forces or subcommittees. Independent Trustees do not receive any
employee benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation.
The Independent Trustees also serve in the same capacity for other funds managed
by the Advisor. These funds differ broadly in type and complexity and in some
cases have substantially different Trustee fee schedules. The following table
shows the aggregate compensation received by each Independent Trustee during
1999 from each Trust and from all of the Scudder funds as a group.
<TABLE>
------------------------------ ---------------------- --------------------------
NAME INVESTMENT TRUST* ALL SCUDDER FUNDS
------------------------------ ---------------------- --------------------------
56
<PAGE>
------------------------------ ---------------------- --------------------------
NAME INVESTMENT TRUST* ALL SCUDDER FUNDS
------------------------------ ---------------------- --------------------------
<S> <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>
* Investment Trust consists of 7 funds: Classic Growth Fund, Scudder
Capital Growth Fund, Scudder Dividend and Growth Fund, Scudder Growth
and Income Fund, Scudder Large Company Growth Fund, Scudder S&P 500
Index Fund, and Scudder Small Company Stock Fund.
** Newly elected Trustee. On July 13, 2000, shareholders of the Fund
elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly-constituted Board of Trustees.
+ 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 Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
SHAREHOLDER RIGHTS
The Fund is a 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 March 6, 1991, from Scudder Growth
and Income Fund, and on June 10, 1998 from Scudder Investment Trust. The Fund
changed its name from AARP Capital Growth Fund on July 17, 2000.
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 seven series: Classic Growth Fund, Scudder Capital Growth Fund,
Scudder Dividend and Growth Fund, Scudder Growth and Income Fund, Scudder Large
Company Growth Fund, Scudder S&P 500 Index Fund, and Scudder Small Company Stock
Fund. The Fund is further divided into six classes of shares: Class AARP, Class
S, Class A, Class B, Class C and Class I.
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 each series of the Fund has equal rights with each other share of
that series as to voting, dividends and liquidations. All shares issued and
outstanding will be fully paid and nonassessable by the Trust, and redeemable as
described in this Statement of Additional Information and in each series'
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
57
<PAGE>
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 that 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 of the Fund.
The Trust's Declaration of Trust provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law and that the Fund will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the 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 the 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.
The Trust's Board of Trustees supervises the Fund's activities. The Trust
adopted a plan pursuant to Rule 18f-3 under the 1940 Act (the "Plan") to permit
the Trust to establish a multiple class distribution system for the Funds.
Under the Plan, each class of shares will represent interests in the same
portfolio of investments of the Series, and be identical in all respects to each
other class, except as set forth below. The only differences among the various
classes of shares of the Series will relate solely to: (a) different
distribution fee payments or service fee payments associated with any Rule 12b-1
Plan for a particular class of shares and any other costs relating to
implementing or amending such Rule 12b-1 Plan (including obtaining shareholder
approval of such Rule 12b-1 Plan or any amendment thereto) which will be borne
solely by shareholders of such class; (b) different service fees; (c) different
account minimums; (d) the bearing by each class of its Class Expenses, as
defined in Section 2(b) below; (e) the voting rights related to any Rule 12b-1
Plan affecting a specific class of shares; (f) separate exchange privileges; (g)
different conversion features and (h) different class names and designations.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or fraction
thereof in respect of a fractional share) on matters that such shares (or class
of shares) shall be entitled to vote. Shareholders of the Fund shall vote
together on any matter, except to the extent otherwise required by the 1940 Act,
or when the Board of Trustees has determined that the matter affects only the
interest of shareholders of one or more classes of the Fund, in which case only
the shareholders of such class or classes of the Fund shall be entitled to vote
thereon. Any matter shall be deemed to have been effectively acted upon with
respect to the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Trust's Declaration of Trust. As used in the
Prospectus and in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Trust and all additional portfolios (e.g.,
election of directors), means the vote of the lesser of (i) 67% of the Trust's
shares represented at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Fund's outstanding shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single
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portfolio (e.g., annual approval of investment management contracts), means the
vote of the lesser of (i) 67% of the shares of the portfolio represented at a
meeting if the holders of more than 50% of the outstanding shares of the
portfolio are present in person or by proxy, or (ii) more than 50% of the
outstanding shares of the portfolio. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Additional Information
Other Information
The CUSIP numbers of the classes are:
Class A: 460965-742
Class B: 460965-734
Class C: 460965-726
Class I: 460965-718
The Fund has a fiscal year ending September 30.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Advisor in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert is counsel to the Fund.
The Fund's Shares prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Fund has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statement for further information
with respect to the Fund and the securities offered hereby. The Registration
Statement and its amendments are available for inspection by the public at the
SEC in Washington, D.C.
Financial Statements
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated September 30, 2000, are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.
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Standard & Poor's Earnings and Dividend Rankings for Common Stocks
The investment process involves assessment of various factors -- such as product
and industry position, corporate resources and financial policy -- with results
that make some common stocks more highly esteemed than others. In this
assessment, Standard & Poor believes that earnings and dividend performance is
the end result of the interplay of these factors and that, over the long run,
the record of this performance has a considerable bearing on relative quality.
The rankings, however, do not pretend to reflect all of the factors, tangible or
intangible, that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of protection for
principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements in
establishing Standard & Poor's earnings and dividend rankings for common stocks,
which are designed to capsulize the nature of this record in a single symbol. It
should be noted, however, that the process also takes into consideration certain
adjustments and modifications deemed desirable in establishing such rankings.
The point of departure in arriving at these rankings is a computerized scoring
system based on per-share earnings and dividend records of the most recent ten
years -- a period deemed long enough to measure significant time segments of
secular growth, to capture indications of basic change in trend as they develop,
and to encompass the full peak-to-peak range of the business cycle. Basic scores
are computed for earnings and dividends, then adjusted as indicated by a set of
predetermined modifiers for growth, stability within long-term trend, and
cyclicality. Adjusted scores for earnings and dividends are then combined to
yield a final score.
Further, the ranking system makes allowance for the fact that, in general,
corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix determined
by analysis of the scores of a large and representative sample of stocks. The
range of scores in the array of this sample has been aligned with the following
ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the stock is not
amenable to the ranking process.
The positions as determined above may be modified in some instances by special
considerations, such as natural disasters, massive strikes, and non-recurring
accounting adjustments.
A ranking is not a forecast of future market price performance, but is basically
an appraisal of past performance of earnings and dividends, and relative current
standing. These rankings must not be used as market recommendations; a
high-score stock may at times be so overpriced as to justify its sale, while a
low-score stock may be attractively priced for purchase. Rankings based upon
earnings and dividend records are no substitute for complete analysis. They
cannot take into account potential effects of management changes, internal
company policies not yet fully reflected in the earnings and dividend record,
public relations standing, recent competitive shifts, and a host of other
factors that may be relevant to investment status and decision.
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STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
Scudder Large Company Growth Fund (Class A, B, C and Class I Shares)
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A (formerly known as Class R),,
Class B, Class C and Class I Shares (the "Shares") of Scudder Large Company
Growth Fund (the "Fund"), a diversified series of Investment Trust (the
"Trust"), an open-end management investment company. It should be read in
conjunction with the prospectus of the Shares dated December 29, 2000. The
prospectus may be obtained without charge from the Fund at the address or
telephone number on this cover or the firm from which this Statement of
Additional Information was received.
Scudder Large Company Growth Fund offers the following classes of shares: Class
S, Class AARP, Class A, Class B, Class C and Class I shares (the "Shares"). Only
Class A, Class B, Class C and Class I shares of Scudder Large Company Growth
Fund are offered herein.
TABLE OF CONTENTS
Investment Restrictions.....................................................2
Investment Policies and Techniques..........................................4
Dividends, Distributions and Taxes.........................................18
Performance................................................................23
Investment Manager and Underwriter.........................................26
Portfolio Transactions.....................................................32
Net Asset Value............................................................34
Purchase, Repurchase and Redemption of Shares..............................35
Purchase of Shares.........................................................35
Redemption or Repurchase of Shares.........................................41
Special Features...........................................................45
Officers and Trustees......................................................49
Shareholder Rights.........................................................52
Zurich Scudder Investments, Inc. (the "Advisor") serves as the Fund's investment
manager.
The financial statements appearing in the Fund's July 31, 2000 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund accompanies this document.
<PAGE>
INVESTMENT RESTRICTIONS
Unless specified to the contrary, the following fundamental restrictions may not
be changed without the approval of a majority of the outstanding voting
securities of the Fund involved which, under the 1940 Act and the rules
thereunder and as used in this Statement of Additional Information, means the
lesser of (1) 67% or more of the voting securities present at such meeting, if
the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy, or (2) more than 50% of the outstanding
voting securities of the Fund. Nonfundamental policies of the Fund may be
modified by the Fund's Trustees without a vote of the shareholders.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund. The Fund is
under no restrictions as to the amount of portfolio securities which may be
bought or sold.
The Fund has elected to be classified as a diversified series of an open-end
investment company. In addition, as a matter of fundamental policy, the Fund
will not:
(1) borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts related to physical
commodities; or
(7) make loans except as permitted under the 1940 Act, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time.
Other Investment Policies. The Trustees of the Trust have voluntarily adopted
policies and restrictions which are observed in the conduct of the Funds'
affairs. These represent intentions of the Trustees based upon current
circumstances. They differ from fundamental investment policies in that they may
be changed or amended by action of the Trustees without prior notice to or
approval of shareholders.
Nonfundamental policies of the Fund may be changed by the Trustees of the Trust
and without shareholder approval. As a matter of nonfundamental policy, the Fund
may not:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
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(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); or
(7) lend portfolio securities in an amount greater than 5% of its
total assets.
Master/feeder Fund Structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Fund while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Advisor. 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
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costs. The program is subject to the oversight and periodic review of the Boards
of the participating funds. To the extent the Fund is actually engaged in
borrowing through the interfund lending program, the Fund, as a matter of
non-fundamental policy, may not borrow for other than temporary or emergency
purposes (and not for leveraging), except that the Fund may engage in reverse
repurchase agreements and dollar rolls for any purpose.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, the Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which Zurich Scudder Investments acts as trustee
or investment advisor that operate as cash management investment vehicles and
that are excluded from the definition of investment company pursuant to section
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (collectively, the
"Central Funds") in excess of the limitations of Section 12(d)(1) of the
Investment Company Act. Investment by the Fund in shares of the Central Funds
will be in accordance with the Fund's investment policies and restrictions as
set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
INVESTMENT POLICIES AND TECHNIQUES
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. The net asset value of the Fund's shares will increase or
decrease with changes in the market price of the Fund's investments, and there
can be no assurance that the Fund's objective will be met.
The Fund is an open-end management investment company which continuously offers
and redeems shares at net asset value. The Fund is a company of the type
commonly known as a mutual fund.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which a Fund may engage (such as hedging,
etc.) or a financial instrument which a Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that the Advisor, in its discretion, might, but is not required to,
use in managing a Fund's portfolio assets. The Advisor may, in its discretion,
at any time employ such practice, technique or instrument for a Fund, but not
for all funds advised by it. Furthermore, it is possible that certain types of
financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of the Fund, but, to the extent employed, could from
time to time have a material impact on the Fund's performance.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
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The Fund, a diversified series of Investment Trust, seeks to provide long-term
growth of capital. It does this by investing at least 65% of its total assets in
equities of large U.S. companies (those with a market value of $1 billion or
more). Although current income is an incidental consideration, many of the
Fund's securities should provide regular dividends which are expected to grow
over time.
The Fund's equity investments consist of common stocks, preferred stocks and
securities convertible into common stocks, rights and warrants of companies
which offer, the Fund's management believes, the prospect for above-average
growth in earnings, cash flow or assets relative to the overall market. The
prospect for above-average growth in assets is evaluated in terms of the
potential future earnings such growth in assets can produce.
The Fund allocates its investments among different industries and companies, and
adjusts its portfolio securities based on long-term investment considerations as
opposed to short-term trading. While the Fund emphasizes U.S. investments, it
can commit a portion of assets to the equity securities of foreign growth
companies which meet the criteria applicable to domestic investments.
Investments. The Fund invests primarily in equity securities issued by
large-sized domestic companies that offer, the Fund's management believes,
above-average appreciation potential. In seeking such investments, the Advisor
invests in companies with the following characteristics:
--companies that have exhibited above-average growth rates over an extended
period with prospects for maintaining greater than average rates of growth in
earnings, cash flow or assets in the future;
--companies that are in a strong financial position with high credit standings
and profitability;
--companies with important business franchises, leading products or dominant
marketing and distribution systems;
--companies guided by experienced, motivated management; or
--companies selling at attractive prices relative to potential growth in
earnings, cash flow or assets.
The Advisor uses qualitative research techniques to identify companies that have
above-average quality and growth characteristics and that are deemed to be
selling at attractive market valuations. In-depth fundamental research is used
to evaluate various aspects of corporate performance, with a particular focus on
consistency of results, long-term growth prospects and financial strength. From
time to time, for temporary defensive or emergency purposes, the Fund may invest
a portion of its assets in cash and cash equivalents when the Advisor deems such
a position advisable in light of economic or market conditions. It is impossible
to predict for how long such alternate strategies may be utilized. The Fund also
may invest in repurchase agreements, and may engage in strategic transactions.
Quality. The Fund invests at least 65% of its total assets in the equity
securities of large U.S. growth companies, i.e., those with total market
capitalization of $1 billion or more. The Fund looks for companies with
above-average financial quality. When assessing financial quality, the Advisor
weighs four elements of business risk. These factors are the Advisor's
assessment of the strength of a company's balance sheet, the accounting
practices a company follows, the volatility of a company's earnings over time
and the vulnerability of earnings to changes in external factors, such as the
general economy, the competitive environment, governmental action and
technological change.
Foreign Securities. While the Fund generally emphasizes investments in companies
domiciled in the U.S., it may invest in listed and unlisted foreign securities
of the same types as the domestic securities in which it may invest, when the
anticipated performance of foreign securities is believed by the Advisor to
offer more potential than domestic alternatives in keeping with the investment
objective of the Fund.
5
<PAGE>
Investors should recognize that investing in foreign securities involves certain
special considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign stock markets, while growing
in volume of trading activity, have substantially less volume than the New York
Stock Exchange, Inc. (the "Exchange"), and securities of some foreign companies
are less liquid and more volatile than securities of domestic companies.
Similarly, volume and liquidity in most foreign bond markets are less than the
volume and liquidity in the U.S., and at times volatility of price can be
greater than in the U.S. Further, foreign markets have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Fixed commissions on some foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
Fund will endeavor to achieve the most favorable net results on its portfolio
transactions. Further, the Fund may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts. There is generally
less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the U.S. It may be more
difficult for the Fund's agents to keep currently informed about corporate
actions such as stock dividends or other matters which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Payment for securities without delivery may be required in certain
foreign markets. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Investments in foreign securities may also
entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing countries.
For example, the possibility of revolution and the dependence on foreign
economic assistance may be greater in these countries than in developed
countries. The management of the Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Investments in companies domiciled in developing countries may be
subject to potentially greater risks than investments in developed countries.
Investments in foreign securities usually are denominated currencies of foreign
countries. Moreover, the Fund temporarily may hold funds in bank deposits in
foreign currencies during the completion of investment programs. Accordingly,
the value of the assets for the Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Fund may incur costs and experience
conversion difficulties and uncertainties in connection with conversions between
various currencies. Although the Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies, if
any, into U.S. dollars on a daily basis. It may do so from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer. The Fund
will conduct its foreign currency exchange transactions, if any, either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through strategic transactions involving currencies.
To the extent that the Fund invests in foreign securities, the Fund's share
price could reflect the movements of the stock markets in which it is invested
and the currencies in which the investments are denominated; the
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strength or weakness of the U.S. dollar against foreign currencies could account
for part of the Fund's investment performance.
Common stocks. Under normal circumstances, the Fund invests primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because the Fund may hold foreign
currencies and forward contracts, futures contracts and options on futures
contracts on foreign currencies, the value of the assets of the Fund as measured
in U.S. dollars may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Fund may incur
costs in connection with conversions between various currencies. Although the
Fund values its assets daily in terms of U.S. dollars, it does not intend to
convert its holdings of foreign currencies into U.S. dollars on a daily basis.
It will do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward or
futures contracts to purchase or sell foreign currencies.
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their net asset values).
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
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are issued by The Select Sector SPDR Trust, an open-end management investment
company with nine portfolios that each seeks to closely track the price
performance and dividend yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Convertible Securities. The Fund may invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stocks. Investments in convertible securities may
provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest include fixed-income or
zero coupon debt securities which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. The exchange
ratio for any particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate distributions or
scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than nonconvertible
securities of similar quality because of their conversion or exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
nonconvertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes (LYONs). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity.
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Zero coupon convertible securities offer the opportunity for capital
appreciation as increases (or decreases) in market value of such securities
closely follows the movements in the market value of the underlying common
stock. Zero coupon convertible securities are generally expected to be less
volatile than the underlying common stocks as they are usually issued with short
to medium length maturities (15 years or less) and are issued with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
Debt Securities. When the Advisor believes that it is appropriate to do so in
order to achieve the Fund's objective of long-term capital appreciation, the
Fund may invest in debt securities including bonds of private issuers, bonds of
foreign governments and supranational organizations. Portfolio debt investments
will be selected on the basis of, among other things, credit quality, and the
fundamental outlooks for currency, economic and interest rate trends, taking
into account the ability to hedge a degree of currency or local bond price risk.
The Fund may purchase high quality bonds, rated Aaa, Aa or A by Moody's or AAA,
AA or A by S&P or, if unrated, judged to be of equivalent quality as determined
by the Advisor.
The principal risks involved with investments in bonds include interest rate
risk, credit risk and pre-payment risk. Interest rate risk refers to the likely
decline in the value of bonds as interest rates rise. Generally, longer-term
securities are more susceptible to changes in value as a result of interest-rate
changes than are shorter-term securities. Credit risk refers to the risk that an
issuer of a bond may default with respect to the payment of principal and
interest. The lower a bond is rated, the more it is considered to be a
speculative or risky investment. Pre-payment risk is commonly associated with
pooled debt securities, such as mortgage-backed securities and asset backed
securities, but may affect other debt securities as well. When the underlying
debt obligations are prepaid ahead of schedule, the return on the security will
be lower than expected. Pre-payment rates usually increase when interest rates
are falling.
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System, any foreign bank or any domestic or foreign
broker-dealer which is recognized as a reporting government securities dealer if
the creditworthiness of the bank or broker-dealer has been determined by the
Advisor to be at least as high as that of other obligations the Fund may
purchase, or to be at least equal to that of issuers of commercial paper rated
within the two highest grades assigned by Standard and Poor's Corporation or
Moody's Investor Services, Inc. ("Moody's"). Some repurchase commitment
transactions may not provide the Fund with collateral marked-to-market during
the term of the commitment.
A repurchase agreement provides a means for the Fund to earn income on funds for
periods as short as overnight. It is an arrangement under which the purchaser
(i.e., the Fund) acquires a security ("Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price.
Securities subject to a repurchase agreement are held in a segregated account
and the value of such securities kept at least equal to the repurchase price on
a daily basis. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price upon repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation itself. Obligations will be
held by the Custodian or in the Federal Reserve Book Entry system. For purposes
of the 1940 Act a repurchase agreement is deemed to be a loan from the Fund to
the seller of the Obligation subject to the repurchase agreement and is
therefore subject to the Fund's investment restriction applicable to loans. It
is not clear whether a court would consider the Obligation purchased by the Fund
subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in price of
the Obligation. If the court characterizes the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Fund, the
Advisor seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the
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Obligation, in which case the Fund may incur a loss if the proceeds to the Fund
of the sale to a third party are less than the repurchase price. However, if the
market value of the Obligation subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
A repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction, and such
repurchase agreements involve risks similar to repurchase agreements with U.S.
entities.
Illiquid Securities. The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. The absence of a
trading market can make it difficult to ascertain a market value for these
investments. This investment practice, therefore, could have the effect of
increasing the level of illiquidity of a Fund. It is a Fund's policy that
illiquid securities (including repurchase agreements of more than seven days
duration, certain restricted securities, and other securities which are not
readily marketable) may not constitute, at the time of purchase, more than 15%
of the value of the Fund's net assets. The Trust's Board of Trustees has
approved guidelines for use by the Advisor in determining whether a security is
illiquid.
Generally speaking, restricted securities may be sold (i) only to qualified
institutional buyers; (ii) in a privately negotiated transaction to a limited
number of purchasers; (iii) in limited quantities after they have been held for
a specified period of time and other conditions are met pursuant to an exemption
from registration; or (iv) in a public offering for which a registration
statement is in effect under the 1933 Act. Issuers of restricted securities may
not be subject to the disclosure and other investor protection requirements that
would be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between a Fund's decision to sell a
restricted or illiquid security and the point at which the Fund is permitted or
able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, a Fund may be required to
bear all or part of the registration expenses. A Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Advisor will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Advisor may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Trustees do not currently intend to borrow for investment leverage purposes,
if such a strategy were implemented in the future it would increase a Fund's
volatility and the risk of loss in a declining market. Borrowing by the Fund
will involve special risk considerations. Although the principal of the Fund's
borrowings will be fixed, the Fund's assets may change in value during the time
a borrowing is outstanding, thus increasing exposure to capital risk.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights
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other than a purchase option. Thus, if a warrant held by the Fund were not
exercised by the date of its expiration, the Fund would lose the entire purchase
price of the warrant.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. The Fund will enter into reverse repurchase agreements only when the
Advisor 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 transactions may increase fluctuations in the market value of
a Fund's assets and may be viewed as a form of leverage.
Dollar Roll Transactions. "Dollar roll" transactions, consist of the sale by the
Fund to a bank or broker/dealers (the "counterparty") of GNMA certificates or
other mortgage-backed securities together with a commitment to purchase from the
counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The Fund
receives a fee from the counterparty as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed over a period of several
months with a different purchase and repurchase price fixed and a cash
settlement made at each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which the Fund agrees to buy a security on a future date.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors, collars, currency forward contracts, currency futures contracts,
currency swaps or options on currencies, or currency futures and various other
currency transactions (collectively, all the above are called "Strategic
Transactions"). In addition, strategic transactions may also include new
techniques, instruments or strategies that are permitted as regulatory changes
occur. Strategic Transactions may be used without limit (subject to certain
limitations imposed by the 1940 Act) to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Advisor's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in
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the case of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of currency transactions can result in
the Fund incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange
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would cease to exist, although outstanding options on that exchange would
generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Advisor. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. The Fund will not purchase call
options unless the aggregate premiums paid on all options held by the Fund at
any time do not exceed 20% of its total assets. All calls sold by the Fund must
be "covered" (i.e., the Fund must own the securities or futures contract subject
to the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not purchase put options unless the aggregate premiums paid on all
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options held by the Fund at any time do not exceed 20% of its total assets. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against
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fluctuations in relative value. Currency transactions include forward currency
contracts, exchange listed currency futures, exchange listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and operates similarly to
an interest rate swap, which is described below. The Fund may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the
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maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Advisor, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Advisor's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Advisor and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Advisor. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
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Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid assets
denominated in that currency equal to the Fund's obligations or to segregate
cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
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<PAGE>
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Dividends, Distributions and Taxes
Dividends and Capital Gains Distributions
The Fund intends to follow the practice of distributing all of its investment
company taxable income, which includes any excess of net realized short-term
capital gains over net realized long-term capital losses. The Fund may follow
the practice of distributing the entire excess of net realized long-term capital
gains over net realized short-term capital losses. However, the Fund may retain
all or part of such gain for reinvestment after paying the related federal
income taxes for which the shareholders may then be asked to claim a credit
against their federal income tax liability. (See "Taxes.")
If the Fund does not distribute an amount of capital gain and/or ordinary income
required to be distributed by an excise tax provision of the Code, it may be
subject to such tax. In certain circumstances, the Fund may determine that it is
in the interest of shareholders to distribute less than such an amount.
Distributions of investment company taxable income and net realized capital
gains are taxable (See "Taxes"), whether made in shares or cash.
Earnings and profits distributed to shareholders on redemptions of Fund shares
may be utilized by the Fund, to the extent permissible, as part of a Fund's
dividend paid deduction on its federal tax return.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Additional distributions
for the Fund 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.
The Fund intends to distribute investment company taxable income in December
each year. The Fund intends to declare in December any net realized capital
gains resulting from its investment activity. The Fund intends to distribute the
December dividends and capital gains either in December or in the following
January.
Dividends paid by the Fund with respect to each class of its shares will be
calculated in the same manner, at the same time and on the same day. The level
of income dividends per share (as a percentage of net asset value) will be lower
for Class B and Class C Shares than for Class A Shares primarily as a result of
the distribution services fee applicable to Class B and Class C Shares.
Distributions of capital gains, if any, will be paid in the same proportion for
each class.
Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value on the reinvestment date, except that, upon written request
to the Shareholder Service Agent, a shareholder may select one of the following
options:
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To receive income and short-term capital gain dividends in cash and long-term
capital gain dividends in shares of the same class at net asset value; or
To receive income and capital gain dividends in cash.
Dividends will be reinvested in Shares of the same class of the Fund unless
shareholders indicate in writing that they wish to receive them in cash or in
shares of other Scudder Funds with multiple classes of shares or Kemper Funds as
provided in the prospectus. See "Special Features -- Class A Shares -- Combined
Purchases" for a list of such other Funds. To use this privilege of investing
dividends of the Fund in shares of another Scudder or Kemper Fund, shareholders
must maintain a minimum account value of $1,000 in the Fund distributing the
dividends. The Fund will reinvest dividend checks (and future dividends) in
shares of that same Fund and class if checks are returned as undeliverable.
Dividends and other distributions of the Fund in the aggregate amount of $10 or
less are automatically reinvested in shares of the Fund unless the shareholder
requests that such policy not be applied to the shareholder's account.
Taxes
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code or a predecessor statute, and has qualified as such
since its inception. It intends to continue to qualify for such treatment. Such
qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90% 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 the Fund's
earnings and profits, and would be eligible for the dividends received deduction
in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income 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 the Fund. Presently, the Fund has
no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, the Fund intends to elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a relative share of federal income taxes paid by the 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.
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Dividends from domestic corporations are expected to comprise a substantial part
of the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the deduction for dividends received by corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the shares of the Fund
with respect to which the dividends are received are treated as debt-financed
under federal income tax law, and is eliminated if either those shares or the
shares of the Fund are deemed to have been held by the Fund or the 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 the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends 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 for 2001 ($53,000 for married individuals filing a
joint return, with a phase-out of the deduction for adjusted gross income
between $53,000 and $63,000; $33,000 for a single individual, with a phase-out
for adjusted gross income between $33,000 and $43,000). 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 the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
In some cases, shareholders of the Fund will not be permitted to take all or
portion of their sales loads into account for purposes of determining the amount
of gain or loss realized on the disposition of their shares. This prohibition
generally applies where (1) the shareholder incurs a sales load in acquiring the
shares of the Fund, (2) the shares are disposed of before the 91st day after the
date on which they were acquired, and (3) the shareholder
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<PAGE>
subsequently acquires shares in the Fund or another regulated investment company
and the otherwise applicable sales charge is reduced under a "reinvestment
right" received upon the initial purchase of Fund shares. The term "reinvestment
right" means any right to acquire shares of one or more regulated investment
companies without the payment of a sales load or with the payment of a reduced
sales charge. Sales charges affected by this rule are treated as if they were
incurred with respect to the shares acquired under the reinvestment right. This
provision may be applied to successive acquisitions of fund shares.
In some cases, shareholders of the Fund will not be permitted to take all or a
portion of their sales loads into account for purposes of determining the amount
of gain or loss realized on the disposition of their shares. This prohibition
generally applies where (1) the shareholder incurs a sales load in acquiring the
shares of the Fund, (2) the shares are disposed of before the 91st day after the
date on which they were acquired, and (3) the shareholder subsequently acquires
shares in the Fund or another regulated investment company and the otherwise
applicable sales charge is reduced under a "reinvestment right" received upon
the initial purchase of Fund shares. The term " reinvestment right" means any
right to acquire shares of one or more regulated investment companies without
the payment of a sales load or with the payment of a reduced sales charge. Sales
charges affected by this rule are treated as if they were incurred with respect
to the shares acquired under the reinvestment right. This provision may be
applied to successive acquisitions of fund shares.
The Fund may invest in shares of certain foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). If
the Fund receives a so-called "excess distribution" with respect to PFIC stock,
the Fund itself may be subject to a tax on a portion of the excess distribution.
Certain distributions from a PFIC as well as gains from the sale of the PFIC
shares are treated as "excess distributions." In general, under the PFIC rules,
an excess distribution is treated as having been realized ratably over the
period during which the Fund held the PFIC shares. The Fund will be subject to
tax on the portion, if any, of an excess distribution that is allocated to prior
Fund taxable years and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. Excess distributions allocated
to the current taxable year are characterized as ordinary income even though,
absent application of the PFIC rules, certain excess distributions might have
been classified as capital gain.
The Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares; any
mark to market losses and any loss from an actual disposition of shares would be
deductible as ordinary 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.
Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the 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 the Fund's portfolio. If
the 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
the Fund is not a taxable transaction for the Fund.
Many futures contracts and certain foreign currency forward contracts entered
into by the Fund and all listed non-equity options written or purchased by the
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,
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gain or loss attributable to the lapse, exercise or closing out of any such
position generally will be treated as 60% long-term and 40% short-term capital
gain or loss, and on the last trading day of the Fund's fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e., treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts and similar financial instruments
entered into or acquired by the Fund will be treated as ordinary income or loss.
Under certain circumstances, entry into a futures contract to sell a security
may constitute a short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying security or a substantially
identical security in the Fund's portfolio.
If the Fund writes a covered call option on portfolio stock, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
Positions of the Fund which consist of at least one stock and at least one other
position with respect to a related security which substantially diminishes the
Fund's risk of loss with respect to such stock could be treated as a "straddle"
which is governed by Section 1092 of the Code, the operation of which may cause
deferral of losses, adjustments in the holding periods of 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 the Fund.
Positions of the Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or non-equity option
governed by Section 1256 which substantially diminishes the Fund's risk of loss
with respect to such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of Section 1092 of
the Code, certain tax elections exist for them which reduce or eliminate the
operation of these rules. The 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 the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
A portion of the difference between the issue price of zero coupon securities
and their face value ("original issue discount") is considered to be income to a
Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount imputed income will comprise
a part of the investment company taxable income of the Fund, which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the Fund's
level.
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 contracts 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
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decrease the amount of the Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
The 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 the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The 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 the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Dividend and interest income received by the Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders should consult their tax advisors about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
Performance
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Performance information will be computed separately for each class.
Class A, B and C shares are newly offered and therefore have no available
performance information.
Performance figures for Class A, B and C shares are derived from the historical
performance of Class S shares, adjusted to reflect the higher gross total annual
operating expenses applicable to Class A, B and C shares, which may be higher or
lower than those of Class S shares. The performance figures are also adjusted to
reflect the maximum sales charge of 5.75% for Class A shares and the maximum
current contingent deferred sales charge of 4% for Class B shares and 1% for
Class C shares. Returns for the historical performance of the Class S shares may
include the effect of a temporary waiver of management fees and/or absorption of
certain operating expenses by the investment advisor and certain
23
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subsidiaries. Without such a waiver or absorption, returns would have been lower
and ratings or rankings may have been less favorable.
The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of the Class A, B and C shares of the Fund as described
above; they do not guarantee future results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
Average Annual Total Return
Average annual total return is the average annual compound rate of return for
the periods of one year, five years and ten years (or such shorter periods as
may be applicable dating from the commencement of the Fund's operations), all
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by
computing the average annual compound rates of return of a hypothetical
investment over such periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Returns for the Period Ended July 31, 2000(1)(2)
1 Year 5 Years Life of Fund(3)
Scudder Large Company Growth Fund - 21.79% 23.39% 18.07%
Class A
Scudder Large Company Growth Fund - 23.93% 23.53% 17.83%
Class B
Scudder Large Company Growth Fund 27.80% 23.81% 17.86%
-- Class C
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class A, B and C shares for the period prior to
their introduction are based upon the performance of Class S shares as
described above.
(2) As described above, average annual total returns are based on
historical earnings and are not intended to indicate future
performance. Average annual total return for the Fund or class will
vary based on changes in market conditions and the level of the Fund's
and class' expenses.
(3) The Fund commenced operations on May 15, 1991.
In connection with communicating its average annual total return to current or
prospective shareholders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative
24
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total return is calculated by computing the cumulative rates of return of a
hypothetical investment over such periods, according to the following formula
(cumulative total return is then expressed as a percentage): C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $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 July 31, 2000 (1)
1 Year 5 Years Life of Fund(2)
Scudder Large Company Growth Fund - 21.79% 186.00% 364.67%
Class A
Scudder Large Company Growth Fund - 23.93% 187.67% 356.31%
Class B
Scudder Large Company Growth Fund - 27.80% 190.94% 357.37%
Class C
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class A, B and C shares for the period prior to
their introduction are based upon the performance of Class S shares as
described above.
(2) The Fund commenced operations on May 15, 1991. The average annual total
return for the life of the Fund would have been lower had the Advisor
not maintained the Fund's expenses.
Total Return
Total return is the rate of return on an investment for a specified period of
time calculated in the same manner as cumulative total return.
From time to time, in advertisements, sales literature, and reports to
shareholders or prospective investors, figures relating to the growth in the
total net assets of the Fund apart from capital appreciation will be cited, as
an update to the information in this section, including, but not limited to: net
cash flow, net subscriptions, gross subscriptions, net asset growth, net account
growth, and subscription rates. Capital appreciation generally will be covered
by marketing literature as part of the Fund's and classes' performance data.
Quotations of a Fund's performance are based on historical earnings, show the
performance of a hypothetical investment, and are not intended to indicate
future performance of the Fund. An investor's shares when redeemed may be worth
more or less than their original cost. Performance of a Fund will vary based on
changes in market conditions and the level of that Fund's expenses.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Historical information on the value of the dollar versus foreign currencies may
be used from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the
25
<PAGE>
value of the U.S. dollar against these currencies. In addition, marketing
materials may cite country and economic statistics and historical stock market
performance for any of the countries in which the Fund invests.
From time to time, in advertising and marketing literature, the Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, members of the Board
and officers of the Fund, the Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Fund. In addition, the amount of assets that the Advisor has under
management in various geographical areas may be quoted in advertising and
marketing materials.
Marketing and other Fund literature may include a description of the potential
risks and rewards associated with an investment in the Fund. The description may
include a "risk/return spectrum" which compares the Fund to other Scudder funds
or broad categories of funds, such as money market, bond or equity funds, in
terms of potential risks and returns. Money market funds are designed to
maintain a constant $1.00 share price and have a fluctuating yield. Share price,
yield and total return of a bond fund will fluctuate. The share price and return
of an equity fund also will fluctuate. The description may also compare the Fund
to bank products, such as certificates of deposit. Unlike mutual funds,
certificates of deposit are insured up to $100,000 by the U.S. government and
offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and money
market funds seek stability of principal, these investments are considered to be
less risky than investments in either bond or equity funds, which may involve
the loss of principal. However, all long-term investments, including investments
in bank products, may be subject to inflation risk, which is the risk of erosion
of the value of an investment as prices increase over a long time period. The
risks/returns associated with an investment in bond or equity funds depend upon
many factors. For bond funds these factors include, but are not limited to, a
fund's overall investment objective, the average portfolio maturity, credit
quality of the securities held, and interest rate movements. For equity funds,
factors include a fund's overall investment objective, the types of equity
securities held and the financial position of the issuers of the securities. The
risks/returns associated with an investment in international bond or equity
funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment categories
in the following order: bank products, money market funds, bond funds and equity
funds. Shorter-term bond funds generally are considered less risky and offer the
potential for less return than longer-term bond funds. The same is true of
domestic bond funds relative to international bond funds, and bond funds that
purchase higher quality securities relative to bond funds that purchase lower
quality securities. Growth and income equity funds are generally considered to
be less risky and offer the potential for less return than growth funds. In
addition, international equity funds usually are considered more risky than
domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical information made by
independent sources may also be used in advertisements concerning the Fund,
including reprints of, or selections from, editorials or articles about the
Fund.
Investment Manager and Underwriter
Investment Manager. Zurich Scudder Investments, Inc., Two International Place,
Boston, Massachusetts, an investment counsel firm, acts as investment advisor to
the Fund. This organization, the predecessor of which is Scudder, Stevens &
Clark, Inc., ("Scudder") 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
Advisor introduced Scudder International Fund, Inc., the first mutual fund
available in the U.S. investing internationally in securities of issuers in
several foreign countries. The predecessor firm reorganized from a partnership
to a corporation on June 28, 1985. On June 26, 1997, Scudder entered into
26
<PAGE>
an agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder
and Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name 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. On October 17, 2000, the
dual holding company structure of Zurich Financial Services Group, comprised of
Allied Zurich p.l.c. in the United Kingdom and Zurich Allied A.G. in
Switzerland, was unified into a single Swiss holding company, Zurich Financial
Services. The Advisor changed its name from Scudder Kemper Investments, Inc. to
Zurich Scudder Investments, Inc. The Advisor manages the Fund's daily investment
and business affairs subject to the policies established by the Trust's Board of
Trustees. The Trustees have overall responsibility for the management of the
Fund under Massachusetts law.
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.
Pursuant to an investment management agreement with the Fund, the Advisor acts
as the Fund's investment advisor, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions.
The principal source of the Advisor's income is professional fees received from
providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today it provides investment counsel
for many individuals and institutions, including insurance companies, industrial
corporations, and financial and banking organizations, as well as providing
investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor 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
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world researching hundreds of companies.
In selecting securities in which the Fund may invest, the conclusions and
investment decisions of the Advisor with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Advisor. Investment decisions for the Fund and other clients are
made with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to the Fund.
The investment management agreement (the "Agreement") was most recently approved
by the Trustees on August 11, 1998, became effective on September 7, 1998, and
was approved at a shareholder meeting held on
27
<PAGE>
December 15, 1998. The Agreement was subsequently amended and restated by the
Trustees on October 10, 2000. The Agreement will continue in effect until
September 30, 2001 and from year to year thereafter only if its continuance is
approved annually by the vote of a majority of those Trustees who are not
parties to such Agreement or interested persons of the Advisor or the Fund, cast
in person at a meeting called for the purpose of voting on such approval, and
either by a vote of the Trust's Trustees or of a majority of the outstanding
voting securities of the Fund. The Agreement may be terminated at any time
without payment of penalty by either party on sixty days' written notice and
automatically terminates in the event of its assignment. The continuance of the
Agreement was last approved by the Trustees on July 10, 2000.
Under the Agreement, the Advisor regularly provides the Fund with continuing
investment management for the Fund's portfolio consistent with the Fund's
investment objective, policies and restrictions and determines what securities
shall be purchased, held or sold and what portion of the Fund's assets shall be
held uninvested, subject to the Trust's Declaration of Trust, By-Laws, the 1940
Act, the Code and to the Fund's investment objective, policies and restrictions,
and subject, further, to such policies and instructions as the Board of Trustees
of the Trust may from time to time establish. The Advisor 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 Fund.
Under the Agreement, the Advisor renders significant administrative services
(not otherwise provided by third parties) necessary for the Fund's operations as
an open-end investment company including, but not limited to, preparing reports
and notices to the Trustees and shareholders; supervising, negotiating
contractual arrangements with, and monitoring various third-party service
providers to the Fund (such as the Fund's transfer agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of the
Fund's federal, state and local tax returns; preparing and filing the Fund's
federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends; and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
The Advisor pays the compensation and expenses of all Trustees, officers and
executive employees (except expenses incurred attending Board and committee
meetings outside New York, New York; Boston, Massachusetts and Chicago,
Illinois) of the Fund affiliated with the Advisor and makes available, without
expense to the Trust, the services of such Trustees, officers and employees of
the Advisor as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities.
The Fund is charged by the Advisor a fee equal to 0.70 of 1% of the first $1.5
billion of average daily net assets, 0.65 of 1% on assets in excess of $1.5
billion up to and including $2.0 billion, and 0.60 of 1% on assets in excess of
$2.0 billion. The fee is payable monthly, provided the Fund will make such
interim payments as may be requested by Scudder not to exceed 75% of the amount
of the fee then accrued on the books of the Fund and unpaid. The Agreement
provides that if the Fund's expenses, exclusive of taxes, interest, and
extraordinary expenses, exceed specified limits, such excess, up to the amount
of the management fee, will be paid by the Advisor. The Advisor retains the
ability to be repaid by the Fund if expenses fall below the specified limit
prior to the end of the fiscal year. These expense limitation arrangements can
decrease the Fund's expenses and improve its performance. During the fiscal
years ended October 31, 1997 and 1998, the Advisor imposed a portion of its
management fee amounting to $1,790,426 and $2,478,112 respectively. For the 9
months ended July 31, 1999, the Advisor imposed a portion of its management fee
amounting to $3,855,969, of which $488,848 was unpaid at July 31, 1999. For the
fiscal year ended July 31, 2000, the fee pursuant to the Agreement amounted to
$8,344,919.
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Under the Agreement the Fund is responsible for all of its other expenses
including: organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the Transfer Agent; 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
Advisor; the cost of printing and distributing reports and notices to
stockholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses of shareholders' meetings, the cost of responding to shareholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees of the Fund with respect thereto.
The Agreement identifies the Advisor as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Scudder Kemper Investments, Inc." and
"Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this
license, the Trust, with respect to the Fund, has the non-exclusive right to use
and sublicense the Scudder name and marks as part of its name, and to use the
Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the Advisor
concerning such Agreement, the Trustees of the Trust who are not "interested
persons" of the Advisor are represented by independent counsel at the Fund's
expense.
The Agreement provides that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Advisor's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.
The Advisor may serve as advisor to other funds with investment objectives and
policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the Fund as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of Shares of the Fund.
The term Scudder Investments is the designation given to the services provided
by Zurich Scudder Investments, Inc. and its affiliates to the Scudder Family of
Funds. AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor 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 Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
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 advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (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 Fund, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Trust and employees of the Advisor and principal
29
<PAGE>
underwriter are permitted to make personal securities transactions, including
transactions in securities that may be purchased or held by the Fund, subject to
requirements and restrictions set forth in the applicable Code of Ethics. The
Advisor's Code of Ethics contains provisions and requirements designed to
identify and address certain conflicts of interest between personal investment
activities and the interests of the Fund. Among other things, the Advisor'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
Advisor's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, is the principal underwriter and distributor for the Class A, B and C
shares of the Fund and acts as agent of the Fund in the continuous offering of
its Shares. KDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. The Fund pays
the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI, as principal underwriter, pays for
the printing and distribution of copies thereof used in connection with the
offering of Shares to prospective investors. KDI also pays for supplementary
sales literature and advertising costs.
The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of the Fund, including the Trustees who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees or a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the distribution agreement or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The distribution agreement may not be amended for a class to increase
the fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund, and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the distribution
agreement.
Class B Shares and Class C Shares. The Fund has adopted a plan under Rule 12b-1
(the "Rule 12b-1 Plan") that provides for fees payable as an expense of the
Class B shares and Class C shares that are used by KDI to pay for distribution
and services for those classes. Because 12b-1 fees are paid out of class assets
on an ongoing basis they will, over time, increase the cost of an investment and
cost more than other types of sales charges.
Rule 12b-1 Plan. Since the distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of the Fund to make payments to KDI pursuant to the Plan will
cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under a Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under the Plan
may or may not be sufficient to reimburse KDI for its expenses incurred.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class B shares. This fee is accrued daily as an
expense of Class B shares. KDI also receives any contingent deferred sales
charges. KDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%.
30
<PAGE>
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class C shares. This fee is accrued daily as an
expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or the Fund. KDI also receives any
contingent deferred sales charges.
Administrative Fee. The Fund has entered into an administrative services
agreement with Zurich Scudder (the "Administration Agreement"), pursuant to
which Zurich Scudder will provide or pay others to provide substantially all of
the administrative services required by the Fund (other than those provided by
Zurich Scudder under its investment management agreements with the Fund, as
described above) in exchange for the payment by the Fund of an administrative
services fee (the "Administrative Fee") of 0.325% for Class A, 0.375% for Class
B and 0.350% for Class C of average daily net assets of each class. One effect
of this arrangement is to make the future expense ratio for each class more
predictable.
Various third-party service providers (the "Service Providers"), some of which
are affiliated with Zurich Scudder, provide certain services to the Fund
pursuant to separate agreements with the Fund. Scudder Fund Accounting
Corporation, a subsidiary of Zurich Scudder, computes net asset value for the
Fund and maintains their accounting records. PricewaterhouseCoopers LLP audits
the financial statements of the Fund and provides other audit, tax, and related
services. Dechert acts as general counsel for the Fund.
Zurich Scudder will pay the Service Providers for the provision of their
services to the Fund and will pay other fund expenses, including insurance,
registration, printing and postage fees. In return, the Fund will pay Zurich
Scudder an Administrative Fee.
The Administration Agreement has an initial term of three years, subject to
earlier termination by the Fund's Board. The fee payable by the Fund to Zurich
Scudder pursuant to the Administration Agreements is reduced by the amount of
any credit received from the Fund's custodian for cash balances.
Certain expenses of the Fund will not be borne by Zurich Scudder under the
Administration Agreements, such as taxes, brokerage, interest and extraordinary
expenses; and the fees and expenses of the Independent Directors (including the
fees and expenses of their independent counsel). In addition, the Fund will
continue to pay the fees required by its investment management agreement with
Zurich Scudder. Administrative Services. Administrative services are provided to
the Fund on behalf of Class A, B and C shareholders under an administrative
services agreement ("administrative agreement") with KDI. KDI bears all its
expenses of providing services pursuant to the administrative agreement between
KDI and the Fund, including the payment of service fees. The Fund pays KDI an
administrative services fee, payable monthly, at an annual rate of up to 0.25%
of average daily net assets of Class A, B and C shares of the Fund.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms") that provide services and facilities
for their customers or clients who are investors in the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A Shares, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to 0.25% of the net assets in Fund accounts that it maintains
and services attributable to Class A Shares, commencing with the month after
investment. With respect to Class B and Class C Shares, KDI currently advances
to firms the first-year service fee at a rate of up to 0.25% of the purchase
price of such Shares. For periods after the first year, KDI currently intends to
pay firms a service fee at a rate of up to 0.25% (calculated monthly and paid
quarterly) of the net assets attributable to Class B and Class C Shares
maintained and serviced by the firm. After the first year, a firm becomes
eligible for the quarterly service
31
<PAGE>
fee and the fee continues until terminated by KDI or the Fund. Firms to which
service fees may be paid include affiliates of KDI. In addition KDI may, from
time to time, from its own resources pay certain firms additional amounts for
ongoing administrative services and assistance provided to their customers and
clients who are shareholders of the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of 0.25%
based upon Fund assets in accounts for which a firm provides administrative
services and at the annual rate of 0.15% based upon Fund assets in accounts for
which there is no firm of record (other than KDI) listed on the Fund's records.
The effective administrative services fee rate to be charged against all assets
of the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services. The Board of Trustees of the Fund, in its discretion,
may approve basing the fee to KDI at the annual rate of 0.25% on all Fund assets
in the future
Certain trustees or officers of the Fund are also directors or officers of the
Advisor or KDI, as indicated under "Officers and Trustees."
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, a subsidiary of the Advisor,
computes net asset value for the Fund. Prior to the implementation of the
Administration Agreement, the Fund paid SFAC an annual fee equal to 0.025% of
the first $150 million of average daily net assets, 0.0075% on the next 85
million of such assets, 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges for this service. For the fiscal year ended
October 31, 1997, SFAC's fee amounted to $57,787, and for the fiscal year ended
October 31, 1998, SFAC's fee was $62,799. For the nine months ended July 31,
1999, SFAC's fee was $76,061. For the fiscal year ended July 31, 2000, SFAC's
fee was $135,642, of which $10,344 was unpaid at July 31, 2000.
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company (the "Custodian"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian has custody of all securities and cash of the Fund held
outside the United States. The Custodian attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Fund. Kemper Service Company ("KSVC"), 811 Main Street, Kansas City,
Missouri 64105-2005, an affiliate of the Advisor, is the Fund's transfer agent,
dividend-paying agent and shareholder service agent for the Fund's Class A, B
and C shares. Prior to the implementation of the Administration Agreement, KSVC
received as transfer agent, annual account fees of $5 per account, transaction
and maintenance charges, annual fees associated with the contingent deferred
sales charge (Class B shares only) and out-of-pocket expense reimbursement.
Independent Accountants and Reports to Shareholders. The financial highlights of
the Fund included in the Fund's prospectus and the Financial Statements
incorporated by reference in this Statement of Additional Information have been
so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. PricewaterhouseCoopers LLP audits the financial
statements of the Fund and provides other audit, tax and related services.
Shareholders will receive annual audited financial statements and semi-annual
unaudited financial statements.
Portfolio Transactions
Brokerage Commissions. Allocation of brokerage may be placed by the Advisor.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for the Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Advisor 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
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<PAGE>
the Fund to reported commissions paid by others. The Advisor routinely reviews
commission rates, execution and settlement services performed and makes internal
and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Advisor is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Advisor 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 Advisor or the Fund in exchange for the direction by the Advisor of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Advisor will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Advisor; the
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<PAGE>
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Advisor, it is the opinion
of the Advisor that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than the Fund and not all such information is used by
the Advisor in connection with the Fund. Conversely, such information provided
to the Advisor by broker/dealers through whom other clients of the Advisor
effect securities transactions may be useful to the Advisor in providing
services to the Fund.
The Trustees review, from time to time, whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Fund on portfolio transactions is legally permissible and advisable.
For the fiscal years ended October 31, 1998 and 1997, the Fund paid brokerage
commissions of $828,829 and $317,984, respectively. For the nine months ended
July 31, 1999, the Fund paid brokerage commissions of $551,527. For the fiscal
year ended July 31, 2000, the Fund paid brokerage commissions of $1,001,695.
For the fiscal year ended October 31, 1998, $793,177 (95.7% of the total
brokerage commissions paid) resulted from orders placed, consistent with the
policy of seeking to obtain the most favorable net results, with brokers and
dealers who provided supplementary research services to the Trust or Advisor.
For the nine months ended July 31, 1999, $446,773 (81% of the total brokerage
commissions paid) resulted from orders placed, consistent with the policy of
seeking to obtain the most favorable net results, with brokers and dealers who
provided supplementary research services to the Trust or Advisor.
For the fiscal year ended July 31, 2000, $752,584 (75% of the total brokerage
commissions paid) resulted from orders placed, consistent with the policy of
seeking to obtain the most favorable net results, with brokers and dealers who
provided supplementary research services to the Trust or Advisor.
The total amount of brokerage transactions aggregated, for the fiscal year ended
October 31, 1998 was $504,513,801, of which 79.86% were transactions which
included research commissions. The total amount of brokerage transactions
aggregated for the nine months ended July 31, 1999 was $808,965,832, of which
$664,562,646 (82.15% of all brokerage transactions) were transactions which
included research commissions. The total amount of brokerage transactions
aggregated, for the fiscal year ended July 31, 2000 was $1,685,334,724, of which
74% were transactions which included research commissions.
Portfolio Turnover
The Fund's average annual portfolio turnover rate for the fiscal year ended
October 31, 1998 was 54%. For the fiscal year ended July 31, 2000, and the nine
month period ended July 31, 1999, the Fund's average annual portfolio turnover
rates were 56% and 63%, respectively. For the nine-month period ended July 31,
1999, the figure was annualized.
A higher rate involves greater brokerage and transaction expenses to the Fund
and may result in the realization of net capital gains, which would be taxable
to shareholders when distributed. Purchases and sales are made for the Fund's
portfolio whenever necessary, in management's opinion, to meet the Fund's
objective.
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<PAGE>
Net Asset Value
The net asset value of shares of each class of the Fund is computed as of the
close of regular trading on the Exchange on each day the Exchange is open for
trading. The Exchange is scheduled to be closed on the following holidays: New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. Net asset value per share of each class of the
Fund is determined by dividing the value of the total assets attributable to
shares of a class of the Fund, less all liabilities attributable to shares of a
class, by the total number of shares outstanding of that class. The per share
net asset value of the Class B and Class C Shares of the Fund will generally be
lower than that of the Class A Shares of the Fund because of the higher expenses
borne by the Class B and Class C Shares.
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. Lacking
a Calculated Mean quotation, the security is valued at the most recent bid
quotation as of the Value Time.
Debt securities, other than short-term securities, are valued at prices supplied
by the Fund's pricing agent(s) which reflect broker/dealer supplied valuations
and electronic data processing techniques. Short-term securities with remaining
maturities of sixty days or less are valued by the amortized cost method, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the Advisor 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 Fund's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is
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<PAGE>
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Fund Shares are sold at their public offering price, which is the net asset
value per such shares next determined after an order is received in proper form
plus, with respect to Class A Shares, an initial sales charge. The minimum
initial investment for Class A, B or C is $1,000 and the minimum subsequent
investment is $100 but such minimum amounts may be changed at any time. The Fund
may waive the minimum for purchases by trustees, directors, officers or
employees of the Fund or the Advisor and its affiliates. An order for the
purchase of Shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
Purchase of Shares
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution/services fees. These differences are summarized in the table below.
Each class has distinct advantages and disadvantages for different investors,
and investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees ^(1)
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 0.25% Initial sales charge
5.75% of the public offering waived or reduced for
price(2) certain purchases
Class B Maximum contingent deferred sales 1.00% Shares convert to Class A
charge of 4% of redemption shares six years after
proceeds; declines to zero after issuance
six years
Class C Contingent deferred sales charge of 1.00% No conversion feature
1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
(1) There is a service fee of 0.25% for each class.
(2) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales
charge if redeemed within one year of purchase and a 0.50% contingent
deferred sales charge if redeemed within the second year of purchase.
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<PAGE>
The minimum initial investment for each of Class A, B and C of the Fund is
$1,000 and the minimum subsequent investment is $50. The minimum initial
investment for an Individual Retirement Account is $250 and the minimum
subsequent investment is $50. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of as a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over .00** .00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI, the
Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Scudder
Kemper Mutual Funds listed under "Special Features -- Class A Shares -- Combined
Purchases" totals at least $1,000,000 including purchases of Class A shares
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features"; or (b) a
participant-directed qualified retirement plan described in Code Section 401(a),
a participant-directed non-qualified deferred compensation plan described in
Code Section 457 or a participant-directed qualified retirement plan described
in Code Section 403(b)(7) which is not sponsored by a K-12 school district,
provided in each case that such plan has not less than 200 eligible employees
(the "Large Order NAV Purchase Privilege"). Redemption within two years of the
purchase of shares purchased under the Large Order NAV Purchase Privilege may be
subject to a contingent deferred sales charge. See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Large Order NAV Purchase
Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a
37
<PAGE>
calendar year basis for sales of shares pursuant to the Large Order NAV Purchase
Privilege to employer-sponsored employee benefit plans using the subaccount
recordkeeping system made available through Kemper Service Company. For purposes
of determining the appropriate commission percentage to be applied to a
particular sale, KDI will consider the cumulative amount invested by the
purchaser in the Fund and other Scudder Kemper Mutual Funds listed under
"Special Features -- Class A Shares -- Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above. The privilege of purchasing Class A shares
of the Fund at net asset value under the Large Order NAV Purchase Privilege is
not available if another net asset value purchase privilege also applies.
Class A shares of the Fund or of any other Scudder Kemper Mutual Funds listed
under "Special Features -- Class A Shares -- Combined Purchases" may be
purchased at net asset value in any amount by members of the plaintiff class in
the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten-year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may in its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the Fund at net asset value under this privilege is not available if another net
asset value purchase privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Scudder Kemper Mutual Funds
pursuant to personal services contracts with KDI, for themselves or members of
their families. KDI in its discretion may compensate financial services firms
for sales of Class A shares under this privilege at a commission rate of 0.50%
of the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, employees (including retirees) and sales representatives of the Fund,
its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) any trust, pension,
profit-sharing or other benefit plan for only such persons; (d) persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class
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A shares at net asset value hereunder. Class A shares may be sold at net asset
value in any amount to unit investment trusts sponsored by Ranson & Associates,
Inc. In addition, unitholders of unit investment trusts sponsored by Ranson &
Associates, Inc. or its predecessors may purchase the Fund's Class A shares at
net asset value through reinvestment programs described in the prospectuses of
such trusts that have such programs. Class A shares of the Fund may be sold at
net asset value through certain investment advisors registered under the 1940
Act and other financial services firms acting solely as agent for their clients,
that adhere to certain standards established by KDI, including a requirement
that such shares be sold for the benefit of their clients participating in an
investment advisory program or agency commission program under which such
clients pay a fee to the investment advisor or other firm for portfolio
management or agency brokerage services. Such shares are sold for investment
purposes and on the condition that they will not be resold except through
redemption or repurchase by the Fund. The Fund may also issue Class A shares at
net asset value in connection with the acquisition of the assets of or merger or
consolidation with another investment company, or to shareholders in connection
with the investment or reinvestment of income and capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share of the Class B shares. The purpose of the conversion feature is to relieve
holders of Class B shares from the distribution services fee when they have been
outstanding long enough for KDI to have been compensated for distribution
related expenses. For purposes of conversion to Class A shares, shares purchased
through the reinvestment of dividends and other distributions paid with respect
to Class B shares in a shareholder's Fund account will be converted to Class A
shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares." KDI currently advances to firms the first year distribution fee
at a rate of 0.75% of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Purchase of Class I Shares. Class I shares are offered at net asset value
without an initial sales charge and are not subject to a contingent deferred
sales charge or a Rule 12b-1 fee. Also, there is no administration
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services fee charged to Class I shares. As a result of the relatively lower
expenses for Class I shares, the level of income dividends per share (as a
percentage of net asset value) and, therefore, the overall investment value,
will typically be higher for Class I shares than for Class A, Class B, or Class
C shares.
Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Zurich
Scudder Investments, Inc. and its affiliates and rollover accounts from those
plans; (2) the following investment advisory clients of Zurich Scudder and its
investment advisory affiliates that invest at least $1 million in a Fund:
unaffiliated benefit plans, such as qualified retirement plans (other than
individual retirement accounts and self-directed retirement plans); unaffiliated
banks and insurance companies purchasing for their own accounts; and endowment
funds of unaffiliated non-profit organizations; (3) investment-only accounts for
large qualified plans, with at least $50 million in total plan assets or at
least 1000 participants; (4) trust and fiduciary accounts of trust companies and
bank trust departments providing fee based advisory services that invest at
least $1 million in a Fund on behalf of each trust; (5) policy holders under
Zurich-American Insurance Group's collateral investment program investing at
least $200,000 in a Fund; and (6) investment companies managed by Scudder Kemper
that invest primarily in other investment companies. Class I shares currently
are available for purchase only from Kemper Distributors, Inc. ("KDI"),
principal underwriter for the Fund, and, in the case of category (4) above,
selected dealers authorized by KDI. Share certificates are not available for
Class I shares.
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this decision, investors should review their particular circumstances carefully
with their financial representative. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than six years might consider Class B shares. Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might consider Class C shares. KDI has established the following procedures
regarding the purchase of Class A, Class B and Class C shares. These procedures
do not reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $500,000 or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value where the combined
subaccount value in a Fund or other Scudder Kemper Mutual Funds listed under
"Special Features - Class A Shares - Combined Purchases" is in excess of $1
million for Class B shares or $5 million for Class C shares including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features." KemFlex Plans that on May
1, 2000 have in excess of $1 million invested in Class B shares of Kemper Mutual
Funds, or have in excess of $850,000 invested in Class B shares of Kemper Mutual
Funds and are able to qualify for the purchase of Class A shares at net asset
value (e.g., pursuant to a Letter of Intent), will have future investments made
in Class A shares and will have the option to covert their holdings in Class B
shares to Class A shares free of any contingent deferred sales charge on May 1,
2002. For more information about the three sales arrangements, consult your
financial representative or the Shareholder Service Agent. Financial services
firms may receive different compensation depending upon which class of shares
they sell. Class I shares are available only to certain institutional investors.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. KDI does not believe
that termination of a relationship with a bank would result in any material
adverse consequences to the Fund.
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KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to tome, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other Funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of the Fund next determined after receipt in good order
by KDI of the order accompanied by payment. However, orders received by dealers
or other financial services firms prior to the determination of net asset value
(see "Net Asset Value") and received in good order by KDI prior to the close of
its business day will be confirmed at a price based on the net asset value
effective on that day ("trade date"). The Fund reserves the right to determine
the net asset value more frequently than once a day if deemed desirable. Dealers
and other financial services firms are obligated to transmit orders promptly.
Collection may take significantly longer for a check drawn on a foreign bank
than for a check drawn on a domestic bank. Therefore, if an order is accompanied
by a check drawn on a foreign bank, funds must normally be collected before
shares will be purchased. See "Purchase and Redemption of Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders for any reason. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct
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certified Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
Redemption or Repurchase of Shares
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper Funds, Attention: Redemption Department, P.O.
Box 219153, Kansas City, Missouri 64141-9153. When certificates for shares have
been issued, they must be mailed to or deposited with the Shareholder Service
Agent, along with a duly endorsed stock power and accompanied by a written
request for redemption. Redemption requests and a stock power must be endorsed
by the account holder with signatures guaranteed by a commercial bank, trust
company, savings and loan association, federal savings bank, member firm of a
national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed exactly as the account is
registered including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
The redemption price for shares of a class of the Fund will be the net asset
value per share of that class of the Fund next determined following receipt by
the Shareholder Service Agent of a properly executed request with any required
documents as described above. Payment for shares redeemed will be made in cash
as promptly as practicable but in no event later than seven days after receipt
of a properly executed request accompanied by any outstanding share certificates
in proper form for transfer. When the Fund is asked to redeem shares for which
it may not have yet received good payment (i.e., purchases by check,
EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of redemption
proceeds until it has determined that collected funds have been received for the
purchase of such shares, which will be up to 10 days from receipt by the Fund of
the purchase amount. The redemption within two years of Class A shares purchased
at net asset value under the Large Order NAV Purchase Privilege may be subject
to a contingent deferred sales charge (see "Purchase of Shares -- Initial Sales
Charge Alternative -- Class A Shares"), the redemption of Class B shares within
six years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge -- Class B Shares" below), and the redemption of Class C
shares within the first year following purchase may be subject to a contingent
deferred sales charge (see "Contingent Deferred Sales Charge -- Class C Shares"
below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $800 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer-sponsored employee benefit plans
using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address
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of record, normally a telephone request or a written request by any one account
holder without a signature guarantee is sufficient for redemptions by individual
or joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a
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participant-directed qualified retirement plan described in Code Section 401(a),
a participant-directed non-qualified deferred compensation plan described in
Code Section 457 or a participant-directed qualified retirement plan described
in Code Section 403(b)(7) which is not sponsored by a K-12 school district; (b)
redemptions by employer-sponsored employee benefit plans using the subaccount
record keeping system made available through the Shareholder Service Agent; (c)
redemption of shares of a shareholder (including a registered joint owner) who
has died; (d) redemption of shares of a shareholder (including a registered
joint owner) who after purchase of the shares being redeemed becomes totally
disabled (as evidenced by a determination by the federal Social Security
Administration); (e) redemptions under the Fund's Systematic Withdrawal Plan at
a maximum of 10% per year of the net asset value of the account; and (f)
redemptions of shares whose dealer of record at the time of the investment
notifies KDI that the dealer waives the discretionary commission applicable to
such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to,
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substantially equal periodic payments described in Internal Revenue Code Section
72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to satisfy required
minimum distributions after age 70 1/2 from an IRA account (with the maximum
amount subject to this waiver being based only upon the shareholder's Kemper IRA
accounts), (f) for any participant-directed redemption of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent (g) redemption of
shares by an employer sponsored employee benefit plan that offers funds in
addition to Scudder Kemper Mutual Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly, and (g)
redemption of shares purchased through a dealer-sponsored asset allocation
program maintained on an omnibus record-keeping system provided the dealer of
record had waived the advance of the first year administrative services and
distribution fees applicable to such shares and has agreed to receive such fees
quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of 3% ($300) because it was in the second year after the purchase was
made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in March
1998 will be eligible for the second year's charge if redeemed on or after March
1, 1999. In the event no specific order is requested when redeeming shares
subject to a contingent deferred sales charge, the redemption will be made first
from shares representing reinvested dividends and then from the earliest
purchase of shares. KDI receives any contingent deferred sales charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Scudder Kemper Mutual Funds listed under "Special Features --
Class A Shares -- Combined Purchases" (other than shares of the Kemper Cash
Reserves Fund purchased directly at net asset value) may reinvest up to the full
amount redeemed at net asset value at the time of the reinvestment in Class A
shares of the Fund or of the other listed Scudder Kemper Mutual Funds. A
shareholder of the Fund or other Scudder Kemper Mutual Funds who redeems Class A
shares purchased under the Large Order NAV Purchase Privilege (see "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares") or Class B shares
or Class C shares and incurs a contingent deferred sales charge may reinvest up
to the full amount redeemed at net asset value at the time of the reinvestment,
in the same class of shares as the case may be, of the Fund or of other Scudder
Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge schedule.
Also, a holder of Class B shares who has redeemed shares may reinvest up to the
full amount redeemed, less any applicable contingent deferred sales charge that
may have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Fund or of the other Scudder Kemper Mutual Funds listed
under "Special Features -- Class A Shares -- Combined Purchases." Purchases
through the reinvestment privilege are subject to the minimum investment
requirements applicable to the shares being purchased and may only be made for
Scudder Kemper Mutual Funds available for sale in the shareholder's state of
residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same
45
<PAGE>
value used to determine net asset value, and selecting the securities in such
manner as the Board of Trustees may deem fair and equitable. If such a
distribution occurred, shareholders receiving securities and selling them could
receive less than the redemption value of such securities and in addition would
incur certain transaction costs. Such a redemption would not be as liquid as a
redemption entirely in cash. The Trust has elected, however, to be governed by
Rule 18f-1 under the 1940 Act, as a result of which the Fund is obligated to
redeem shares, with respect to any one shareholder during any 90-day period,
solely in cash up to the lesser of $250,000 or 1% of the net asset value of a
Share at the beginning of the period.
Special Features
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Strategic Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash
Reserves Fund (available only upon exchange or conversion from Class A shares of
another Scudder Kemper Mutual Fund), Kemper U.S. Mortgage Fund, Kemper
Short-Intermediate Government Fund, Kemper Value Plus Growth Fund, Kemper
Horizon Fund, Kemper New Europe Fund, Inc., Kemper Asian Growth Fund, Kemper
Aggressive Growth Fund, Kemper Global/International Series, Inc., Kemper Equity
Trust and Kemper Securities Trust, Scudder 21st Century Growth Fund, The Japan
Fund, Inc., Scudder High Yield Tax Free Fund, Scudder Pathway Series -Moderate
Portfolio, Scudder Pathway Series - Conservative Portfolio, Scudder Pathway
Series - Growth Portfolio, Scudder International Fund, Scudder Growth and Income
Fund, Scudder Large Company Growth Fund, Scudder Health Care Fund, Scudder
Technology Innovation Fund, Global Discovery Fund, Value Fund, and Classic
Growth Fund ("Scudder Kemper Mutual Funds"). Except as noted below, there is no
combined purchase credit for direct purchases of shares of Zurich Money Funds,
Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account
Trust, Investor's Municipal Cash Fund or Investors Cash Trust ("Money Market
Funds"), which are not considered a "Scudder Kemper Mutual Fund" for purposes
hereof. For purposes of the Combined Purchases feature described above as well
as for the Letter of Intent and Cumulative Discount features described below,
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent may include: (a)
Money Market Funds as "Kemper Mutual Funds", (b) all classes of shares of any
Scudder Kemper Mutual Fund and (c) the value of any other plan investments, such
as guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Scudder Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Scudder Kemper Mutual Funds held of record as of the initial purchase
date under the Letter as an "accumulation credit" toward the completion of the
Letter, but no price adjustment will be made on such shares. Only investments in
Class A shares are included for this privilege.
46
<PAGE>
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Scudder Kemper Mutual Funds (computed at the maximum
offering price at the time of the purchase for which the discount is applicable)
already owned by the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Scudder
Kemper Mutual Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Scudder Kemper Mutual Funds and shares of
the Money Market Funds listed under "Special Features -- Class A Shares --
Combined Purchases" above may be exchanged for each other at their relative net
asset values. Shares of Money Market Funds and the Kemper Cash Reserves Fund
that were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. Series of
Kemper Target Equity Fund are available on exchange only during the Offering
Period for such series as described in the applicable prospectus. Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund and Investors Cash Trust are available on exchange
but only through a financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Scudder Kemper Mutual
Fund or a Money Market Fund under the exchange privilege described above without
paying any contingent deferred sales charge at the time of exchange. If the
Class A shares received on exchange are redeemed thereafter, a contingent
deferred sales charge may be imposed in accordance with the foregoing
requirements provided that the shares redeemed will retain their original cost
and purchase date for purposes of calculating the contingent deferred sales
charge.
Class B Shares. Class B shares of the Fund and Class B shares of any other
Scudder Kemper Mutual Funds listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class B shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of calculating the
contingent deferred sales charge that may be imposed upon the redemption of the
Class B shares received on exchange, amounts exchanged retain their original
cost and purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Scudder Kemper Mutual Funds listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class C shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of determining
whether there is a contingent deferred sales charge that may be imposed upon the
redemption of the Class C shares received by exchange, they retain the cost and
purchase date of the shares that were originally purchased and exchanged.
General. Shares of a Scudder Kemper Mutual Fund with a value in excess of
$1,000,000 (except Kemper Cash Reserves Fund) acquired by exchange through
another Scudder Kemper Mutual Fund, or from a Money Market Fund, may not be
exchanged thereafter until they have been owned for 15 days (the "15-Day Hold
Policy"). In addition, shares of a Kemper fund with a value of $1,000,000 or
less (except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
fund, or from a money market fund, may not be exchanged thereafter until they
have been owned for 15 days, if, in the Advisor's judgment, the exchange
activity may have an adverse effect on the fund. In particular, a pattern of
exchanges that coincides with a "market timing" strategy may be disruptive to
the Kemper fund and therefore may be subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including, without limitation, accounts
administered by a financial
47
<PAGE>
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the Scudder Kemper Mutual Fund into which they are being
exchanged. Exchanges are made based on relative dollar values of the shares
involved in the exchange. There is no service fee for an exchange; however,
dealers or other firms may charge for their services in effecting exchange
transactions. Exchanges will be effected by redemption of shares of the fund
held and purchase of shares of the other fund. For federal income tax purposes,
any such exchange constitutes a sale upon which a gain or loss may be realized,
depending upon whether the value of the shares being exchanged is more or less
than the shareholder's adjusted cost basis of such shares. Shareholders
interested in exercising the exchange privilege may obtain prospectuses of the
other Funds from dealers, other firms or KDI. Exchanges may be accomplished by a
written request to Kemper Service Company, Attention: Exchange Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the shareholder
has given authorization. Once the authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048, subject to the
limitations on liability under "Redemption or Repurchase of Shares -- General."
Any share certificates must be deposited prior to any exchange of such shares.
During periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone exchange privilege. The
exchange privilege is not a right and may be suspended, terminated or modified
at any time. Exchanges may only be made for Funds that are available for sale in
the shareholder's state of residence. Currently, Tax-Exempt California Money
Market Fund is available for sale only in California and Investors Municipal
Cash Fund is available for sale only in certain states. Except as otherwise
permitted by applicable regulations, 60 days' prior written notice of any
termination or material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Scudder Kemper Mutual Fund or Money Market Fund may authorize the
automatic exchange of a specified amount ($50 minimum) of such shares for shares
of the same class of another such Scudder Kemper Mutual Fund. If selected,
exchanges will be made automatically until the shareholder or the Fund
terminates the privilege. Exchanges are subject to the terms and conditions
described above under "Exchange Privilege," except that the $1,000 minimum
investment requirement for the Scudder Kemper Mutual Fund acquired on exchange
is not applicable. This privilege may not be used for the exchange of shares
held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated ClearingHouse System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (maximum
$50,000) from the shareholder's account at a bank, savings and loan or credit
union into the shareholder's Fund account. By enrolling in Bank Direct Deposit,
the shareholder authorizes the Fund and its agents to either draw checks or
initiate Automated ClearingHouse debits against the designated account at a bank
or other financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri 64141-6415. Termination by a shareholder will become effective
within thirty days after the Shareholder Service Agent has received the request.
The Fund may immediately terminate a
48
<PAGE>
shareholder's Plan in the event that any item is unpaid by the shareholder's
financial institution. The Fund may terminate or modify this privilege at any
time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $50. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts
("IRAs"). This includes Savings Incentive Match Plan for Employees of
Small Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP")
IRA accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to
employees of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be
adopted by employers. The maximum annual contribution per participant
is the lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the Exchange is closed other than customary
weekend and holiday closings or during any period in which trading on the
Exchange is restricted, (b) during any period when an emergency exists as a
result of which (i) disposal of the Fund's investments is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund to determine
the value of its net assets, or (c) for such other periods as the SEC may by
order permit for the protection of the Fund's shareholders.
49
<PAGE>
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B Shares and
not Class A Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B Shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
Officers and Trustees
The officers and trustees of the Trust, their ages, their principal occupations
and their affiliations, if any, with the Advisor, and Kemper Distributors, Inc.,
are as follows:
<TABLE>
<CAPTION>
---------------------------------- ----------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ -------------------- ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Linda C. Coughlin (48)+* Trustee and President Managing Director of Zurich Scudder Director and Vice
Investments, Inc. Chairman
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board, Inc.
Chapel Hill, NC (not-for-profit business research
organization)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Keith R. Fox (45) Trustee Private Equity Investor, General --
10 East 53rd Street Partner, Exeter Group of Funds
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, LLC (venture capital firm)
Boston, MA 02108
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
50
<PAGE>
---------------------------------- ----------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ -------------------- ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Thomas V. Bruns (43)# Vice President Managing Director of Zurich Scudder President
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
William F. Glavin (41)# Vice President Managing Director of Zurich Scudder Managing Director
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
James E. Masur (40)+ Vice President Senior Vice President of Zurich __
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Kathryn L. Quirk (47)+ Vice President and Managing Director of Zurich Scudder Director, Vice
Assistant Secretary Investments, Inc. President, Chief Legal
Officer and Secretary
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Howard S. Schneider (43)# Vice President Managing Director of Zurich Scudder __
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
John R. Hebble (42)+ Treasurer Senior Vice President of Zurich --
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Zurich --
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Zurich --
Scudder Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
John Millette (37)+ Vice President and Vice President of Zurich Scudder --
Secretary Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
ADDITIONAL OFFICERS
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
William F. Gadsden (45)++ Vice President Managing Director of Zurich Scudder __
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Valerie F. Malter (42)++ Vice President Managing Director of Zurich Scudder __
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Kathleen T. Millard (39)++ Vice President Managing Director of Zurich Scudder __
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
James M. Eysenbach (38)@ Vice President Managing Director of Zurich Scudder __
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and its
counsel to be persons who are "interested persons" of the Advisor 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
51
<PAGE>
++ Address: 345 Park Avenue, New York, New York
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
The Trustees and Officers of the Trust also serve in similar capacities with
respect to other Scudder Funds.
As of November 30, 2000, 36,790 shares in the aggregate, or 14.58% of the
outstanding shares of Scudder Large Company Growth Fund, Class AARP were held in
the name of Scudder Trust Company, Trustee for the IRA of Harold Craggs, who may
deemed to be the beneficial owner of such shares.
As of November 30, 2000, 17,665 shares in the aggregate, or 7.0% of the
outstanding shares of Scudder Large Company Growth Fund, Class AARP were held by
Elmer Rosen, Trustee for Elmer Rosen Living Trust, who may deemed to be the
beneficial owner of such shares.
As of November 30, 2000, 2,831,785 shares in the aggregate, or 7.97% of the
outstanding shares of Scudder Large Company Growth Fund, Class S were held in
the name of Merrill, Lynch, Pierce, Fenner & Smith, for the exclusive benefit of
customers, 4800 Deer lake Drive East, Jacksonville, FL 32246, who may deemed to
be the beneficial owner of such shares.
Remuneration
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees of the Trust is responsible for the general oversight of
the Fund's business. A majority of the Board's members are not affiliated with
Zurich Scudder Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund of the Trust and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to Scudder and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by Scudder and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee of Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Fund's independent public accountants and
reviews accounting policies and controls. In addition, Independent Trustees from
time to time have established and served on task forces and subcommittees
focusing on particular matters such as investment, accounting and shareholder
service issues.
Compensation of Officers and Trustees of the Fund
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 service. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' 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.
52
<PAGE>
The Independent Trustees also serve in the same capacity for other funds managed
by the Advisor. These funds differ broadly in type and complexity and in some
cases have substantially different Trustee fee schedules. The following table
shows the aggregate compensation received by each Independent Trustee during
1999 from each Trust and from all of the Scudder funds as a group.
------------------------------ ----------------------- -------------------------
Name INVESTMENT TRUST* All Scudder Funds
------------------------------ ----------------------- -------------------------
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** $0 140,000 (30 funds)
------------------------------ ----------------------- -------------------------
* Investment Trust consists of seven funds: Scudder Large Company Growth
Fund, Classic Growth Fund, Scudder Capital Growth Fund, Scudder
Dividend & Growth Fund, Scudder Growth and Income Fund, Scudder S&P 500
Index Fund and Scudder Small Company Stock Fund.
** Newly elected Trustee. On July 13, 2000, shareholders of the Fund
elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly constituted Board of Trustees.
+ 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 Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
Shareholder Rights
The Fund is a 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 March 6, 1991, from Scudder Growth
and Income Fund, and on June 10, 1998 from Scudder Investment Trust. The Fund
changed its name from Scudder Quality Growth Fund on March 1, 1997.
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 seven series: Classic Growth Fund, Scudder Capital Growth Fund,
Scudder Dividend & Growth Fund, Scudder Growth and Income Fund, Scudder Large
Company Growth Fund, Scudder S&P 500 Index Fund, and Scudder Small Company Stock
Fund. The Fund is further divided into six classes of shares: Class AARP, Class
S, Class A (formerly known as Class R),, Class B, Class C and Class I.
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 each series of the Fund has equal rights with each other share of
that series as to voting, dividends and liquidations. All shares issued and
outstanding will be fully paid and nonassessable by the Trust, and redeemable as
described in this Statement of Additional Information and in each series'
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
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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 that 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 of the Fund.
The Trust's Declaration of Trust provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law and that the Fund will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the 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 the 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.
The Trust's Board of Trustees supervises the Fund's activities. The Trust
adopted a plan pursuant to Rule 18f-3 under the 1940 Act (the "Plan") to permit
the Trust to establish a multiple class distribution system for the Fund.
Under the Plan, each class of shares will represent interests in the same
portfolio of investments of the Series, and be identical in all respects to each
other class, except as set forth below. The only differences among the various
classes of shares of the Series will relate solely to: (a) different
distribution fee payments or service fee payments associated with any Rule 12b-1
Plan for a particular class of shares and any other costs relating to
implementing or amending such Rule 12b-1 Plan (including obtaining shareholder
approval of such Rule 12b-1 Plan or any amendment thereto) which will be borne
solely by shareholders of such class; (b) different service fees; (c) different
account minimums; (d) the bearing by each class of its Class Expenses, as
defined in Section 2(b) below; (e) the voting rights related to any Rule 12b-1
Plan affecting a specific class of shares; (f) separate exchange privileges; (g)
different conversion features and (h) different class names and designations.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or fraction
thereof in respect of a fractional share) on matters that such shares (or class
of shares) shall be entitled to vote. Shareholders of the Fund shall vote
together on any matter, except to the extent otherwise required by the 1940 Act,
or when the Board of Trustees has determined that the matter affects only the
interest of shareholders of one or more classes of the Fund, in which case only
the shareholders of such class or classes of the Fund shall be entitled to vote
thereon. Any matter shall be deemed to have been effectively acted upon with
respect to the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Trust's Declaration of Trust. As used in the
Prospectus and in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Trust and all
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additional portfolios (e.g., election of directors), means the vote of the
lesser of (i) 67% of the Trust's shares represented at a meeting if the holders
of more than 50% of the outstanding shares are present in person or by proxy, or
(ii) more than 50% of the Fund's outstanding shares. The term "majority", when
referring to the approvals to be obtained from shareholders in connection with
matters affecting a single Fund or any other single portfolio (e.g., annual
approval of investment management contracts), means the vote of the lesser of
(i) 67% of the shares of the portfolio represented at a meeting if the holders
of more than 50% of the outstanding shares of the portfolio are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of the
portfolio. Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held.
Additional Information
Other Information The CUSIP numbers of the classes are:
Class A: 460965-692
Class B: 460965-684
Class C: 460965-676
Class I: 460965-668
The Fund has a fiscal year ending July 31. On August 10, 1998, the Board changed
Large Company Growth Fund's fiscal year end to July 31 from October 31.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Advisor in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert is counsel to the Fund.
The Fund's Shares prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Fund has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statement for further information
with respect to the Fund and the securities offered hereby. The Registration
Statement and its amendments are available for inspection by the public at the
SEC in Washington, D.C.
Financial Statements
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated July 31, 2000, are incorporated herein by reference and are hereby
deemed to be a part of this Statement of Additional Information.
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Standard & Poor's Earnings and Dividend Rankings for Common Stocks
The investment process involves assessment of various factors -- such as product
and industry position, corporate resources and financial policy -- with results
that make some common stocks more highly esteemed than others. In this
assessment, Standard & Poor believes that earnings and dividend performance is
the end result of the interplay of these factors and that, over the long run,
the record of this performance has a considerable bearing on relative quality.
The rankings, however, do not pretend to reflect all of the factors, tangible or
intangible, that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of protection for
principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements in
establishing Standard & Poor's earnings and dividend rankings for common stocks,
which are designed to capsulize the nature of this record in a single symbol. It
should be noted, however, that the process also takes into consideration certain
adjustments and modifications deemed desirable in establishing such rankings.
The point of departure in arriving at these rankings is a computerized scoring
system based on per-share earnings and dividend records of the most recent ten
years -- a period deemed long enough to measure significant time segments of
secular growth, to capture indications of basic change in trend as they develop,
and to encompass the full peak-to-peak range of the business cycle. Basic scores
are computed for earnings and dividends, then adjusted as indicated by a set of
predetermined modifiers for growth, stability within long-term trend, and
cyclicality. Adjusted scores for earnings and dividends are then combined to
yield a final score.
Further, the ranking system makes allowance for the fact that, in general,
corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix determined
by analysis of the scores of a large and representative sample of stocks. The
range of scores in the array of this sample has been aligned with the following
ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the stock is not
amenable to the ranking process.
The positions as determined above may be modified in some instances by special
considerations, such as natural disasters, massive strikes, and non-recurring
accounting adjustments.
A ranking is not a forecast of future market price performance, but is basically
an appraisal of past performance of earnings and dividends, and relative current
standing. These rankings must not be used as market recommendations; a
high-score stock may at times be so overpriced as to justify its sale, while a
low-score stock may be attractively priced for purchase. Rankings based upon
earnings and dividend records are no substitute for complete analysis. They
cannot take into account potential effects of management changes, internal
company policies not yet fully reflected in the earnings and dividend record,
public relations standing, recent competitive shifts, and a host of other
factors that may be relevant to investment status and decision.
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STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
Scudder Small Company Stock Fund (Class A, B and C Shares)
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, Class B and Class C shares (the
"Shares") of Scudder Small Company Stock Fund (the "Fund"), a diversified series
of Investment Trust (the "Trust"), an open-end management investment company. It
should be read in conjunction with the prospectus of the Shares dated December
29, 2000. The prospectus may be obtained without charge from the Fund at the
address or telephone number on this cover or the firm from which this Statement
of Additional Information was received.
Scudder Small Company Stock Fund offers the following classes of shares:
Class S, Class AARP, Class A, Class B and Class C shares (the "Shares"). Only
Class A, Class B and Class C shares of Scudder Small Company Stock Fund are
offered herein.
TABLE OF CONTENTS
Investment Restrictions.......................................................2
Investment Policies and Techniques............................................4
Dividends, Distributions and Taxes...........................................22
Performance..................................................................27
Investment Manager and Underwriter...........................................30
Portfolio Transactions.......................................................36
Net Asset Value..............................................................38
Purchase, Repurchase and Redemption of Shares................................39
Purchase of Shares...........................................................39
Redemption or Repurchase of Shares...........................................44
Special Features.............................................................48
Officers and Trustees........................................................52
Shareholder Rights...........................................................52
Zurich Scudder Investments, Inc. (the "Advisor") serves as the Fund's investment
manager.
The financial statements appearing in the Fund's September 30, 2000 Annual
Report to Shareholders are incorporated herein by reference. The Annual Report
for the Fund accompanies this document.
<PAGE>
Investment Restrictions
Unless specified to the contrary, the following fundamental restrictions may not
be changed without the approval of a majority of the outstanding voting
securities of the Fund involved which, under the Investment Company Act of 1940,
as amended (the "1940 Act") and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (1) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities of the Fund are present or represented by
proxy, or (2) more than 50% of the outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified series of an open-end
investment company. In addition, as a matter of fundamental policy, the Fund
will not:
(1) borrow money, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, and as interpreted or modified
by regulatory authority having jurisdiction, from time to
time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts related to physical
commodities; or
(7) make loans except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time.
Other Investment Policies. The Trustees of the Trust have voluntarily adopted
policies and restrictions which are observed in the conduct of the Fund's
affairs. These represent intentions of the Trustees based upon current
circumstances. They differ from fundamental investment policies in that they may
be changed or amended by action of the Trustees without prior notice to or
approval of shareholders.
Nonfundamental policies of the Fund may be changed by the Trustees of the Trust
and without shareholder approval. As a matter of nonfundamental policy, the Fund
does not currently intend to:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
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(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); or
(7) lend portfolio securities in an amount greater than 5% of its
total assets.
Master/feeder Fund Structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Fund while investing in a master
fund in a master/feeder fund structure as described below. A master/feeder fund
structure is one in which a fund (a "feeder fund"), instead of investing
directly in a portfolio of securities, invests most or all of its investment
assets in a separate registered investment company (the "master fund") with
substantially the same investment objective and policies as the feeder fund.
Such a structure permits the pooling of assets of two or more feeder funds,
preserving separate identities or distribution channels at the feeder fund
level. Based on the premise that certain of the expenses of operating an
investment portfolio are relatively fixed, a larger investment portfolio may
eventually achieve a lower ratio of operating expenses to average net assets. An
existing investment company is able to convert to a feeder fund by selling all
of its investments, which involves brokerage and other transaction costs and
realization of a taxable gain or loss, or by contributing its assets to the
master fund and avoiding transaction costs and, if proper procedures are
followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the Securities and Exchange Commission (the "SEC") that permits the Fund to
participate in an interfund lending program among certain investment companies
advised by the Advisor. 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
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bank at a higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to a lending fund could result in a lost investment
opportunity or additional costs. The program is subject to the oversight and
periodic review of the Boards of the participating funds. To the extent the Fund
is actually engaged in borrowing through the interfund lending program, the
Fund, as a matter of non-fundamental policy, may not borrow for other than
temporary or emergency purposes (and not for leveraging), except that the Fund
may engage in reverse repurchase agreements and dollar rolls for any purpose.
Investment Policies and Techniques
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. The net asset value of the Fund's shares will increase or
decrease with changes in the market price of the Fund's investments, and there
can be no assurance that the Fund's objective will be met.
The Fund is an open-end management investment company which continuously offers
and redeems shares at net asset value. The Fund is a company of the type
commonly known as a mutual fund.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage (such as hedging,
etc.) or a financial instrument which the Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that the Advisor, in its discretion, might, but is not required to,
use in managing the Fund's portfolio assets. The Advisor may, in its discretion,
at any time employ such practice, technique or instrument for the Fund, but not
for all funds advised by it. Furthermore, it is possible that certain types of
financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of the Fund, but, to the extent employed, could from
time to time have a material impact on the Fund's performance.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
Scudder Small Company Stock Fund, a diversified series of Investment Trust,
seeks to provide long-term capital growth and maintain lower downside risk
compared with other small cap mutual funds. The Fund pursues this investment
objective by investing at least 65% of total assets in equities, mainly common
stocks of small companies. Unlike many other diversified 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.
4
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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.
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.
Investments
Common stocks. Under normal circumstances, the Fund invests primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies. For example, the Fund may invest in a variety of
investment companies which seek to track the composition and performance of
specific indexes or a specific portion of an index. These index-based
investments hold substantially all of their assets in securities representing
their specific index. Accordingly, the main risk of investing in index-based
investments is the same as investing in a portfolio of equity securities
comprising the index. The market prices of index-based investments will
fluctuate in accordance with both changes in the market value of their
underlying portfolio securities and due to supply and demand for the instruments
on the exchanges on which they are traded (which may result in their trading at
a discount or premium to their NAVs). Index-based investments may not replicate
exactly the performance of their specified index because of transaction costs
and because of the temporary unavailability of certain component securities of
the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
5
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Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Dollar Roll Transactions. Dollar roll transactions consist of the sale by the
Fund to a bank or broker/dealers (the "counterparty") of GNMA certificates or
other mortgage-backed securities together with a commitment to purchase from the
counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The Fund
receives a fee from the counterparty as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed over a period of several
months with a different purchase and repurchase price fixed and a cash
settlement made at each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which the Fund agrees to buy a security on a future date.
The Fund will not use 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. The
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 Fund
because they involve the sale of a security coupled with an agreement to
repurchase. Like all borrowings, a dollar roll involves costs to the Fund. For
example, while the Fund receives a fee as consideration for agreeing to
repurchase the security, the Fund forgoes the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Fund, thereby effectively
charging the Fund interest on its borrowing. Further, although the Fund can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of the Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are different
from those related to the securities underlying the transactions. For example,
if the counterparty becomes insolvent, the Fund's right to purchase from the
counterparty might be restricted. Additionally, the value of such securities may
change adversely before the Fund is able to purchase them. Similarly, the Fund
may be required to purchase securities in connection with a dollar roll at a
higher price than may otherwise be available on the open market. Since, as noted
above, the counterparty is required to deliver a similar, but not identical
security to the Fund, the security that the Fund is required to buy under the
dollar roll may be worth less than an identical security. Finally, there can be
no assurance that the Fund's use of the cash that they receive from a dollar
roll will provide a return that exceeds borrowing costs.
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
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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 Fund 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.
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.
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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
Fund's 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 Fund. Thus, such an issue may not
be said to be publicly offered. Unlike the equity securities of operating
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 the 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 Fund believes 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 Fund's 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 Fund of Trust Preferred Securities are typically used to purchase a junior
subordinated debenture, and distributions from the Special Trust are funded by
the payments of principal and interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by the Special
Trust are deferred by the debenture issuer, the debentures would be treated as
original issue discount obligations for the remainder of their term. As a
result, holders of Trust Preferred Securities, such as the Fund, 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 Fund receives any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Fund, to sell their holdings.
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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.
The 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. The 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 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 the 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 the Fund's original investment.
Certain municipal lease obligations and participation interests may be deemed
illiquid for the purpose of the Fund's limitation on investments in illiquid
securities. Other municipal lease obligations and participation interests
acquired by the 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 the Fund.
The Fund may purchase participation interests in municipal lease obligations
held by a commercial bank or other financial institution. Such participations
provide the Fund with the right to a pro rata undivided interest
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in the underlying municipal lease obligations. In addition, such participations
generally provide the 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. The 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. The Fund 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 the 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 1940 Act a repurchase agreement is deemed to be a
loan to the seller of the Obligation and is therefore covered by the Fund's
investment restriction applicable to loans.
Each repurchase agreement entered into by the Fund requires that if the market
value of the Obligation becomes less than the repurchase price (including
interest), the 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 to the repurchase agreement will equal or exceed the repurchase price.
In the event that the 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, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in price of
the Obligation. 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. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them 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 Advisor 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
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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 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.
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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 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,
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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 Fund, most likely will be deemed
the beneficial holder of the underlying U.S. Government securities. The Fund
understand that the staff of the SEC no longer considers such privately stripped
obligations to be U.S. Government securities, as defined in the 1940 Act;
therefore, the Fund 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 Fund is "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 the Fund's policies (see "Investment Restrictions" on page 1). 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
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fund's investment advisor considers all relevant factors and circumstances
including the creditworthiness of the borrower. The Fund has 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 the Fund's investment objectives and policies
may be deemed to be loans.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts. 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, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors, collars, currency forward contracts, currency futures contracts,
currency swaps or options on currencies, or currency futures and various other
currency transactions (collectively, all the above are called "Strategic
Transactions"). In addition, strategic transactions may also include new
techniques, instruments or strategies that are permitted as regulatory changes
occur. Strategic Transactions may be used without limit (subject to certain
limitations imposed by the 1940 Act) to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Advisor's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting
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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 the 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, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the
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Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Advisor. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
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 the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
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The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of,
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or
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sale of its portfolio securities or the receipt of income therefrom. Position
hedging is entering into a currency transaction with respect to portfolio
security positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Advisor, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Advisor'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.
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Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Advisor and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Advisor. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent the 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 the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation
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must be segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by the
Fund will require the Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate cash or liquid assets sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by the Fund
on an index will require the Fund to own portfolio securities which correlate
with the index or to segregate cash or liquid assets equal to the excess of the
index value over the exercise price on a current basis. A put option written by
the Fund requires the Fund to segregate cash or liquid assets equal to the
exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid assets
denominated in that currency equal to the Fund's obligations or to segregate
cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and, in connection with such
options, the Fund will segregate an amount of cash or liquid assets equal to the
full value of the option. OTC options settling with physical delivery, or with
an election of either physical delivery or cash settlement will be treated the
same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash or liquid assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, if the Fund held a futures or forward contract
instead of segregating cash or liquid assets, it could purchase a put option on
the same futures or forward contract with a strike price as high or higher than
the price of the contract held. Other Strategic Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction no segregation is required, but if it terminates
prior to such time, cash or liquid assets equal to any remaining obligation
would need to be segregated.
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.
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<PAGE>
Foreign Securities. The Fund 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 Fund's performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the 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 Fund 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
Fund's 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 Fund 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 the
Fund seeks to mitigate the risks associated with these considerations through
diversification and active professional management.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, the Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which Zurich Scudder Investments acts as trustee
or investment advisor that operate as cash management investment vehicles and
that are excluded from the definition of investment company pursuant to section
3(c)(1) or 3(c)(7) of the 1940 Act (collectively, the "Central Funds") in excess
of the limitations of Section 12(d)(1) of the Investment Company Act. Investment
by the Fund in shares of the Central Funds will be in accordance with the Fund's
investment policies and restrictions as set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
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<PAGE>
The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Capital Gains Distributions
The Fund intends to follow the practice of distributing all of its investment
company taxable income, which includes any excess of net realized short-term
capital gains over net realized long-term capital losses. The Fund may follow
the practice of distributing the entire excess of net realized long-term capital
gains over net realized short-term capital losses. However, the Fund may retain
all or part of such gain for reinvestment after paying the related federal
income taxes for which the shareholders may then be asked to claim a credit
against their federal income tax liability. (See "Taxes.")
If the Fund does not distribute an amount of capital gain and/or ordinary income
required to be distributed by an excise tax provision of the Code, it may be
subject to such tax. In certain circumstances, the Fund may determine that it is
in the interest of shareholders to distribute less than such an amount.
Distributions of investment company taxable income and net realized capital
gains are taxable (See "Taxes"), whether made in shares or cash.
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
dividend paid deduction on its federal tax return.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Additional distributions
for the Fund may be made if necessary. Both types of distributions will be made
in shares of the Fund and confirmations will be mailed to each shareholder
unless a shareholder has elected to receive cash, in which case a check will be
sent.
The Fund intends to distribute investment company taxable income in December
each year. The Fund intends to declare in December any net realized capital
gains resulting from its investment activity. The Fund intends to distribute the
December dividends and capital gains either in December or in the following
January.
Dividends paid by the Fund with respect to each class of its shares will be
calculated in the same manner, at the same time and on the same day. The level
of income dividends per share (as a percentage of net asset value) will be lower
for Class B and Class C Shares than for Class A Shares primarily as a result of
the distribution services fee applicable to Class B and Class C Shares.
Distributions of capital gains, if any, will be paid in the same proportion for
each class.
Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value on the reinvestment date, except that, upon written request
to the Shareholder Service Agent, a shareholder may select one of the following
options:
1. To receive income and short-term capital gain dividends in
cash and long-term capital gain dividends in shares of the
same class at net asset value; or
2. To receive income and capital gain dividends in cash.
Dividends will be reinvested in Shares of the same class of the Fund unless
shareholders indicate in writing that they wish to receive them in cash or in
shares of other Scudder Funds with multiple classes of shares or Kemper
22
<PAGE>
Funds as provided in the prospectus. See "Special Features -- Class A Shares --
Combined Purchases" for a list of such other Funds. To use this privilege of
investing dividends of the Fund in shares of another Scudder or Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Fund will reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions of the Fund in the aggregate
amount of $10 or less are automatically reinvested in shares of the Fund unless
the shareholder requests that such policy not be applied to the shareholder's
account.
Taxes
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code or a predecessor statute, and has qualified as such
since its inception. It intends to continue to qualify for such treatment. Such
qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code.
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of the Fund's
earnings and profits, and would be eligible for the dividends received deduction
in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income 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 the Fund. Presently, the Fund has
no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, the Fund intends to elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a relative share of federal income taxes paid by the 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 the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the deduction for dividends received by corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the shares of the Fund
with respect to which the dividends are received are treated as debt-financed
under federal income tax law, and is eliminated if either those shares or the
shares of the Fund are deemed to have been held by the Fund or the 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.
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<PAGE>
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gain, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends 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 for 2001 ($53,000 for married individuals filing a
joint return, with a phase-out of the deduction for adjusted gross income
between $53,000 and $63,000; $33,000 for a single individual, with a phase-out
for adjusted gross income between $33,000 and $43,000). However, an individual
not permitted to make a deductible contribution to an IRA for any such taxable
year may nonetheless make nondeductible contributions up to $2,000 to an IRA (up
to $2,000 per individual for married couples if only one spouse has earned
income) for that year. There are special rules for determining how withdrawals
are to be taxed if an IRA contains both deductible and nondeductible amounts. In
general, a proportionate amount of each withdrawal will be deemed to be made
from nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
In some cases, shareholders of the Fund will not be permitted to take all or a
portion of their sales loads into account for purposes of determining the amount
of gain or loss realized on the disposition of their shares. This prohibition
generally applies where (1) the shareholder incurs a sales load in acquiring the
shares of the Fund, (2) the shares are disposed of before the 91st day after the
date on which they were acquired, and (3) the shareholder subsequently acquires
shares in the Fund or another regulated investment company and the otherwise
applicable sales charge is reduced under a "reinvestment right" received upon
the initial purchase of Fund shares. The term " reinvestment right" means any
right to acquire shares of one or more regulated investment companies without
the payment of a sales load or with the payment of a reduced sales charge. Sales
charges affected by this rule are treated as if they were incurred with respect
to the shares acquired under the reinvestment right. This provision may be
applied to successive acquisitions of fund shares.
The Fund may invest in shares of certain foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). If
the Fund receives a so-called "excess distribution" with respect to
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<PAGE>
PFIC stock, the Fund itself may be subject to a tax on a portion of the excess
distribution. Certain distributions from a PFIC as well as gains from the sale
of the PFIC shares are treated as "excess distributions." In general, under the
PFIC rules, an excess distribution is treated as having been realized ratably
over the period during which the Fund held the PFIC shares. The Fund will be
subject to tax on the portion, if any, of an excess distribution that is
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Excess
distributions allocated to the current taxable year are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares; any
mark to market losses and any loss from an actual disposition of shares would be
deductible as ordinary 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.
Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the 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 the Fund's portfolio. If
the 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
the Fund is not a taxable transaction for the Fund.
Many futures contracts and certain foreign currency forward contracts entered
into by the Fund and all listed non-equity options written or purchased by the
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 the Fund's fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e. treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts and similar financial instruments
entered into or acquired by the Fund will be treated as ordinary income or loss.
Under certain circumstances, entry into a futures contract to sell a security
may constitute a short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying security or a substantially
identical security in the Fund's portfolio.
If the Fund writes a covered call option on portfolio stock, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
Positions of the Fund which consist of at least one stock and at least one other
position with respect to a related security which substantially diminishes the
Fund's risk of loss with respect to such stock could be treated as a "straddle"
which is governed by Section 1092 of the Code, the operation of which may cause
deferral of losses, adjustments in the holding periods of 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 the Fund.
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<PAGE>
Positions of the Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or non-equity option
governed by Section 1256 which substantially diminishes the Fund's risk of loss
with respect to such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of Section 1092 of
the Code, certain tax elections exist for them which reduce or eliminate the
operation of these rules. The 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 the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
A portion of the difference between the issue price of zero coupon securities
and their face value ("original issue discount") is considered to be income to
the Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount imputed income will comprise
a part of the investment company taxable income of the Fund, which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the Fund's
level.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables, or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain options, futures contracts and
forward contracts, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract and
the date of disposition are also treated as ordinary gain or loss. These gains
or losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
The 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 the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
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<PAGE>
The 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 the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Dividend and interest income received by the Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders should consult their tax advisors about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
PERFORMANCE
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Performance information will be computed separately for each class.
Class A, B and C shares are newly offered and therefore have no available
performance information.
Performance figures for Class A, B and C shares are derived from the historical
performance of Class AARP shares, adjusted to reflect the higher gross total
annual operating expenses applicable to Class A, B and C shares, which may be
higher or lower than those of Class AARP shares. The performance figures are
also adjusted to reflect the maximum sales charge of 5.75% for Class A shares
and the maximum current contingent deferred sales charge of 4% for Class B
shares and 1% for Class C shares. Returns for the historical performance of the
Class S shares may include the effect of a temporary waiver of management fees
and/or absorption of certain operating expenses by the investment advisor and
certain subsidiaries. Without such a waiver or absorption, returns would have
been lower and ratings or rankings may have been less favorable.
The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of the Class A, B and C shares of the Fund as described
above; they do not guarantee future results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
Average Annual Total Return
Average annual total return is the average annual compound rate of return for
the periods of one year, five years and ten years (or such shorter periods as
may be applicable dating from the commencement of the Fund's operations), all
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by
computing the average annual compound rates of return of a hypothetical
investment over such periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial investment of $1,000
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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 September 30, 2000^(1)(2)(3)
1 Year Life of Fund
Scudder Small Company Stock Fund -
Class A -3.74% 3.82%
Scudder Small Company Stock Fund -
Class B -1.73% 3.81%
Scudder Small Company Stock Fund -
Class C 1.34% 4.70%
(1) Because Class A, Class B and C shares were not introduced until
December 29, 2000, the returns for Class B and C shares for the period
prior to their introduction are based upon the performance of Class
AARP shares as described above.
(2) On July 17, 2000, the Fund was reorganized from AARP Growth Trust into
a newly created series of Investment Trust.
(3) As described above, average annual total return is based on historical
earnings and is not intended to indicate future performance. Average
annual total return for the Fund or class 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, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by computing the cumulative
rates of return of a hypothetical investment over such periods, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $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 September 30, 2000^(1)(2)
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1 Year Life of Fund
Scudder Small Company Stock Fund -
Class A -3.83% 14.40%
Scudder Small Company Stock Fund -
Class B -1.73% 15.85%
Scudder Small Company Stock Fund -
Class C 1.31% 18.21%
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the returns for Class A, B and C shares for the period prior to
their introduction are based upon the performance of Class AARP shares.
(2) On July 17, 2000, the Fund was reorganized from AARP Growth Trust into
a newly created series of Investment Trust.
Total Return
Total return is the rate of return on an investment for a specified period of
time calculated in the same manner as cumulative total return.
From time to time, in advertisements, sales literature, and reports to
shareholders or prospective investors, figures relating to the growth in the
total net assets of the Fund apart from capital appreciation will be cited, as
an update to the information in this section, including, but not limited to: net
cash flow, net subscriptions, gross subscriptions, net asset growth, net account
growth, and subscription rates. Capital appreciation generally will be covered
by marketing literature as part of the Fund's and classes' performance data.
Quotations of a Fund's performance are based on historical earnings, show the
performance of a hypothetical investment, and are not intended to indicate
future performance of the Fund. An investor's shares when redeemed may be worth
more or less than their original cost. Performance of a Fund will vary based on
changes in market conditions and the level of the Fund's expenses.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Historical information on the value of the dollar versus foreign currencies may
be used from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which the Fund invests.
From time to time, in advertising and marketing literature, the Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.
From time to time, in marketing and other Fund literature, members of the Board
and officers of the Fund, the Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Fund. In addition, the amount of assets that the Advisor has under
management in various geographical areas may be quoted in advertising and
marketing materials.
The Fund may be advertised as an investment choice in Scudder's college planning
program.
Marketing and other Fund literature may include a description of the potential
risks and rewards associated with an investment in the Fund. The description may
include a "risk/return spectrum" which compares the Fund to other Scudder funds
or broad categories of funds, such as money market, bond or equity funds, in
terms of
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potential risks and returns. Money market funds are designed to maintain a
constant $1.00 share price and have a fluctuating yield. Share price, yield and
total return of a bond fund will fluctuate. The share price and return of an
equity fund also will fluctuate. The description may also compare the Fund to
bank products, such as certificates of deposit. Unlike mutual funds,
certificates of deposit are insured up to $100,000 by the U.S. government and
offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and money
market funds seek stability of principal, these investments are considered to be
less risky than investments in either bond or equity funds, which may involve
the loss of principal. However, all long-term investments, including investments
in bank products, may be subject to inflation risk, which is the risk of erosion
of the value of an investment as prices increase over a long time period. The
risks/returns associated with an investment in bond or equity funds depend upon
many factors. For bond funds these factors include, but are not limited to, a
fund's overall investment objective, the average portfolio maturity, credit
quality of the securities held, and interest rate movements. For equity funds,
factors include a fund's overall investment objective, the types of equity
securities held and the financial position of the issuers of the securities. The
risks/returns associated with an investment in international bond or equity
funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment categories
in the following order: bank products, money market funds, bond funds and equity
funds. Shorter-term bond funds generally are considered less risky and offer the
potential for less return than longer-term bond funds. The same is true of
domestic bond funds relative to international bond funds, and bond funds that
purchase higher quality securities relative to bond funds that purchase lower
quality securities. Growth and income equity funds are generally considered to
be less risky and offer the potential for less return than growth funds. In
addition, international equity funds usually are considered more risky than
domestic equity funds but generally offer the potential for greater return.
Evaluation of Fund performance or other relevant statistical information made by
independent sources may also be used in advertisements concerning the Fund,
including reprints of, or selections from, editorials or articles about the
Fund.
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Zurich Scudder Investments, Inc., Two International Place,
Boston, Massachusetts, an investment counsel firm, acts as investment advisor to
the Fund. This organization, the predecessor of which is Scudder, Stevens &
Clark, Inc., ("Scudder") 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
Advisor introduced Scudder International Fund, Inc., the first mutual fund
available in the U.S. investing internationally in securities of issuers in
several foreign countries. The predecessor firm reorganized from a partnership
to a corporation on June 28, 1985. On June 26, 1997, Scudder entered into an
agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder and
Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc. 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. On October
17, 2000, the dual holding company structure of Zurich Financial Services Group,
comprised of Allied Zurich p.l.c. in the United Kingdom and Zurich Allied A.G.
in Switzerland, was unified into a single Swiss holding company, Zurich
Financial Services. The Advisor changed its name from Scudder Kemper
Investments, Inc. to Zurich Scudder Investments, Inc. The Advisor manages the
Fund's daily investment and business affairs subject to the policies established
by the Trust's Board of Trustees. The Trustees have overall responsibility for
the management of the Fund under Massachusetts law.
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
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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.
Pursuant to an investment management agreement with the Fund, the Advisor acts
as the Fund's investment advisor, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions.
The principal source of the Advisor's income is professional fees received from
providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today it provides investment counsel
for many individuals and institutions, including insurance companies, industrial
corporations, and financial and banking organizations, as well as providing
investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor 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
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world researching hundreds of companies.
In selecting securities in which the Fund may invest, the conclusions and
investment decisions of the Advisor with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Advisor. Investment decisions for the Fund and other clients are
made with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to the Fund.
The present investment management agreement (the "Agreement") dated July 17,
2000 was last approved by the Trustees on July 13, 2000. The Agreement will
continue in effect until September 30, 2001 and from year to year thereafter
only if its continuance is approved annually by the vote of a majority of those
Trustees who are not parties to such Agreement or interested persons of the
Advisor or the Fund, cast in person at a meeting called for the purpose of
voting on such approval, and either by a vote of the Trust's Trustees or of a
majority of the outstanding voting securities of the Fund. The Agreement may be
terminated at any time without payment of penalty by either party on sixty days'
written notice and automatically terminates in the event of its assignment.
Under the Agreement, the Advisor regularly provides the Fund with continuing
investment management for the Fund's portfolio consistent with the Fund's
investment objective, policies and restrictions and determines what securities
shall be purchased, held or sold and what portion of the Fund's assets shall be
held uninvested, subject to the Trust's Declaration of Trust, By-Laws, the 1940
Act, the Code and to the Fund's investment objective, policies and restrictions,
and subject, further, to such policies and instructions as the Board of Trustees
of the Trust may from time to time establish. The Advisor 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 Fund.
Under the Agreement, the Advisor renders significant administrative services
(not otherwise provided by third parties) necessary for the Fund's operations as
an open-end investment company including, but not limited to, preparing reports
and notices to the Trustees and shareholders; supervising, negotiating
contractual arrangements with, and monitoring various third-party service
providers to the Fund (such as the Fund's transfer agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of the
Fund's federal, state and local tax returns;
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preparing and filing the Fund's federal excise tax returns; assisting with
investor and public relations matters; monitoring the valuation of securities
and the calculation of net asset value; monitoring the registration of shares of
the Fund under applicable federal and state securities laws; maintaining the
Fund's books and records to the extent not otherwise maintained by a third
party; assisting in establishing accounting policies of the Fund; assisting in
the resolution of accounting and legal issues; establishing and monitoring the
Fund's operating budget; processing the payment of the Fund's bills; assisting
the Fund in, and otherwise arranging for, the payment of distributions and
dividends; and otherwise assisting the Fund in the conduct of its business,
subject to the direction and control of the Trustees.
The Advisor pays the compensation and expenses of all Trustees, officers and
executive employees (except expenses incurred attending Board and committee
meetings outside New York, New York; Boston, Massachusetts and Chicago,
Illinois) of the Fund affiliated with the Advisor and makes available, without
expense to the Trust, the services of such Trustees, officers and employees of
the Advisor as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities.
For these services Scudder Small Company Stock Fund pays the Advisor 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
Advisor 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 the Fund was considered an "AARP Fund", and for
investment management services the Fund paid the Advisor 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 the Fund. The individual Fund fees for AARP Small Company
Stock Fund were 0.55%.
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 Agreement the Fund is responsible for all of its other expenses
including: organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the Transfer Agent; 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
Advisor; the cost of printing and distributing reports and notices to
stockholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses of shareholders' meetings, the cost of responding to shareholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees of the Fund with respect thereto.
The Agreement identifies the Advisor as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Scudder Kemper Investments, Inc." and
"Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this
license, the Trust, with respect to the Fund, has the non-exclusive right to use
and
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sublicense the Scudder name and marks as part of its name, and to use the
Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the Advisor
concerning such Agreement, the Trustees of the Trust who are not "interested
persons" of the Advisor are represented by independent counsel at the Fund's
expense.
The Agreement provides that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Advisor's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.
The Advisor may serve as advisor to other funds with investment objectives and
policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the Fund as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of Shares of the Fund.
The term Scudder Investments is the designation given to the services provided
by Zurich Scudder Investments, Inc. and its affiliates to the Scudder Family of
Funds.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor 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 Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
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 advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (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 Fund, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Trust and employees of the Advisor and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Advisor's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Advisor'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
Advisor's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, is the principal underwriter and distributor for the Class A, B and C
shares of the Fund and acts as agent of the Fund in the continuous offering of
its Shares. KDI bears all of its expenses of providing
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services pursuant to the distribution agreement, including the payment of any
commissions. The Fund pays the cost for the prospectus and shareholder reports
to be set in type and printed for existing shareholders, and KDI, as principal
underwriter, pays for the printing and distribution of copies thereof used in
connection with the offering of Shares to prospective investors. KDI also pays
for supplementary sales literature and advertising costs.
The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of the Fund, including the Trustees who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees or a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the distribution agreement or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The distribution agreement may not be amended for a class to increase
the fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund, and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the distribution
agreement.
Class B Shares and Class C Shares. The Fund has adopted a plan under Rule 12b-1
(the "Rule 12b-1 Plan") that provides for fees payable as an expense of the
Class B shares and Class C shares that are used by KDI to pay for distribution
and services for those classes. Because 12b-1 fees are paid out of fund assets
on an ongoing basis they will, over time, increase the cost of an investment and
cost more than other types of sales charges.
Rule 12b-1 Plan. Since the distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class B shares. This fee is accrued daily as an
expense of Class B shares. KDI also receives any contingent deferred sales
charges. KDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%.
For its services under the distribution agreement, KDI receives a fee from the
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of the Fund attributable to Class C shares. This fee is accrued daily as an
expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or the Fund. KDI also receives any
contingent deferred sales charges.
Administrative Fee. The Fund has entered into an administrative services
agreement with Scudder Kemper (the "Administration Agreement"), pursuant to
which Scudder Kemper will provide or pay others to provide substantially all of
the administrative services required by the Fund (other than those provided by
Scudder Kemper under its investment management agreement with the Fund, as
described above) in exchange for the payment by the Fund of an administrative
services fee (the "Administrative Fee") of 0.475 % for Class A, 0.525% for Class
B and 0.500% for Class C. One effect of these arrangements is to make the 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 Fund
pursuant to separate agreements with the Fund. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, computes net asset value for the
Fund and maintains its accounting records. Kemper Service Company is the
transfer, shareholder servicing and dividend-paying agent
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for the shares of the Fund. As custodian, State Street Bank and Trust Company
holds the portfolio securities of the Fund, pursuant to a custodian agreement.
PricewaterhouseCoopers LLP audits the financial statements of the Fund and
provides other audit, tax, and related services. Dechert acts as general counsel
for the Fund.
Scudder Kemper will pay the Service Providers for the provision of their
services to the Fund and will pay other Fund's expenses, including insurance,
registration, printing and postage fees. In return, the Fund will pay Scudder
Kemper an Administrative Fee.
The Administration Agreement has an initial term of three years, subject to
earlier termination by the Fund's Board. The fee payable by the Fund to Scudder
Kemper pursuant to the Administration Agreement is reduced by the amount of any
credit received from the Fund's custodian for cash balances.
Certain expenses of the Fund will not be borne by Scudder Kemper under the
Administration Agreement, 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, the Fund will
continue to pay the fees required by its investment management agreement with
Scudder Kemper.
Administrative Services. Administrative services are provided to the Fund on
behalf of Class A, B and C shareholders under an administrative services
agreement ("administrative agreement") with KDI. KDI bears all its expenses of
providing services pursuant to the administrative agreement between KDI and the
Fund, including the payment of service fees. The Fund pays KDI an administrative
services fee, payable monthly, at an annual rate of up to 0.25% of the average
daily net assets of each class.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms") that provide services and facilities
for their customers or clients who are investors in the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A Shares, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to 0.25% of the net assets in Fund accounts that it maintains
and services attributable to Class A Shares, commencing with the month after
investment. With respect to Class B and Class C Shares, KDI currently advances
to firms the first-year service fee at a rate of up to 0.25% of the purchase
price of such Shares. For periods after the first year, KDI currently intends to
pay firms a service fee at a rate of up to 0.25% (calculated monthly and paid
quarterly) of the net assets attributable to Class B and Class C Shares
maintained and serviced by the firm. After the first year, a firm becomes
eligible for the quarterly service fee and the fee continues until terminated by
KDI or the Fund. Firms to which service fees may be paid include affiliates of
KDI. In addition KDI may, from time to time, from its own resources pay certain
firms additional amounts for ongoing administrative services and assistance
provided to their customers and clients who are shareholders of the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of 0.25%
based upon Fund assets in accounts for which a firm provides administrative
services and at the annual rate of 0.15% based upon Fund assets in accounts for
which there is no firm of record (other than KDI) listed on the Fund's records.
The effective administrative services fee rate to be charged against all assets
of the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services. The Board of Trustees of the Fund, in its discretion,
may approve basing the fee to KDI at the annual rate of 0.25% on all Fund assets
in the future.
Certain trustees or officers of the Fund are also directors or officers of the
Advisor or KDI, as indicated under "Officers and Trustees."
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, a subsidiary of the Advisor,
computes net asset value for the Fund. Prior to the
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implementation of the Administration Agreement, the Fund paid SFAC 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 the 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 the Fund $50,709 and $25,445,
respectively.Prior to July 17, 2000, SFAC's fee was $43,006, of which $12,644
was unpaid at September 30, 2000.
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company (the "Custodian"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian has custody of all securities and cash of the Fund held
outside the United States. The Custodian attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Fund. Kemper Service Company ("KSVC"), 811 Main Street, Kansas City,
Missouri 64105-2005, an affiliate of the Advisor, is the Fund's transfer agent,
dividend-paying agent and shareholder service agent for the Fund's Class A, B
and C shares. Prior to the implementation of the Administration Agreement, KSVC
received as transfer agent, annual account fees of $5 per account, transaction
and maintenance charges, annual fees associated with the contingent deferred
sales charge (Class B shares only) and out-of-pocket expense reimbursement.
Independent Accountants and Reports to Shareholders. The financial highlights of
the Fund included in the Fund's prospectus and the Financial Statements
incorporated by reference in this Statement of Additional Information have been
so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. PricewaterhouseCoopers LLP audits the financial
statements of the Fund and provides other audit, tax and related services.
Shareholders will receive annual audited financial statements and semi-annual
unaudited financial statements.
PORTFOLIO TRANSACTIONS
Brokerage Commissions. Allocation of brokerage may be placed by the Advisor.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for the Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Advisor seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others. The Advisor
routinely reviews commission rates, execution and settlement services performed
and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
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<PAGE>
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Advisor is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Advisor 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 Advisor or the Fund in exchange for the direction by the Advisor of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Advisor will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Advisor; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Advisor, it is the opinion
of the Advisor that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than the Fund and not all such information is used by
the Advisor in connection with the Fund. Conversely, such information provided
to the Advisor by broker/dealers through whom other clients of the Advisor
effect securities transactions may be useful to the Advisor in providing
services to the Fund.
The Trustees review, from time to time, whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Fund on portfolio transactions is legally permissible and advisable.
For the fiscal years ended September 30, 1998, 1999 and 2000 the Fund (formerly
AARP Small Company Stock Fund) paid brokerage commissions of $106,149, $78,436
and $______, respectively.
For the fiscal year ended September 30, 1999, $73,784 (94%) of the total
brokerage commissions paid the 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 Advisor. The amount of such transactions aggregated $67,964,040, of
which $60,424,485 (88.91% of all
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<PAGE>
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 year ended September 30, 2000, $_________ (____%) of the total
brokerage commissions paid by the 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 Advisor. The amount of such transactions aggregated $___________, of
which $___________ (____% 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
The Fund's (formerly AARP Small Company Stock Fund) 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, 1998, 1999 and 2000 was
12.4%, 17.4% and 48%.
A higher rate involves greater brokerage and transaction expenses to the Fund
and may result in the realization of net capital gains, which would be taxable
to shareholders when distributed. Purchases and sales are made for the Fund's
portfolio whenever necessary, in management's opinion, to meet the Fund's
objective.
NET ASSET VALUE
The net asset value of shares of each class of the Fund is computed as of the
close of regular trading on the Exchange on each day the Exchange is open for
trading. The Exchange is scheduled to be closed on the following holidays: New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. Net asset value per share of each class of the
Fund is determined by dividing the value of the total assets attributable to
shares of a class of the Fund, less all liabilities attributable to shares of a
class, by the total number of shares outstanding of that class. The per share
net asset value of the Class B and Class C Shares of the Fund will generally be
lower than that of the Class A Shares of the Fund because of the higher expenses
borne by the Class B and Class C Shares.
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. Lacking
a Calculated Mean quotation, the security is valued at the most recent bid
quotation as of the Value Time.
Debt securities, other than short-term securities, are valued at prices supplied
by the Fund's pricing agent(s) which reflect broker/dealer supplied valuations
and electronic data processing techniques. Short-term securities with remaining
maturities of sixty days or less are valued by the amortized cost method, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the Advisor 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
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<PAGE>
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 Fund's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Fund Shares are sold at their public offering price, which is the net asset
value per such shares next determined after an order is received in proper form
plus, with respect to Class A Shares, an initial sales charge. The minimum
initial investment for Class A, B or C is $1,000 and the minimum subsequent
investment is $100 but such minimum amounts may be changed at any time. The Fund
may waive the minimum for purchases by trustees, directors, officers or
employees of the Fund or the Advisor and its affiliates. An order for the
purchase of Shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
PURCHASE OF SHARES
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution/services fees. These differences are summarized in the table below.
Each class has distinct advantages and disadvantages for different investors,
and investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees (1)
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 0.25% Initial sales charge
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<PAGE>
5.75% of the public offering waived or reduced for
price(2) certain purchases
Class B Maximum contingent deferred sales 1.00% Shares convert to Class A
charge of 4% of redemption shares six years after
proceeds; declines to zero after issuance
six years
Class C Contingent deferred sales charge of 1.00% No conversion feature
1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
(1) There is a service fee of 0.25% for each class.
(2) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales charge
if redeemed within one year of purchase and a 0.50% contingent deferred
sales charge if redeemed within the second year of purchase.
The minimum initial investment for each of Class A, B and C of the Fund is
$1,000 and the minimum subsequent investment is $100. The minimum initial
investment for an Individual Retirement Account is $250 and the minimum
subsequent investment is $50. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of As a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over .00** .00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI, the
Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table,
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<PAGE>
during periods and for transactions specified in such notice and such
re-allowances may be based upon attainment of minimum sales levels. During
periods when 90% or more of the sales charge is re-allowed, such dealers may be
deemed to be underwriters as that term is defined in the Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Scudder
Kemper Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" totals at least $1,000,000 including purchases of Class A shares
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features"; or (b) a
participant-directed qualified retirement plan described in Code Section 401(a),
a participant-directed non-qualified deferred compensation plan described in
Code Section 457 or a participant-directed qualified retirement plan described
in Code Section 403(b)(7) which is not sponsored by a K-12 school district,
provided in each case that such plan has not less than 200 eligible employees
(the "Large Order NAV Purchase Privilege"). Redemption within two years of the
purchase of shares purchased under the Large Order NAV Purchase Privilege may be
subject to a contingent deferred sales charge. See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Large Order NAV Purchase
Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer-sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
cumulative amount invested by the purchaser in the Fund and other Scudder Kemper
Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases," including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features referred to above. The privilege of
purchasing Class A shares of the Fund at net asset value under the Large Order
NAV Purchase Privilege is not available if another net asset value purchase
privilege also applies.
Class A shares of the Fund or of any other Scudder Kemper Mutual Fund listed
under "Special Features -- Class A Shares -- Combined Purchases" may be
purchased at net asset value in any amount by members of the plaintiff class in
the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten-year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may in its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the Fund at net asset value under this privilege is not available if another net
asset value purchase privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Scudder Kemper Mutual Funds
pursuant to personal services contracts with KDI, for themselves or members of
their families. KDI in its discretion may compensate financial services firms
for sales of Class A shares under this privilege at a commission rate of 0.50%
of the amount of Class A shares purchased.
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<PAGE>
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, employees (including retirees) and sales representatives of the Fund,
its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) any trust, pension,
profit-sharing or other benefit plan for only such persons; (d) persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
programs described in the prospectuses of such trusts that have such programs.
Class A shares of the Fund may be sold at net asset value through certain
investment advisors registered under the 1940 Act and other financial services
firms acting solely as agent for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
advisor or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another investment company, or
to shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share of the Class B shares. The purpose of the conversion feature is to relieve
holders of Class B shares from the distribution services fee when they have been
outstanding long enough for KDI to have been compensated for distribution
related expenses. For purposes of conversion to Class A
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<PAGE>
shares, shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's Fund
account will be converted to Class A shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares." KDI currently advances to firms the first year distribution fee
at a rate of 0.75% of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this decision, investors should review their particular circumstances carefully
with their financial representative. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than six years might consider Class B shares. Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might consider Class C shares. KDI has established the following procedures
regarding the purchase of Class A, Class B and Class C shares. These procedures
do not reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $500,000 or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value where the combined
subaccount value in a Fund or other Kemper Mutual Funds listed under "Special
Features - Class A Shares - Combined Purchases" is in excess of $1 million for
Class B shares or $5 million for Class C shares including purchases pursuant to
the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features." KemFlex Plans that on May 1, 2000 have in
excess of $1 million invested in Class B shares of Kemper Mutual Funds, or have
in excess of $850,000 invested in Class B shares of Kemper Mutual Funds and are
able to qualify for the purchase of Class A shares at net asset value (e.g.,
pursuant to a Letter of Intent), will have future investments made in Class A
shares and will have the option to covert their holdings in Class B shares to
Class A shares free of any contingent deferred sales charge on May 1, 2002. For
more information about the three sales arrangements, consult your financial
representative or the Shareholder Service Agent. Financial services firms may
receive different compensation depending upon which class of shares they sell.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. KDI does not believe
that termination of a relationship with a bank would result in any material
adverse consequences to the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
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<PAGE>
In addition to the discounts or commissions described above, KDI will, from time
to tome, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other Funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of the Fund next determined after receipt in good order
by KDI of the order accompanied by payment. However, orders received by dealers
or other financial services firms prior to the determination of net asset value
(see "Net Asset Value") and received in good order by KDI prior to the close of
its business day will be confirmed at a price based on the net asset value
effective on that day ("trade date"). The Fund reserves the right to determine
the net asset value more frequently than once a day if deemed desirable. Dealers
and other financial services firms are obligated to transmit orders promptly.
Collection may take significantly longer for a check drawn on a foreign bank
than for a check drawn on a domestic bank. Therefore, if an order is accompanied
by a check drawn on a foreign bank, funds must normally be collected before
shares will be purchased. See "Purchase and Redemption of Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders for any reason. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Scudder Kemper Mutual Funds, Attention: Redemption
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Department, P.O. Box 219153, Kansas City, Missouri 64141-9153. When certificates
for shares have been issued, they must be mailed to or deposited with the
Shareholder Service Agent, along with a duly endorsed stock power and
accompanied by a written request for redemption. Redemption requests and a stock
power must be endorsed by the account holder with signatures guaranteed by a
commercial bank, trust company, savings and loan association, federal savings
bank, member firm of a national securities exchange or other eligible financial
institution. The redemption request and stock power must be signed exactly as
the account is registered including any special capacity of the registered
owner. Additional documentation may be requested, and a signature guarantee is
normally required, from institutional and fiduciary account holders, such as
corporations, custodians (e.g., under the Uniform Transfers to Minors Act),
executors, administrators, trustees or guardians.
The redemption price for shares of a class of the Fund will be the net asset
value per share of that class of the Fund next determined following receipt by
the Shareholder Service Agent of a properly executed request with any required
documents as described above. Payment for shares redeemed will be made in cash
as promptly as practicable but in no event later than seven days after receipt
of a properly executed request accompanied by any outstanding share certificates
in proper form for transfer. When the Fund is asked to redeem shares for which
it may not have yet received good payment (i.e., purchases by check,
EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of redemption
proceeds until it has determined that collected funds have been received for the
purchase of such shares, which will be up to 10 days from receipt by the Fund of
the purchase amount. The redemption within two years of Class A shares purchased
at net asset value under the Large Order NAV Purchase Privilege may be subject
to a contingent deferred sales charge (see "Purchase of Shares -- Initial Sales
Charge Alternative -- Class A Shares"), the redemption of Class B shares within
six years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge -- Class B Shares" below), and the redemption of Class C
shares within the first year following purchase may be subject to a contingent
deferred sales charge (see "Contingent Deferred Sales Charge -- Class C Shares"
below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $800 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer-sponsored employee benefit plans
using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the
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shareholder's account has had an address change within 30 days of the redemption
request. During periods when it is difficult to contact the Shareholder Service
Agent by telephone, it may be difficult to use the telephone redemption
privilege, although investors can still redeem by mail. The Fund reserves the
right to terminate or modify this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the discretionary commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or
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reinvested dividends on Class B shares. The charge is computed at the
following rates applied to the value of the shares redeemed, excluding
amounts not subject to the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
(g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Scudder Kemper Mutual Funds and whose dealer of
record has waived the advance of the first year administrative service and
distribution fees applicable to such shares and agrees to receive such fees
quarterly, and (g) redemption of shares purchased through a dealer-sponsored
asset allocation program maintained on an omnibus record-keeping system provided
the dealer of record had waived the advance of the first year administrative
services and distribution fees applicable to such shares and has agreed to
receive such fees quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and
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by an additional $1,000 of share appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in March
1998 will be eligible for the second year's charge if redeemed on or after March
1, 1999. In the event no specific order is requested when redeeming shares
subject to a contingent deferred sales charge, the redemption will be made first
from shares representing reinvested dividends and then from the earliest
purchase of shares. KDI receives any contingent deferred sales charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Scudder Kemper Mutual Fund listed under "Special Features --
Class A Shares -- Combined Purchases" (other than shares of the Kemper Cash
Reserves Fund purchased directly at net asset value) may reinvest up to the full
amount redeemed at net asset value at the time of the reinvestment in Class A
shares of the Fund or of the other listed Scudder Kemper Mutual Funds. A
shareholder of the Fund or other Scudder Kemper Mutual Funds who redeems Class A
shares purchased under the Large Order NAV Purchase Privilege (see "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares") or Class B shares
or Class C shares and incurs a contingent deferred sales charge may reinvest up
to the full amount redeemed at net asset value at the time of the reinvestment,
in the same class of shares as the case may be, of the Fund or of other Scudder
Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge schedule.
Also, a holder of Class B shares who has redeemed shares may reinvest up to the
full amount redeemed, less any applicable contingent deferred sales charge that
may have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Fund or of the other Scudder Kemper Mutual Funds listed
under "Special Features -- Class A Shares -- Combined Purchases." Purchases
through the reinvestment privilege are subject to the minimum investment
requirements applicable to the shares being purchased and may only be made for
Scudder Kemper Mutual Funds available for sale in the shareholder's state of
residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same value used to
determine net asset value, and selecting the securities in such manner as the
Board of Trustees may deem fair and equitable. If such a distribution occurred,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Trust has elected, however, to be governed by Rule 18f-1
under the 1940 Act, as a result of which the Fund is obligated to redeem shares,
with respect to any one shareholder during any 90-day period, solely in cash up
to the lesser of $250,000 or 1% of the net asset value of a Share at the
beginning of the period.
SPECIAL FEATURES
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Strategic Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
limited offering period), Kemper Intermediate
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Municipal Bond Fund, Kemper Cash Reserves Fund (available only upon exchange or
conversion from Class A shares of another Scudder Kemper Mutual Fund), Kemper
U.S. Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper Value Plus
Growth Fund, Kemper Horizon Fund, Kemper New Europe Fund, Inc., Kemper Asian
Growth Fund, Kemper Aggressive Growth Fund, Kemper Global/International Series,
Inc., Kemper Equity Trust and Kemper Securities Trust, Scudder 21st Century
Growth Fund, The Japan Fund, Inc., Scudder High Yield Tax Free Fund, Scudder
Pathway Series -Moderate Portfolio, Scudder Pathway Series - Conservative
Portfolio, Scudder Pathway Series - Growth Portfolio, Scudder International
Fund, Scudder Growth and Income Fund, Scudder Large Company Growth Fund, Scudder
Health Care Fund, Scudder Technology Innovation Fund, Global Discovery Fund,
Value Fund, and Classic Growth Fund ("Scudder Kemper Mutual Funds"). Except as
noted below, there is no combined purchase credit for direct purchases of shares
of Zurich Money Funds, Cash Equivalent Fund, Tax-Exempt California Money Market
Fund, Cash Account Trust, Investor's Municipal Cash Fund or Investors Cash Trust
("Money Market Funds"), which are not considered a "Scudder Kemper Mutual Fund"
for purposes hereof. For purposes of the Combined Purchases feature described
above as well as for the Letter of Intent and Cumulative Discount features
described below, employer sponsored employee benefit plans using the subaccount
record keeping system made available through the Shareholder Service Agent may
include: (a) Money Market Funds as "Kemper Mutual Funds", (b) all classes of
shares of any Scudder Kemper Mutual Fund and (c) the value of any other plan
investments, such as guaranteed investment contracts and employer stock,
maintained on such subaccount record keeping system.
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Scudder Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Scudder Kemper Mutual Funds held of record as of the initial purchase
date under the Letter as an "accumulation credit" toward the completion of the
Letter, but no price adjustment will be made on such shares. Only investments in
Class A shares are included for this privilege.
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Scudder Kemper Mutual Funds (computed at the maximum
offering price at the time of the purchase for which the discount is applicable)
already owned by the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Scudder
Kemper Mutual Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Scudder Kemper Mutual Funds and shares of
the Money Market Funds listed under "Special Features -- Class A Shares --
Combined Purchases" above may be exchanged for each other at their relative net
asset values. Shares of Money Market Funds and the Kemper Cash Reserves Fund
that were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. Series of
Kemper Target Equity Fund are available on exchange only during the Offering
Period for such series as described in the applicable prospectus. Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund and Investors Cash Trust are available on exchange
but only through a financial services firm having a services agreement with KDI.
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Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Scudder Kemper Mutual
Fund or a Money Market Fund under the exchange privilege described above without
paying any contingent deferred sales charge at the time of exchange. If the
Class A shares received on exchange are redeemed thereafter, a contingent
deferred sales charge may be imposed in accordance with the foregoing
requirements provided that the shares redeemed will retain their original cost
and purchase date for purposes of calculating the contingent deferred sales
charge.
Class B Shares. Class B shares of the Fund and Class B shares of any other
Scudder Kemper Mutual Fund listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class B shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of calculating the
contingent deferred sales charge that may be imposed upon the redemption of the
Class B shares received on exchange, amounts exchanged retain their original
cost and purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Scudder Kemper Mutual Fund listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class C shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of determining
whether there is a contingent deferred sales charge that may be imposed upon the
redemption of the Class C shares received by exchange, they retain the cost and
purchase date of the shares that were originally purchased and exchanged.
General. Shares of a Scudder Kemper Mutual Fund with a value in excess of
$1,000,000 (except Kemper Cash Reserves Fund) acquired by exchange through
another Scudder Kemper Mutual Fund, or from a Money Market Fund, may not be
exchanged thereafter until they have been owned for 15 days (the "15-Day Hold
Policy"). In addition, shares of a Scudder Kemper Mutual Fund with a value of
$1,000,000 or less (except Kemper Cash Reserves Fund) acquired by exchange from
another Scudder Kemper Mutual Fund, or from a money market fund, may not be
exchanged thereafter until they have been owned for 15 days, if, in the
Advisor's judgment, the exchange activity may have an adverse effect on the
fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Scudder Kemper Mutual Fund and
therefore may be subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including, without limitation, accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged must
at least equal the minimum investment requirement of the Scudder Kemper Mutual
Fund into which they are being exchanged. Exchanges are made based on relative
dollar values of the shares involved in the exchange. There is no service fee
for an exchange; however, dealers or other firms may charge for their services
in effecting exchange transactions. Exchanges will be effected by redemption of
shares of the fund held and purchase of shares of the other fund. For federal
income tax purposes, any such exchange constitutes a sale upon which a gain or
loss may be realized, depending upon whether the value of the shares being
exchanged is more or less than the shareholder's adjusted cost basis of such
shares. Shareholders interested in exercising the exchange privilege may obtain
prospectuses of the other Funds from dealers, other firms or KDI. Exchanges may
be accomplished by a written request to Kemper Service Company, Attention:
Exchange Department, P.O. Box 419557, Kansas City, Missouri 64141-6557, or by
telephone if the shareholder has given authorization. Once the authorization is
on file, the Shareholder Service Agent will honor requests by telephone at
1-800-621-1048, subject to the limitations on liability under "Redemption or
Repurchase of Shares -- General." Any share certificates must be deposited prior
to any exchange of such shares. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
telephone exchange privilege. The exchange privilege is not a right and may be
suspended, terminated or modified at any time. Exchanges may only be made for
Funds that are available for sale in the shareholder's state of residence.
Currently, Tax-Exempt California Money Market Fund is available for sale only in
California and Investors Municipal Cash Fund is available for sale only in
certain states. Except as otherwise permitted by applicable regulations, 60
days' prior written notice of any termination or material change will be
provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Scudder Kemper Mutual Fund or Money Market Fund may authorize the
automatic exchange of a specified amount ($50 minimum) of such shares for shares
of the same class of another such Scudder Kemper Mutual Fund. If selected,
50
<PAGE>
exchanges will be made automatically until the shareholder or the Scudder Kemper
Mutual Fund terminates the privilege. Exchanges are subject to the terms and
conditions described above under "Exchange Privilege," except that the $1,000
minimum investment requirement for the Scudder Kemper Mutual Fund acquired on
exchange is not applicable. This privilege may not be used for the exchange of
shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated ClearingHouse System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (minimum $50
and maximum $50,000) from the shareholder's account at a bank, savings and loan
or credit union into the shareholder's Fund account. By enrolling in Bank Direct
Deposit, the shareholder authorizes the Fund and its agents to either draw
checks or initiate Automated ClearingHouse debits against the designated account
at a bank or other financial institution. This privilege may be selected by
completing the appropriate section on the Account Application or by contacting
the Shareholder Service Agent for appropriate forms. A shareholder may terminate
his or her Plan by sending written notice to Kemper Service Company, P.O. Box
419415, Kansas City, Missouri 64141-6415. Termination by a shareholder will
become effective within thirty days after the Shareholder Service Agent has
received the request. The Fund may immediately terminate a shareholder's Plan in
the event that any item is unpaid by the shareholder's financial institution.
The Fund may terminate or modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $50. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore,
51
<PAGE>
the Fund will not knowingly permit additional investments of less than $2,000 if
the investor is at the same time making systematic withdrawals. KDI will waive
the contingent deferred sales charge on redemptions of Class A shares purchased
under the Large Order NAV Purchase Privilege, Class B shares and Class C shares
made pursuant to a systematic withdrawal plan. The right is reserved to amend
the systematic withdrawal plan on 30 days' notice. The plan may be terminated at
any time by the investor or the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts
("IRAs"). This includes Savings Incentive Match Plan for Employees of
Small Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP")
IRA accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to
employees of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be
adopted by employers. The maximum annual contribution per participant
is the lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the Exchange is closed other than customary
weekend and holiday closings or during any period in which trading on the
Exchange is restricted, (b) during any period when an emergency exists as a
result of which (i) disposal of the Fund's investments is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund to determine
the value of its net assets, or (c) for such other periods as the SEC may by
order permit for the protection of the Fund's shareholders.
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B Shares and
not Class A Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B Shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
Officers and Trustees
The officers and trustees of the Trust, their ages, their principal occupations
and their affiliations, if any, with the Advisor, and Kemper Distributors, Inc.,
are as follows:
<TABLE>
<CAPTION>
---------------------------------- ----------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ -------------------- ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
52
<PAGE>
---------------------------------- ----------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ -------------------- ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
Linda C. Coughlin (48)+* Trustee and President Managing Director of Zurich Scudder Director and Vice
Investments, Inc. Chairman
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board, Inc.
Chapel Hill, NC (not-for-profit business research
organization)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Keith R. Fox (45) Trustee Private Equity Investor, General --
10 East 53rd Street Partner, Exeter Group of Funds
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, LLC (venture capital firm)
Boston, MA 02108
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Thomas V. Bruns (43)# Vice President Managing Director of Zurich Scudder President
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
William F. Glavin (41)# Vice President Managing Director of Zurich Scudder Managing Director
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
53
<PAGE>
---------------------------------- ----------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ -------------------- ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
James E. Masur (40)+ Vice President Senior Vice President of Zurich __
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Kathryn L. Quirk (47)+ Vice President and Managing Director of Zurich Scudder Director, Secretary,
Assistant Secretary Investments, Inc. Chief Legal Officer and
Vice President
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Howard S. Schneider (43)# Vice President Managing Director of Zurich Scudder __
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
John R. Hebble (42)+ Treasurer Senior Vice President of Zurich __
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Zurich __
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Zurich __
Scudder Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
John Millette (37)+ Vice President and Vice President of Zurich Scudder --
Secretary Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
ADDITIONAL OFFICERS
------------------------------------ --------------------- --------------------------------------- -------------------------
Kathleen T. Millard (39)+ Vice President Managing Director, Zurich Scudder __
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
James M. Eysenbach (38)@ Vice President Managing Director of Zurich Scudder __
Investments, Inc.
------------------------------------ --------------------- --------------------------------------- -------------------------
------------------------------------ --------------------- --------------------------------------- -------------------------
William F. Gadsden (45) ++ Vice President Managing Director of Zurich Scudder __
Investments, Inc.
------------------------------------ --------------------- --------------------------------------- -------------------------
------------------------------------ --------------------- --------------------------------------- -------------------------
Valerie F. Malter (41)++ Vice President Managing Director of Zurich Scudder __
Investments, Inc.
------------------------------------ --------------------- --------------------------------------- -------------------------
</TABLE>
54
<PAGE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and
its counsel to be persons who are "interested persons" of the
Advisor or of the Trust, within the meaning of the 1940 Act.
** 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
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
The Trustees and Officers of the Trusts also serve in similar
capacities with other Scudder Funds.
[TO BE UPDATED: INSERTION OF SHAREHOLDING INFORMATION]
Remuneration
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees of the Trust is responsible for the general oversight of
the Fund's business. A majority of the Board's members are not affiliated with
Zurich Scudder Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund of the Trust and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to Scudder and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by Scudder and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee of Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Fund's independent public accountants and
reviews accounting policies and controls. In addition, Independent Trustees from
time to time have established and served on task forces and subcommittees
focusing on particular matters such as investment, accounting and shareholder
service issues.
Compensation of Officers and Trustees of the Fund
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 service. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' conferences or service on special
trustee task forces or subcommittees. Independent Trustees do not receive any
employee benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation.
The Independent Trustees also serve in the same capacity for other funds managed
by the Advisor. These funds differ broadly in type and complexity and in some
cases have substantially different Trustee fee schedules. The following table
shows the aggregate compensation received by each Independent Trustee during
1999 from each Trust and from all of the Scudder funds as a group.
55
<PAGE>
<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>
* Investment Trust consists of 7 funds: Classic Growth Fund, Scudder
Capital Growth Fund, Scudder Dividend and Growth Fund, Scudder Growth
and Income Fund, Scudder Large Company Growth Fund, Scudder S&P 500
Index Fund, and Scudder Small Company Stock Fund.
** Newly elected Trustee. On July 13, 2000, shareholders of the Fund
elected a new Board of Trustees. See the "Trustees and Officers"
section for the newly-constituted Board of Trustees.
+ 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 Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
SHAREHOLDER RIGHTS
The Fund is a 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 March 6, 1991, from Scudder Growth
and Income Fund, and on June 10, 1998 from Scudder Investment Trust. The Fund
changed its name from AARP Small Company Stock Fund on July 17, 2000.
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 seven series: Classic Growth Fund, Scudder Capital Growth Fund,
Scudder Dividend and Growth Fund, Scudder Growth and Income Fund, Scudder Large
Company Growth Fund, Scudder S&P 500 Index Fund, and Scudder Small Company Stock
Fund. The Fund is further divided into five classes of shares: Class AARP, Class
S, Class A, Class B and Class C.
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 each series of the Fund has equal rights with each other share of
that series as to voting, dividends and liquidations. All shares issued and
outstanding will be fully paid and nonassessable by the Trust, and redeemable as
described in this Statement of Additional Information and in each series'
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
56
<PAGE>
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 that 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 of the Fund.
The Trust's Declaration of Trust provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law and that the Fund will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the 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 the 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.
The Trust's Board of Trustees supervises the Fund's activities. The Trust
adopted a plan pursuant to Rule 18f-3 under the 1940 Act (the "Plan") to permit
the Trust to establish a multiple class distribution system for the Funds.
Under the Plan, each class of shares will represent interests in the same
portfolio of investments of the Series, and be identical in all respects to each
other class, except as set forth below. The only differences among the various
classes of shares of the Series will relate solely to: (a) different
distribution fee payments or service fee payments associated with any Rule 12b-1
Plan for a particular class of shares and any other costs relating to
implementing or amending such Rule 12b-1 Plan (including obtaining shareholder
approval of such Rule 12b-1 Plan or any amendment thereto) which will be borne
solely by shareholders of such class; (b) different service fees; (c) different
account minimums; (d) the bearing by each class of its Class Expenses, as
defined in Section 2(b) below; (e) the voting rights related to any Rule 12b-1
Plan affecting a specific class of shares; (f) separate exchange privileges; (g)
different conversion features and (h) different class names and designations.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or fraction
thereof in respect of a fractional share) on matters that such shares (or class
of shares) shall be entitled to vote. Shareholders of the Fund shall vote
together on any matter, except to the extent otherwise required by the 1940 Act,
or when the Board of Trustees has determined that the matter affects only the
interest of shareholders of one or more classes of the Fund, in which case only
the shareholders of such class or classes of the Fund shall be entitled to vote
thereon. Any matter shall be deemed to have been effectively acted upon with
respect to the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Trust's Declaration of Trust. As used in the
Prospectus and in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Trust and all additional portfolios (e.g.,
election of directors), means the vote of the lesser of (i) 67% of the Trust's
shares represented at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Fund's outstanding shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single
57
<PAGE>
portfolio (e.g., annual approval of investment management contracts), means the
vote of the lesser of (i) 67% of the shares of the portfolio represented at a
meeting if the holders of more than 50% of the outstanding shares of the
portfolio are present in person or by proxy, or (ii) more than 50% of the
outstanding shares of the portfolio. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Additional Information
Other Information
The CUSIP numbers of the classes are:
Class A: 460965-585
Class B: 460965-577
Class C:460965-569
The Fund has a fiscal year ending September 30.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Advisor in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert is counsel to the Fund.
The Fund's Shares prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Fund has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statement for further information
with respect to the Fund and the securities offered hereby. The Registration
Statement and its amendments are available for inspection by the public at the
SEC in Washington, D.C.
Financial Statements
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated September 30, 2000, are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.
58
<PAGE>
Standard & Poor's Earnings and Dividend Rankings for Common Stocks
The investment process involves assessment of various factors -- such as product
and industry position, corporate resources and financial policy -- with results
that make some common stocks more highly esteemed than others. In this
assessment, Standard & Poor believes that earnings and dividend performance is
the end result of the interplay of these factors and that, over the long run,
the record of this performance has a considerable bearing on relative quality.
The rankings, however, do not pretend to reflect all of the factors, tangible or
intangible, that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of protection for
principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements in
establishing Standard & Poor's earnings and dividend rankings for common stocks,
which are designed to capsulize the nature of this record in a single symbol. It
should be noted, however, that the process also takes into consideration certain
adjustments and modifications deemed desirable in establishing such rankings.
The point of departure in arriving at these rankings is a computerized scoring
system based on per-share earnings and dividend records of the most recent ten
years -- a period deemed long enough to measure significant time segments of
secular growth, to capture indications of basic change in trend as they develop,
and to encompass the full peak-to-peak range of the business cycle. Basic scores
are computed for earnings and dividends, then adjusted as indicated by a set of
predetermined modifiers for growth, stability within long-term trend, and
cyclicality. Adjusted scores for earnings and dividends are then combined to
yield a final score.
Further, the ranking system makes allowance for the fact that, in general,
corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix determined
by analysis of the scores of a large and representative sample of stocks. The
range of scores in the array of this sample has been aligned with the following
ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the stock is not
amenable to the ranking process.
The positions as determined above may be modified in some instances by special
considerations, such as natural disasters, massive strikes, and non-recurring
accounting adjustments.
A ranking is not a forecast of future market price performance, but is basically
an appraisal of past performance of earnings and dividends, and relative current
standing. These rankings must not be used as market recommendations; a
high-score stock may at times be so overpriced as to justify its sale, while a
low-score stock may be attractively priced for purchase. Rankings based upon
earnings and dividend records are no substitute for complete analysis. They
cannot take into account potential effects of management changes, internal
company policies not yet fully reflected in the earnings and dividend record,
public relations standing, recent competitive shifts, and a host of other
factors that may be relevant to investment status and decision.
59
<PAGE>
PART C. OTHER INFORMATION
INVESTMENT TRUST
<TABLE>
<CAPTION>
Item 23 Exhibits
------- --------
<S> <C> <C> <C>
(a) (1) Amended and Restated Declaration of Trust dated November 3, 1987.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(2) Certificate of Amendment of Declaration of Trust dated November 13,
1990.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(3) Certificate of Amendment of Declaration of Trust dated February 12,
1991.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(4) Certificate of Amendment of Declaration of Trust dated May 28, 1998.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(5) Establishment and Designation of Series of Shares of Beneficial
Interest, $0.01 par value, with respect to Scudder Growth and Income
Fund and Scudder Quality Growth Fund.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(6) Establishment and Designation of Series of Shares of Beneficial
Interest, $0.01 par value, with respect to Scudder Classic Growth
Fund.
(Incorporated by reference to Post-Effective Amendment No. 76 to the
Registration Statement.)
<PAGE>
(7) Establishment and Designation of Series of Shares of Beneficial
Interest, $0.01 par value, with respect to Scudder Growth and Income
Fund, Scudder Large Company Growth Fund, Scudder Classic Growth
Fund, and Scudder S&P 500 Index Fund.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(8) Establishment and Designation of Series of Shares of Beneficial
Interest, $0.01 par value, with respect to Scudder Real Estate
Investment Fund.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(9) Establishment and Designation of Series of Shares of Beneficial
Interest, $0.01 par value, with respect to Dividend + Growth Fund.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(10) Establishment and Designation of Series of Shares of Beneficial
Interest, $0.01 par value, with respect to Scudder Tax Managed
Growth Fund and Scudder Tax Managed Small Company Fund.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(11) Establishment and Designation of Classes of Shares of Beneficial
Interest, $0.01 par value, Kemper A, B & C Shares, and Scudder S
Shares, with respect to Classic Growth Fund.
(Incorporated by reference to Post-Effective Amendment No. 94 to the
Registration Statement.)
(12) Establishment and Designation of Classes of Shares of Beneficial
Interest, $0.01 par value, Class R Shares, with respect to Scudder
Growth and Income Fund.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
Part C - Page 2
<PAGE>
(13) Establishment and Designation of Classes of Shares of Beneficial
Interest, $0.01 par value, Class R Shares, with respect to Scudder
Large Company Growth Fund.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(14) Redesignation of Series, Scudder Classic Growth Fund to Classic
Growth Fund.
(Incorporated by reference to Post-Effective Amendment No. 94 to the
Registration Statement.)
(15) Redesignation of Series, Scudder Quality Growth Fund to Scudder
Large Company Growth Fund.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(16) Redesignation of Series, Scudder Dividend + Growth Fund to Scudder
Dividend & Growth Fund.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(17) Establishment and Designation of Classes of Shares of Beneficial
Interest, $0.01 par value, Class S and Class AARP, with respect to
Scudder Dividend and Growth Fund. (Incorporated by reference to
Post-Effective Amendment No. 117 to the Registration Statement, as
filed on May 12, 2000.)
(18) Amended and Restated Establishment and Designation of Classes of
Shares of Beneficial Interest, $0.01 par value, Class R, Class S and
Class AARP with respect to Scudder Growth and Income Fund.
(Incorporated by reference to Post-Effective Amendment No. 117 to
the Registration Statement, as filed on May 12, 2000.)
(19) Establishment and Designation of Classes of Shares of Beneficial
Interest, $0.01 par value, Class S and Class AARP, with respect to
Scudder S&P 500 Index Fund. (Incorporated by reference to
Post-Effective Amendment No. 117 to the Registration Statement, as
filed on May 12, 2000.)
(20) Establishment and Designation of Classes of Shares of Beneficial
Interest, $0.01 par value, Class S and Class AARP, with respect to
Scudder Small Company Stock Fund. (Incorporated by reference to
Post-Effective Amendment No. 117 to the Registration Statement, as
filed on May 12, 2000.)
Part C - Page 3
<PAGE>
(21) Establishment and Designation of Classes of Shares of Beneficial
Interest, $0.01 par value, Class S and Class AARP, with respect to
Scudder Capital Growth Fund. (Incorporated by reference to
Post-Effective Amendment No. 117 to the Registration Statement, as
filed on May 12, 2000.)
(22) Amended and Restated Establishment and Designation of Classes of
Shares of Beneficial Interest, $.01 Par Value, Class R, Class S and
Class AARP, with respect to Scudder Large Company Growth Fund.
(Incorporated by reference to Post-Effective Amendment No. 118 to
the Registration Statement, as filed on July 14, 2000.)
(23) Amended and Restated Establishment and Designation of Series of
Shares of Beneficial Interest, $.01 Par Value, Class S and Class
AARP, with respect to Scudder Capital Growth Fund and Scudder Small
Company Stock Fund. (Incorporated by reference to Post-Effective
Amendment No. 118 to the Registration Statement, as filed on July
14, 2000.)
(24) Establishment and Designation of Classes of Shares of Beneficial
Interest, $.01 Par Value, Class S and Class AARP, with respect to
Scudder Capital Growth Fund. (Incorporated by reference to
Post-Effective Amendment No. 118 to the Registration Statement, as
filed on July 14, 2000.)
(25) Establishment and Designation of Classes of Shares of Beneficial
Interest, $.01 par Value, Class S and Class AARP, with respect to
Scudder Small Company Stock Fund. (Incorporated by reference to
Post-Effective Amendment No. 118 to the Registration Statement, as
filed on July 14, 2000.)
(26) Amended and Restated Establishment and Designation of Shares of
Beneficial Interest, Classes A, B, C and I of Scudder Capital Growth
Fund, is filed herein.
(27) Amended and Restated Establishment and Designation of Shares of
Beneficial Interest, Classes A, B, and C of Scudder Growth and
Income Fund, is filed herein.
(28) Amended and Restated Establishment and Designation of Shares of
Beneficial Interest, Classes A, B, C and I of Scudder Large Company
Growth Fund, is filed herein.
(29) Amended and Restated Establishment and Designation of Shares of
Beneficial Interest, Classes A, B, and C of Scudder Dividend and
Growth Fund, is filed herein.
Part C - Page 4
<PAGE>
(30) Amended and Restated Establishment and Designation of Shares of
Beneficial Interest, Classes A, B, and C of Scudder Small Company
Stock Fund, is filed herein.
(b) (1) Amendment to By-Laws of the Registrant dated November 12, 1991.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(2) Amendment to By-Laws of the Registrant, dated February 7, 2000.
(Incorporated by reference to Post-Effective Amendment No. 120 to
the Registration Statement.)
(3) Amendment to By-Laws of the Registrant, dated November 13, 2000, is
incorporated herein.
(c) Inapplicable.
(d) (1) Investment Management Agreement between the Registrant (on behalf of
Scudder Growth and Income Fund) and Scudder Kemper Investments, Inc.
dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
(2) Investment Management Agreement between the Registrant (on behalf of
Scudder Large Company Growth Fund) and Scudder Kemper Investments,
Inc. dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
(3) Investment Management Agreement between the Registrant (on behalf of
Classic Growth Fund) and Scudder Kemper Investments, Inc. dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
(4) Investment Management Agreement between the Registrant (on behalf of
Scudder Real Estate Investment Fund) and Scudder Kemper Investments,
Inc. dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
(5) Investment Management Agreement between the Registrant (on behalf of
Scudder S&P 500 Index Fund) and Scudder Kemper Investments, Inc.
dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
Part C - Page 5
<PAGE>
(6) Investment Management Agreement between the Registrant (on behalf of
Scudder Dividend & Growth Fund) and Scudder Kemper Investments, Inc.
dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
(7) Investment Management Agreement between the Registrant (on behalf of
Scudder Tax Managed Growth Fund) and Scudder Kemper Investments,
Inc. dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
(8) Investment Management Agreement between the Registrant (on behalf of
Scudder Tax Managed Small Company Fund) and Scudder Kemper
Investments, Inc. dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
(9) Investment Advisory Agreement between the Registrant (on behalf of
Scudder S&P 500 Index Fund) and Bankers Trust Company dated
September 9, 1999.
(Incorporated by reference to Post-Effective Amendment No. 109 to
the Registration Statement.)
(10) Investment Management Agreement between the Registrant (on behalf of
Scudder Capital Growth Fund) and Scudder Kemper Investments, Inc.,
dated July 17, 2000. (Incorporated by reference to Post-Effective
Amendment No. 120 to the Registration Statement.)
(11) Investment Management Agreement between the Registrant (on behalf of
Scudder Small Company Stock Fund) and Scudder Kemper Investments,
Inc., dated July 17, 2000. (Incorporated by reference to
Post-Effective Amendment No. 120 to the Registration Statement.)
(12) Investment Management Agreement between the Registrant (on behalf of
Scudder Growth and Income Fund) and Scudder Kemper Investments,
Inc., dated August 14, 2000, is incorporated by reference to
Post-Effective Amendment No. 121 to the Registration Statement.
(13) Amended and Restated Investment Management Agreement between the
Registrant (on behalf of Scudder Dividend and Growth Fund) and
Scudder Kemper Investments, Inc., dated October 2, 2000, is filed
herein.
Part C - Page 6
<PAGE>
(14) Amended and Restated Investment Management Agreement between the
Registrant (on behalf of Scudder Large Company Growth Fund) and
Scudder Kemper Investments, Inc., dated October 2, 2000, is filed
herein.
(e) (1) Underwriting Agreement and Distribution Services Agreement between
the Registrant on behalf of Classic Growth Fund and Kemper
Distributors, Inc. dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
(2) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc. dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
(3) Amendment dated August 31, 1999 to the Underwriting and Distribution
Services Agreement between the Registrant, on behalf of Classic
Growth Fund, and Kemper Distributors, Inc.
(Incorporated by reference to Post-Effective Amendment No. 109 to
the Registration Statement.)
(4) Amendment dated November 2, 1999 to the Underwriting and
Distribution Services Agreement between the Registrant, on behalf of
Classic Growth Fund, and Kemper Distributors, Inc.
(Incorporated by reference to Post-Effective Amendment No. 109 to
the Registration Statement.)
(5) Underwriting Agreement between the Registrant and Scudder Investor
Services dated May 8, 2000. (Incorporated by reference to
Post-Effective Amendment No. 118 to the Registration Statement, as
filed on July 14, 2000.)
(6) Underwriting and Distribution Services Agreement between the
Registrant and Kemper Distributors, Inc. (on behalf of Scudder
Capital Growth Fund, Scudder Dividend and Growth Fund, Scudder
Growth and Income Fund, Scudd4er Large Company Growth Fund and
Scudder Small Company Stock Fund), dated November 9, 2000, is filed
herein.
(f) Inapplicable.
Part C - Page 7
<PAGE>
(g) (1) Custodian Agreement between the Registrant (on behalf of Scudder
Growth and Income Fund) and State Street Bank and Trust Company
("State Street Bank") dated December 31, 1984.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(2) Amendment dated April 1, 1985 to the Custodian Agreement between the
Registrant and State Street Bank.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(3) Amendment dated August 8, 1987 to the Custodian Agreement between
the Registrant and State Street Bank.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(4) Amendment dated August 9, 1988 to the Custodian Agreement between
the Registrant and State Street Bank.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(5) Amendment dated July 29, 1991 to the Custodian Agreement between the
Registrant and State Street Bank.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(6) Amendment dated February 8, 1999 to the Custodian Agreement between
the Registrant and State Street Bank.
(Incorporated by reference to Post-Effective Amendment No. 109 to
the Registration Statement.)
(7) Amendment to the Custodian Agreement between the Registrant and
State Street Bank is filed herein.
(8) Custodian fee schedule for Scudder S&P 500 Index Fund.
(Incorporated by reference to Post-Effective Amendment No. 84 to the
Registration Statement.)
(9) Subcustodian Agreement with fee schedule between State Street Bank
and The Bank of New York, London office, dated December 31, 1978.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(10) Subcustodian Agreement between State Street Bank and The Chase
Manhattan Bank, N.A. dated September 1, 1986.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
Part C - Page 8
<PAGE>
(11) Custodian fee schedule for Scudder Quality Growth Fund and Scudder
Growth and Income Fund.
(Incorporated by reference to Post-Effective Amendment No. 72 to the
Registration Statement.)
(12) Custodian fee schedule for Scudder Classic Growth Fund dated August
1, 1994.
(Incorporated by reference to Post-Effective Amendment No. 77 to the
Registration Statement.)
(h) (1) Transfer Agency and Service Agreement with fee schedule between the
Registrant and Scudder Service Corporation dated October 2, 1989.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(1)(a) Revised fee schedule dated October 6, 1995.
(Incorporated by reference to Post-Effective Amendment No. 76 to the
Registration Statement.)
(1)(b) Form of revised fee schedule dated October 1, 1996.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(2) Transfer Agency Fee Schedule between the Registrant, on behalf of
Scudder Classic Growth Fund, and Kemper Service Company dated
January 1, 1999.
(Incorporated by reference to Post-Effective Amendment No. 109 to
the Registration Statement.)
(3) Agency Agreement between the Registrant on behalf of Classic Growth
Fund and Kemper Service Company dated April 1998. (Incorporated by
reference to Post-Effective Amendment No. 100 to the Registration
Statement.)
(4) Agency Agreement between the Registrant on behalf of Scudder Growth
and Income Fund Class R shares and Scudder Large Company Growth Fund
Class R shares, and Kemper Service Company dated May 3, 1999.
(Incorporated by reference to Post-Effective Amendment No. 106 to
the Registration Statement.)
(5) Agency Agreement between the Registrant (on behalf of Scudder
Capital Growth Fund, Scudder Dividend and Growth Fund, Scudder
Growth and Income Fund, Scudder Large Company Growth Fund, and
Scudder Small Company Stock Fund) and Kemper Service Company, dated
November 8, 2000, is filed herein.
Part C - Page 9
<PAGE>
(6) COMPASS Service Agreement and fee schedule between the Registrant
and Scudder Trust Company dated January 1, 1990.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(7) COMPASS and TRAK 2000 Service Agreement between Scudder Trust
Company and the Registrant dated October 1, 1995.
(Incorporated by reference to Post-Effective Amendment No. 74 to the
Registration Statement.)
(7)(a) Fee Schedule for Services Provided Under Compass and TRAK 2000
Service Agreement between Scudder Trust Company and the Registrant
dated October 1, 1996.
(Incorporated by reference to Post-Effective Amendment No. 109 to
the Registration Statement.)
(8) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Quality Growth Fund and Scudder Fund Accounting
Corporation dated November 1, 1994.
(Incorporated by reference to Post-Effective Amendment No. 72 to the
Registration Statement.)
(9) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Growth and Income Fund and Scudder Fund Accounting
Corporation dated October 17, 1994.
(Incorporated by reference to Post-Effective Amendment No. 73 to the
Registration Statement.)
(10) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Classic Growth Fund, and Scudder Fund Accounting
Corporation dated September 9, 1996.
(Incorporated by reference to Post-Effective Amendment No. 99 to the
Registration Statement.)
(11) Amendment No. 1 dated August 31, 1999 to the Fund Accounting
Services Agreement between the Registrant, on behalf of Classic
Growth Fund, and Scudder Fund Accounting Corporation.
(Incorporated by reference to Post-Effective Amendment No. 109 to
the Registration Statement.)
Part C - Page 10
<PAGE>
(12) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Tax Managed Small Company and Scudder Fund Accounting
Corporation dated July 30, 1998.
(Incorporated by reference to Post-Effective Amendment No. 99 to the
Registration Statement.)
(13) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Tax Managed Growth Fund and Scudder Fund Accounting
Corporation dated July 30, 1998.
(Incorporated by reference to Post-Effective Amendment No. 99 to the
Registration Statement.)
(14) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Dividend & Growth Fund and Scudder Fund Accounting
Corporation dated June 1, 1998.
(Incorporated by reference to Post-Effective Amendment No. 99 to the
Registration Statement.)
(15) Scudder Accounting Fee Schedule between the Registrant, on behalf of
Scudder Large Company Growth Fund - Class R Shares, and Scudder Fund
Accounting Corporation dated September 14, 1999.
(Incorporated by reference to Post-Effective Amendment No. 109 to
the Registration Statement.)
(16) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Real Estate Investment Fund and Scudder Fund Accounting
Corporation dated March 2, 1998.
(Incorporated by reference to Post-Effective Amendment No. 99 to the
Registration Statement.)
(17) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Capital Growth Fund and Scudder Fund Accounting
Corporation, dated July 17, 2000, is incorporated by reference to
Post-Effective Amendment No. 121 to the Registration Statement.
(18) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Small Company Stock Fund and Scudder Fund Accounting
Corporation, dated July 17, 2000, is incorporated by reference to
Post-Effective Amendment No. 121 to the Registration Statement.
Part C - Page 11
<PAGE>
(19) Revised Fund Accounting Services Agreement between the Registrant
(on behalf of Scudder Capital Growth Fund) and Scudder Fund
Accounting Corporation, dated November 13, 2000, is filed herein.
(20) Revised Fund Accounting Services Agreement between the Registrant
(on behalf of Scudder Dividend and Growth Fund) and Scudder Fund
Accounting Corporation, dated November 13, 2000, is filed herein.
(21) Revised Fund Accounting Services Agreement between the Registrant
(on behalf of Scudder Growth and Income Fund) and Scudder Fund
Accounting Corporation, dated November 13, 2000, is filed herein.
(22) Revised Fund Accounting Services Agreement between the Registrant
(on behalf of Scudder Large Company Growth Fund) and Scudder Fund
Accounting Corporation, dated November 13, 2000, is filed herein.
(23) Revised Fund Accounting Services Agreement between the Registrant
(on behalf of Scudder Small Company Stock Fund) and Scudder Fund
Accounting Corporation, dated November 13, 2000, is filed herein.
(24) Investment Accounting Agreement between the Registrant, on behalf of
Scudder S&P 500 Index Fund and Scudder Fund Accounting Corporation
dated August 28, 1997.
(Incorporated by reference to Post-Effective Amendment No. 99 to the
Registration Statement.)
(25) Shareholder Services Agreement between the Registrant and Charles
Schwab & Co., Inc. dated June 1, 1990.
(Incorporated by reference to Post-Effective Amendment No. 78 to the
Registration Statement.)
(26) Service Agreement between Copeland Associates, Inc. and Scudder
Service Corporation (on behalf of Scudder Quality Growth Fund and
Scudder Growth and Income Fund) dated June 8, 1995.
(Incorporated by reference to Post-Effective Amendment No. 74 to the
Registration Statement.)
(27) Administrative Services Agreement between the Registrant on behalf
of Classic Growth Fund, and Kemper Distributors, Inc., dated April
1998.
(Incorporated by reference to Post-Effective Amendment No. 100 to
the Registration Statement.)
Part C - Page 12
<PAGE>
(27)(a) Amendment No. 1 to the Administrative Services Agreement between the
Registrant on behalf of Classic Growth Fund, and Kemper
Distributors, Inc., dated August 31, 1999.
(Incorporated by reference to Post-Effective Amendment No. 109 to
the Registration Statement.)
(28) Administrative Services Agreement between the Registrant on behalf
of Scudder Growth and Income Fund, and Scudder Investor Services,
Inc., dated May 3, 1999.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(29) Administrative Services Agreement between the Registrant on behalf
of Scudder Large Company Growth Fund, and Scudder Investor Services,
Inc., dated May 3, 1999.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(30) Administrative Services Agreement between the Registrant
(on behalf of Scudder Capital Growth Fund, Scudder Dividend and
Growth Fund, Scudder Growth and Income Fund, Scudder Large Company
Growth Fund, Scudder S&P 500 Index Fund, Scudder Small Company Stock
Fund and Scudder Kemper Investments, Inc.), dated July 17, 2000, is
incorporated by reference to Post-Effective Amendment No. 121 to the
Registration Statement.
(31) Amended and Restated Administrative Services Agreement between the
Registrant (on behalf of Scudder Capital Growth Fund, Scudder
Dividend and Growth Fund, Scudder Growth and Income Fund, Scudder
Large Company Growth Fund, and Scudder Small Company Stock Fund),
dated November 13, 2000, is filed herein.
(32) Shareholder Services Agreement between the Registrant (on behalf of
Scudder Capital Growth Fund, Scudder Dividend and Growth Fund,
Scudder Growth and Income Fund, Scudder Large Company Growth Fund,
and Scudder Small Company Stock Fund) and Kemper Distributors, Inc.,
dated November 13, 2000, is filed herein.
(i) Opinion and Consent of Legal Counsel is filed herein.
(j) Consent of Independent Accountants is filed herein.
(k) Inapplicable.
Part C - Page 13
<PAGE>
(l) Inapplicable
(m) (1) 12b-1 Plan between the Registrant, on behalf of Scudder Growth and
Income Fund (Class R shares) and Scudder Large Company Growth Fund
(Class R shares), and Scudder Investor Services, Inc. (Incorporated
by reference to Post-Effective Amendment No. 105 to the Registration
Statement, as filed on May 28, 1999.)
(2) Rule 12b-1 Plan for Scudder Capital Growth Fund Class A, B and C
Shares, dated November 13, 2000, is filed herein.
(3) Rule 12b-1 Plan for Scudder Dividend and Growth Fund Class A, B and
C Shares, dated November 13, 2000, is filed herein.
(4) Rule 12b-1 Plan for Scudder Growth and Income Fund Class B and C
Shares, dated November 13, 2000, is filed herein.
(5) Rule 12b-1 Plan for Scudder Large Company Growth Fund Class B and C
Shares, dated November 13, 2000, is filed herein.
(6) Rule 12b-1 Plan for Scudder Small Company Stock Fund Class A, B and
C Shares, dated November 13, 2000, is filed herein.
(n) (1) Mutual Funds Multi-Distribution System Plan, Rule 18f-3 Plan.
(Incorporated by reference to Post-Effective Amendment No. 94 to the
Registration Statement.)
(2) Plan with respect to Scudder Growth and Income Fund pursuant to Rule
18f-3.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(3) Plan with respect to Scudder Large Company Growth Fund pursuant to
Rule 18f-3.
(Incorporated by reference to Post-Effective Amendment No. 105 to
the Registration Statement, as filed on May 28, 1999.)
(4) Plan with respect to Scudder Dividend and Growth Fund pursuant to
Rule 18f-3. (Incorporated by reference to Post-Effective Amendment
No. 118 to the Registration Statement, as filed on July 14, 2000.)
Part C - Page 14
<PAGE>
(5) Plan with respect to Scudder Capital Growth Fund pursuant to Rule
18f-3. (Incorporated by reference to Post-Effective Amendment No.
118 to the Registration Statement, as filed on July 14, 2000.)
(6) Plan with respect to Scudder Growth and Income Fund pursuant to Rule
18f-3. (Incorporated by reference to Post-Effective Amendment No.
118 to the Registration Statement, as filed on July 14, 2000.)
(7) Plan with respect to Scudder S&P 500 Index Fund pursuant to Rule
18f-3. (Incorporated by reference to Post-Effective Amendment No.
118 to the Registration Statement, as filed on July 14, 2000.)
(8) Plan with respect to Scudder Small Company Stock Fund pursuant to
Rule 18f-3. (Incorporated by reference to Post-Effective Amendment
No. 118 to the Registration Statement, as filed on July 14, 2000.)
(9) Amended and Restated Plan with respect to Scudder Dividend and
Growth Fund pursuant to Rule 18f-3. (Incorporated by reference to
Post-Effective Amendment No. 118 to the Registration Statement, as
filed on July 14, 2000.)
(10) Amended and Restated Plan with respect to Scudder Capital Growth
Fund pursuant to Rule 18f-3. (Incorporated by reference to
Post-Effective Amendment No. 118 to the Registration Statement, as
filed on July 14, 2000.)
(11) Amended and Restated Plan with respect to Scudder Growth and Income
Fund pursuant to Rule 18f-3. (Incorporated by reference to
Post-Effective Amendment No. 118 to the Registration Statement, as
filed on July 14, 2000.)
(12) Amended and Restated Plan with respect to Scudder S&P 500 Index Fund
pursuant to Rule 18f-3. (Incorporated by reference to Post-Effective
Amendment No. 118 to the Registration Statement, as filed on July
14, 2000.)
(13) Amended and Restated Plan with respect to Scudder Small Company
Stock Fund pursuant to Rule 18f-3. (Incorporated by reference to
Post-Effective Amendment No. 118 to the Registration Statement, as
filed on July 14, 2000.)
(14) Amended and Restated Plan with respect to Scudder Large Company
Growth Fund pursuant to Rule 18f-3 is incorporated by reference to
Post-Effective Amendment No. 121 to the Registration Statement.
Part C - Page 15
<PAGE>
(15) Amended and Restated Plan with respect to Investment Trust pursuant
to Rule 18f-3 is filed herein.
(p) (1) Scudder Kemper Investments, Inc., Scudder Investor Services, Inc.
and Kemper Distributors, Inc. Code of Ethics.
(Incorporated by reference to Post-Effective Amendment No. 114 to
the Registration Statement, as filed on April 12, 2000.)
(2) Bankers Trust Company Code of Ethics.
(Incorporated by reference to Post-Effective Amendment No. 114 to
the Registration Statement, as filed on April 12, 2000.)
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
-------- --------------------------------------------------------
None
Item 25. Indemnification.
-------- ----------------
As permitted by Sections 17(h) and 17(i) of the Investment
Company Act of 1940, as amended (the "1940 Act"), pursuant to
Article IV of the Registrant's By-Laws (filed as Exhibit No. 2
to the Registration Statement), officers, directors, employees
and representatives of the Funds may be indemnified against
certain liabilities in connection with the Funds, and pursuant
to Section 12 of the Underwriting Agreement dated May 6, 1998
(filed as Exhibit No. 6(c) to the Registration Statement),
Scudder Investor Services, Inc. (formerly "Scudder Fund
Distributors, Inc."), as principal underwriter of the
Registrant, may be indemnified against certain liabilities
that it may incur. Said Article IV of the By-Laws and Section
12 of the Underwriting Agreement are hereby incorporated by
reference in their entirety.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be
permitted to directors, officers and controlling persons of
the Registrant and the principal underwriter pursuant to the
foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer, or
controlling person of the Registrant and the principal
underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant
by such director, officer or controlling person or the
principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Item 26. Business or Other Connections of Investment Adviser
-------- ---------------------------------------------------
Part C - Page 16
<PAGE>
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer, Scudder Kemper Investments, Inc.**
Director, Kemper Service Company
Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director and Treasurer, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Director and Chairman, Scudder Threadneedle International Ltd.
Director, Scudder Kemper Holdings (UK) Ltd. oo
Director and President, Scudder Realty Holdings Corporation *
Director, Scudder, Stevens & Clark Overseas Corporation o
Director and Treasurer, Zurich Investment Management, Inc. xx
Director and Treasurer, Zurich Kemper Investments, Inc.
Lynn S. Birdsong Director, Vice President and Chief Investment Officer, Scudder Kemper Investments,
Inc.**
Director and Chairman, Scudder Investments (Luxembourg) S.A.#
Director, Scudder Investments (U.K.) Ltd. oo
Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
Director and Chairman, Scudder Investments Japan, Inc. +
Senior Vice President, Scudder Investor Services, Inc.
Director and Chairman, Scudder Trust (Cayman) Ltd. @@@
Director, Scudder, Stevens & Clark Australia x
Director and Vice President, Zurich Investment Management, Inc. xx
Director and President, Scudder, Stevens & Clark Corporation **
Director and President, Scudder , Stevens & Clark Overseas Corporation o
Director, Scudder Threadneedle International Ltd.
Director, Korea Bond Fund Management Co., Ltd. @@
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company xxx
Nicholas Bratt Director, Scudder Kemper Investments, Inc.**
Vice President, Scudder, Stevens & Clark Corporation **
Vice President, Scudder, Stevens & Clark Overseas Corporation o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Part C - Page 17
<PAGE>
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, Chairman of the Board, Zurich Holding Company of America xxx
Director, ZKI Holding Corporation xx
Harold D. Kahn Chief Financial Officer, Scudder Kemper Investments, Inc.**
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Vice President, Chief Legal Officer and Secretary, Kemper Distributors,
Inc.
Director and Secretary, Kemper Service Company
Director, Senior Vice President, Chief Legal Officer & Assistant Clerk, Scudder
Investor Services, Inc.
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director and Secretary, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc. ###
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. @
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
Director, Vice President and Secretary, Scudder Defined Contribution Services,
Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President, Chief Legal Officer and Secretary, Scudder Financial
Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd. @@
Director, Scudder Threadneedle International Ltd.
Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
Director, Scudder Investments Japan, Inc. +
Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
Director and Secretary, Zurich Investment Management, Inc. xx
Part C - Page 18
<PAGE>
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas Corporation o
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. @
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of
Luxembourg
Director, Scudder Threadneedle International Ltd.
Director, Scudder Investments Japan, Inc. +
Director, Scudder Kemper Holdings (UK) Ltd. oo
President and Director, Zurich Investment Management, Inc. xx
Director and Deputy Chairman, Scudder Investment Holdings Ltd.
</TABLE>
* Two International Place, Boston, MA
333 South Hope Street, Los Angeles, CA
@
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
Grand Cayman, Cayman Islands, British West Indies
@@@
o 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
xxx Zurich Towers, 1400 American Ln., Schaumburg, IL
@@ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
One South Place, 5th Floor, London EC2M 2ZS England
oo
ooo One Exchange Square, 29th Floor, Hong Kong
+ Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku,
Tokyo 105-0001
x Level 3, Five Blue Street, North Sydney, NSW 2060
Item 27. Principal Underwriters.
-------- ----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
Part C - Page 19
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3)
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
<S> <C> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154-0010
Ann P. Burbank Vice President None
Two International Place
Boston, MA 02110-4103
Mark S. Casady President, Director and Assistant None
Two International Place Treasurer
Boston, MA 02110-4103
Linda C. Coughlin Director and Senior Vice President Trustee and President
Two International Place
Boston, MA 02110-4103
Scott B. David Vice President None
Two International Place
Boston, MA 02110-4103
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154-0010
William F. Glavin Vice President None
Two International Place
Boston, MA 02110-4103
Robert J. Guerin Vice President None
Two International Place
Boston, MA 02110-4103
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110-4103
James J. McGovern Chief Financial Officer and Treasurer None
345 Park Avenue
New York, NY 10154-0010
Kimberly S. Nassar Vice President None
Two International Place
Boston, MA 02110-4103
Gloria S. Nelund Vice President None
345 Park Avenue
New York, NY 10154-0010
Part C - Page 20
<PAGE>
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110-4103
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110-4103
Kevin G. Poole Vice President None
Two International Place
Boston, MA 02110-4103
Kathryn L. Quirk Director, Senior Vice President, Chief Vice President and
345 Park Avenue Legal Officer and Assistant Clerk Assistant Secretary
New York, NY 10154-0010
Howard S. Schneider Vice President None
Two International Place
Boston, MA 02110-4103
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110-4103
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions And Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
(d)
Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares (on behalf of the Class A, B, C, and as applicable
I shares of Classic Growth Fund, Scudder Capital Growth Fund, Scudder
Dividend and Growth Fund, Scudder Growth and Income Fund, Scudder Large
Company Growth Fund, Scudder S&P 500 Index Fund, and Scudder Small
Company Stock Fund) and acts as principal underwriter of the Scudder
Kemper Funds.
Part C - Page 21
<PAGE>
(e)
Information on the officers and directors of Kemper Distributors, Inc.,
principal underwriter for the Registrant is set forth below. The
principal business address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
<S> <C> <C> <C>
Thomas V. Bruns President None
Linda C. Coughlin Director and Vice Chairman None
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer and Vice President
James J. McGovern Chief Financial Officer and Treasurer None
Linda J. Wondrack Vice President and Chief Compliance Officer Vice President
Paula Gaccione Vice President None
Michael E. Harrington Managing Director None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director and Chairman President
Terrence S. McBride Vice President None
Robert Froelich Managing Director None
C. Perry Moore Senior Vice President and Managing Director None
Lorie O'Malley Managing Director None
William F. Glavin Managing Director None
Gary N. Kocher Managing Director None
Susan K. Crenshaw Vice President None
Johnston A. Norris Managing Director and Senior Vice President None
Part C - Page 22
<PAGE>
John H. Robison, Jr. Managing Director and Senior Vice President None
Robert J. Guerin Vice President None
Kimberly S. Nassar Vice President None
Scott B. David Vice President None
</TABLE>
(f) Not applicable
Item 28. Location of Accounts and Records.
-------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments Inc., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
custodian are maintained by State Street Bank and Trust
Company, Heritage Drive, North Quincy, Massachusetts. Records
relating to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 29. Management Services.
-------- --------------------
Inapplicable.
Item 30. Undertakings.
-------- -------------
Inapplicable.
Part C - Page 23
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Boston and the Commonwealth of
Massachusetts on the 22nd day of December 2000.
INVESTMENT TRUST
By /s/John Millette
----------------
John Millette
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Linda C. Coughlin
--------------------------------------
Linda C. Coughlin Trustee and President (Chief December 22, 2000
Executive Officer)
/s/ Henry P. Becton, Jr.
--------------------------------------
Henry P. Becton, Jr.* Trustee December 22, 2000
/s/Dawn-Marie Driscoll
--------------------------------------
Dawn-Marie Driscoll* Trustee December 22, 2000
/s/ Edgar R. Fiedler
--------------------------------------
Edgar R. Fiedler * Trustee December 22, 2000
/s/ Keith R. Fox
--------------------------------------
Keith R. Fox* Trustee December 22, 2000
/s/ Joan E. Spero
--------------------------------------
Joan E. Spero* Trustee December 22, 2000
/s/ Jean Gleason Stromberg
--------------------------------------
Jean Gleason Stromberg * Trustee December 22, 2000
/s/ Jean C. Tempel
--------------------------------------
Jean C. Tempel* Trustee December 22, 2000
/s/ Steven Zaleznick
--------------------------------------
Steven Zaleznick* Trustee December 22, 2000
/s/John R. Hebble
--------------------------------------
John R. Hebble Treasurer (Chief Financial Officer) December 22, 2000
</TABLE>
<PAGE>
*By: /s/John Millette
----------------
John Millette**
Secretary
**Attorney-in-fact pursuant to the powers of attorney contained in and
incorporated by reference to Post- Effective Amendment No. 118 to the
Registration Statement, as filed on July 14, 2000.
<PAGE>
File No. 2-13628
File No. 811-43
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 124
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 75
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
INVESTMENT TRUST
<PAGE>
INVESTMENT TRUST
Exhibit Index
(a)(26)
(a)(27)
(a)(28)
(a)(29)
(a)(30)
(b)(3)
(d)(13)
(d)(14)
(e)(6)
(g)(7)
(h)(5)
(h)(19)
(h)(20)
(h)(21)
(h)(22)
(h)(23)
(h)(31)
(h)(32)
(i)
(j)
(m)(2)
(m)(3)
(m)(4)
(m)(5)
(m)(6)
(n)(15)
2
