This prospectus sets forth concisely the information about Scudder Pathway
Series: Conservative Portfolio, Balanced Portfolio and Growth Portfolio (each, a
"Portfolio," collectively the "Portfolios"), each a diversified open-end
management investment company, that a prospective investor should know before
investing. Scudder Pathway Series is composed of four separate Portfolios, three
of which are offered herein, with distinctly different investment objectives.
Each Portfolio seeks to accomplish its objective by investing primarily in a
number of other Scudder funds (the "Underlying Scudder Funds"). Please retain
this prospectus for future reference.
If you require more detailed information, a combined Statement of Additional
Information dated November 15, 1996, as amended from time to time, may be
obtained without charge by writing Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103 or calling 1-800-225-2470. The
Statement, which is incorporated by reference into this prospectus, has been
filed with the Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Contents--see page 4.
Scudder
Pathway Series:
Conservative
Portfolio
Balanced Portfolio
Growth Portfolio
Prospectus
November 15, 1996
As Revised
February 14, 1997
Three pure no-load(TM) (no sales charges) mutual funds offering a broad range of
investment opportunities each by investing in a select mix of Scudder Funds.
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Expense information
This information is designed to help you understand the various costs and
expenses that an investor in the Portfolios will bear directly or indirectly.
With Scudder's pure no-load(TM) portfolios and funds, you pay no commissions to
purchase or redeem shares, or to exchange from one portfolio or fund to
another. As a result, all of your investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in each Portfolio for various transactions.
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
-----
Fees to exchange shares NONE
2) Annual Portfolio operating expenses: Estimated expenses paid by a Portfolio
before it distributes its net investment income, expressed as a percentage
of a Portfolio's average daily net assets for the initial fiscal period.
Investment management fee NONE
12b-1 fees NONE
Other expenses NONE
Total Portfolio operating expenses** NONE
Each Portfolio is expected to operate at a zero expense level. However, each
Portfolio's shareholders will indirectly bear that Portfolio's pro rata share
of fees and expenses incurred by the Underlying Scudder Funds in which the
Portfolio is invested. The investment returns of each Portfolio, therefore,
will be net of that Portfolio's share of the expenses of the Underlying Scudder
Funds in which the Portfolio is invested. The chart on page 3 shows the expense
ratios of each Underlying Scudder Fund after fee waiver or reimbursement where
applicable, as of its most recent fiscal year end.
----------------
* You may redeem by writing or calling a Portfolio. If you wish to receive
your redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction information--Redeeming
shares."
** The payment of each Portfolio's pro rata share of expenses is subject to
the Special Servicing Agreement. Please refer to "Portfolio
organization--Special Servicing Agreement."
2
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Expense Ratios of the
Underlying Scudder Funds
Underlying Scudder Funds Expense Ratio
- ------------------------ -------------
Money Market Fund
Scudder Cash Investment Trust 0.83%
Bond Mutual Funds
Scudder Emerging Markets
Income Fund 1.44%
Scudder Global Bond Fund+ 1.00%
Scudder GNMA Fund 0.94%
Scudder High Yield Bond Fund+ 0.00%
Scudder Income Fund 0.98%
Scudder International Bond Fund 1.26%
Scudder Short Term Bond Fund 0.80%
Equity Mutual Funds
Scudder Classic Growth Fund+ 1.25%
Scudder Development Fund 1.24%
Scudder Emerging Markets
Growth Fund+ 2.00%
Scudder Global Discovery Fund 1.60%
Scudder Global Fund 1.34%
Scudder Gold Fund 1.50%
Scudder Growth and Income Fund 0.78%
Scudder International Fund 1.14%
Scudder Large Company Value Fund 0.92%
Scudder Latin America Fund 1.96%
Scudder Micro Cap Fund+ 1.75%
Scudder Pacific Opportunities Fund 1.75%
Scudder Quality Growth Fund 1.07%
Scudder Small Company Value Fund 1.50%
Scudder 21st Century Growth Fund+ 1.75%
Scudder Value Fund+ 1.25%
Based on the foregoing, the ranges for the average weighted expense ratio borne
by the Conservative Portfolio, Balanced Portfolio and Growth Portfolio are
expected to be 0.16% to 1.72%, 0.31% to 1.83% and 0.47% to 1.94%, respectively.
Ranges are provided since the average assets of the Portfolios invested in each
of the Underlying Scudder Funds will fluctuate.
Example
Using the midpoint of the ratios set forth above, the total pro rata expenses
relating to a $1,000 investment, assuming a 5% annual return and redemption at
the end of each period, are listed below. Investors do not pay these expenses
directly; they are paid by each Underlying Scudder Fund before it distributes
its net investment income to a Portfolio. (As noted above, the Portfolios have
no redemption fees of any kind.)
Portfolio 1 Year 3 Years
--------- ------ -------
Conservative Portfolio $10 $30
Balanced Portfolio 11 34
Growth Portfolio 12 38
See "Portfolio organization--Special Servicing Agreement" for an explanation of
the Special Servicing Agreement. This example assumes that each Portfolio
reinvests all dividends and distributions paid by the Underlying Scudder Funds.
This example should not be considered a representation of past or future
expenses or returns. Actual expenses and returns of each Underlying Scudder Fund
vary from year to year and may be higher or lower than those shown.
+ The following funds maintained their expenses at the following rates for
their respective fiscal periods: Scudder Classic Growth Fund: 1.25%, Scudder
Emerging Markets Growth Fund: 2.00%, Scudder Global Bond Fund: 1.00%, Scudder
High Yield Bond Fund: 0.00%, Scudder Micro Cap Fund: 1.75%, Scudder 21st
Century Growth Fund: 1.75% and Scudder Value Fund: 1.25%. If the Adviser had
not maintained the Funds' expenses, the total return for the period would
have been lower. Please see the appropriate Underlying Scudder Fund
prospectus for details.
3
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A message from Scudder's chairman
Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $100 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds and offers IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
Scudder Pathway Series
Investment Objective for Conservative Portfolio
o primarily current income and secondarily long-term growth of capital
Investment Objective for Balanced Portfolio
o a balance of growth and income
Investment Objective for Growth Portfolio
o long-term growth of capital
Investment Characteristics of Scudder Pathway Series
o professionally managed portfolios which allocate their investments among
select Scudder Funds
o provides exposure to a wide range of asset classes, securities and markets
around the globe
o no added fees or expenses associated with the operation of Scudder Pathway
Series
o appropriate for IRA, 401(k) and other retirement plans
Contents
Investment objectives and policies 5
Why invest in the Portfolios? 6
Description of the Underlying
Scudder Funds 7
Information about policies,
investments and risks 18
Investment restrictions of the Portfolios 20
Risks of investing in the Portfolios 20
Distribution and performance information 21
Portfolio organization 22
Transaction information 24
Shareholder benefits 28
Trustees and Officers 31
Investment products and services 32
How to contact Scudder 33
Purchases 34
Exchanges and redemptions 35
Appendix
4
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Investment objectives and policies
Scudder Pathway Series ("the Trust") (also known as "the Series") consists of
four professionally managed, diversified portfolios, three of which are
described in this prospectus. The Portfolios invest primarily in a select mix of
Scudder Funds. The Portfolios' investment objectives are as follows:
o Pathway Conservative Portfolio seeks to provide current income and,
secondarily, long-term growth of capital. In pursuit of these objectives,
the Portfolio, under normal market conditions, will invest substantially in
bond mutual funds, but will have some exposure to equity mutual funds.
o Pathway Balanced Portfolio seeks to provide investors with a balance of
growth and income. It seeks this objective by investing in a mix of money
market, bond and equity mutual funds.
o Pathway Growth Portfolio seeks to provide investors with long-term growth of
capital. In pursuing this objective, the Portfolio will, under normal market
conditions, invest predominantly in equity mutual funds designed to provide
long-term growth. Many of the Portfolio's bond mutual fund holdings offer
the potential for capital appreciation as well as income.
The Scudder Funds in which the Portfolios may invest are referred to as the
"Underlying Scudder Funds," (see table). Some of these Underlying Scudder Funds
are equity mutual funds, which invest primarily in stocks to achieve growth.
Other Underlying Scudder Funds are bond mutual funds, which invest for income
and, in some cases, appreciation as well. The portfolio management team for each
Portfolio allocates investments based on the outlook of the Portfolios'
investment adviser, Scudder, Stevens & Clark, Inc. ("the Adviser"), for the
financial markets, world economies and the relative performance potential of the
Underlying Scudder Funds.
Under normal market conditions, the Portfolios will invest according to the
following guidelines:
o Pathway Conservative Portfolio will invest 40-80% of total assets in bond
mutual funds; 20-50% of total assets in equity mutual funds; and 0-15% of
total assets in a money market fund, cash, or cash equivalents.
o Pathway Balanced Portfolio will invest 40-70% of total assets in equity
mutual funds; 25-60% of total assets in bond mutual funds; and 0-10% of
total assets in a money market fund, cash, or cash equivalents.
o Pathway Growth Portfolio will invest 60-90% of total assets in equity mutual
funds; 10-40% of total assets in bond mutual funds; and 0-5% of total assets
in a money market fund, cash, or cash equivalents.
- -------------------------------------------------------------------------------
Underlying Scudder Funds in which the Portfolios may invest
- -------------------------------------------------------------------------------
Equity Mutual Funds
Scudder Classic Growth Fund
Scudder Development Fund
Scudder Emerging Markets Growth Fund
Scudder Global Fund
Scudder Global Discovery Fund
Scudder Gold Fund
Scudder Growth and Income Fund
Scudder International Fund
Scudder Large Company Value Fund
Scudder Latin America Fund
Scudder Micro Cap Fund
Scudder Pacific Opportunities Fund
Scudder Quality Growth Fund
Scudder Small Company Value Fund
Scudder 21st Century Growth Fund
Scudder Value Fund
Bond Mutual Funds
Scudder Emerging Markets Income Fund
Scudder Global Bond Fund
Scudder GNMA Fund
Scudder High Yield Bond Fund
Scudder Income Fund
Scudder International Bond Fund
Scudder Short Term Bond Fund
Money Market Fund
Scudder Cash Investment Trust
-------------------------------------------------------------------------------
5
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Investment objectives and policies (cont'd)
The Portfolios will purchase or sell shares of Underlying Scudder Funds to: (a)
accommodate purchases and sales of a Portfolio's shares, (b) change the
percentages of a Portfolio's assets invested in each of the Underlying Scudder
Funds in response to changing market conditions, and (c) maintain or modify the
allocation of a Portfolio's assets in accordance with the investment mix
described above. If, as a result of appreciation or depreciation, the percentage
of a Portfolio's assets invested in the above categories exceeds or is less than
the applicable range, the Adviser will consider, in its discretion, whether to
reallocate the assets of the Portfolio to comply with the stated ranges.
Further, to provide for redemptions or for temporary defensive purposes, the
Portfolios may invest without limit in cash or cash equivalents, including
repurchase agreements, commercial paper and other types of money market
instruments.
Except as otherwise indicated, the Portfolios' investment objectives 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 a particular Portfolio remains an appropriate investment in light of
their then current financial position and needs. There can be no assurance that
a Portfolio's objective will be met.
For information about the investment objectives of each of the Underlying
Scudder Funds, please refer to "Description of the Underlying Scudder Funds."
For information about purchasing, exchanging or redeeming shares, refer to
"Transaction information," "Purchases" and "Exchanges and redemptions."
Why invest in the Portfolios?
The Portfolios of Scudder Pathway Series are designed for individuals and
institutions who prefer to have their asset allocation decisions made by
professional money managers, appreciate the advantages of broad diversification,
and are looking for a core investment for their retirement portfolio.
The primary advantages of Scudder Pathway Series for investors are convenience
and economy. Pathway provides an investor access to many Scudder Funds without
the required minimum investment for each. Through a single pure no-load(TM)
investment, they will be able to achieve broad diversification in pursuit of one
of three distinct objectives.
o Pathway Conservative Portfolio is comprised mainly of investments in Scudder
domestic and global bond funds, and, to a lesser extent, equity funds. This
combination of investments can provide income and modest growth potential
for Pathway investors. The Conservative Portfolio is designed to meet the
needs of investors with a time horizon of 3-5 years or more.
o Pathway Balanced Portfolio allocates assets among Scudder domestic and
global equity and bond funds, seeking a blend of current income and capital
appreciation. The Balanced Portfolio is designed to meet the needs of
investors with a time horizon of at least 5-10 years.
o Pathway Growth Portfolio pursues long-term growth by allocating assets
primarily among Scudder's growth-oriented equity funds, and, to a lesser
extent, bond funds. The Growth Portfolio is designed to meet the needs of
investors with a time horizon of 10 years or more.
6
<PAGE>
These three Pathway Portfolios are managed so that each can serve as a complete
investment program or as a core part of a larger portfolio, and may be most
appropriate for long-term investors planning for retirement, particularly
investors in tax-advantaged retirement accounts including IRAs, 401(k) corporate
employee savings plans and 403(b) non-profit organization savings plans.
The proliferation of mutual funds over the last several years and the increased
responsibilities shouldered by employees for managing their retirement and other
long-term assets have left many investors in search of a simple means to manage
their investments. With new investment categories emerging each year and with
each mutual fund reacting differently to political, economic and business
events, many investors are forced to make complex investment decisions with
limited experience, time or personal resources. The Portfolios offer broad
diversification and ongoing professional asset allocation.
Each of the Pathway Portfolios invests in a select group of pure no-load(TM)
Scudder Funds suited to the Portfolio's particular investment objective. The
allocation of assets within each Portfolio is determined by the Adviser
according to fundamental and quantitative investment analysis. Shifts will be
made among Underlying Scudder Funds and asset classes based on the Adviser's
then current outlook for the financial markets and the world's economies.
Because the assets will be adjusted only periodically and only within
pre-determined ranges designed to ensure broad diversification, there should not
be any sudden large-scale changes in asset allocation. The Series is not
designed as a market timing vehicle, but rather as a cost-effective and simple
approach to helping investors meet retirement and other long-term goals.
The Portfolios can invest in a variety of existing international and global
Underlying Scudder Funds and expect to invest some portion of assets in foreign
markets at all times. The Adviser believes this ongoing commitment to global
investment management differentiates the Series from other funds of funds and
asset allocation products. Adding an international component to a long-term
portfolio can increase diversification and lower volatility, while enhancing and
providing the most consistent returns over time.
In addition, the Portfolios offer all the benefits of the Scudder Family of
Funds. Scudder, Stevens & Clark, Inc. manages a diverse family of pure no-loadTM
funds and provides a wide range of services to help investors meet their
investment needs. Please refer to "Investment products and services" for
additional information.
Description of the Underlying Scudder Funds
The following is a concise description of the investment objectives and
practices for each of the Underlying Scudder Funds. There can be no assurance
that the Underlying Scudder Funds' objectives will be met. Additional
information regarding the investment practices of the Underlying Scudder Funds
is located in the section entitled "Additional information about policies and
investments," in the Appendix to this prospectus, in the sections entitled "The
Fund's Investment Objectives and Policies" and "Glossary" in the Statement of
Additional Information and in the prospectuses of each of the Underlying Scudder
Funds. Prospectuses for the Underlying Scudder Funds may be obtained without
charge by writing Scudder Investor Services, Inc., Two International Place,
Boston, MA 02110-4103 or calling 1-800-225-2470. No offer is made in this
prospectus of shares of any of the Underlying Scudder Funds.
The following Underlying Scudder Fund is the money market fund in which a
Portfolio may invest and will likely serve as the primary cash reserve portion
of each Portfolio.
Scudder Cash Investment Trust is a diversified investment company which seeks to
maintain stability of capital and, consistent therewith, to maintain liquidity
7
<PAGE>
Description of the Underlying Scudder Funds (cont'd)
of capital and to provide current income. The Fund seeks to maintain a constant
net asset value of $1.00 per share. Shares of the Fund are not insured or
guaranteed by the U.S. Government and there can be no assurance that a stable
net asset value will be maintained.
The Fund purchases U.S. dollar-denominated money market securities. All of the
Fund's portfolio securities must meet certain quality criteria at the time of
purchase. Generally, the Fund may purchase only securities which are rated, or
issued by a company with comparable securities rated, within the two highest
quality rating categories of one or more of the following rating agencies:
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P") and Fitch
Investors Service, Inc. ("Fitch") or, if unrated, the credit quality of the
security is deemed equivalent, in the opinion of the Adviser, to the rated
securities mentioned above. Amendments have been proposed to the federal rules
regulating quality, maturity and diversification requirements of money market
funds, like the Fund. If the amendments are adopted, the Fund intends to comply
with such new requirements.
The maturity of each investment in the Fund's portfolio is 397 calendar days or
less, except in the case of U.S. Government securities which may have maturities
of up to 762 calendar days. The dollar-weighted average maturity of the Fund's
portfolio varies with money market conditions, but is always 90 days or less. As
a money market fund with a short-term maturity, the Fund's income fluctuates
with changes in interest rates but its price is expected to remain fixed at
$1.00 per share.
The following Underlying Scudder Funds are bond mutual funds which primarily
seek to provide current income or total return.
Scudder Emerging Markets Income Fund is a non-diversified investment company
which seeks to provide high current income. As a secondary objective, the Fund
seeks long-term capital appreciation. In pursuing these goals, the Fund invests
primarily in high-yielding, high-risk debt securities issued by governments and
corporations in emerging markets.
The Fund considers "emerging markets" to include any country that is defined as
an emerging or developing economy by any one of the following: International
Bank for Reconstruction and Development (i.e., the World Bank), the
International Finance Corporation or the United Nations or its authorities.
To reduce currency risk, the Fund invests at least 65% of its assets in U.S.
dollar-denominated debt securities. Therefore, no more than 35% of the Fund's
assets may be invested in debt securities denominated in foreign currencies. By
focusing on fixed-income instruments issued in emerging markets, the Fund
invests predominantly in debt securities that are rated below investment-grade.
The Fund may invest up to 5% of its net assets in non-performing securities
whose quality is comparable to securities rated as low as D by S&P or C by
Moody's. Please refer to the attached Appendix for further information.
The Fund involves above-average bond fund risk and can invest entirely in high
yield/high risk bonds. Investments in emerging markets can be volatile. The
Fund's share price and yield can fluctuate daily in response to political
events, changes in the perceived creditworthiness of emerging nations,
fluctuations in interest rates and, to a certain extent, movements in foreign
currencies.
Scudder Global Bond Fund is a non-diversified investment company which seeks to
provide total return with an emphasis on current income by investing primarily
in high-grade bonds denominated in foreign currencies and the U.S. dollar.
As a secondary objective, the Fund seeks capital appreciation.
The Fund will invest principally in a managed portfolio of high-grade
8
<PAGE>
intermediate- and long-term bonds denominated in the U.S. dollar and foreign
currencies, including bonds denominated in the European Currency Unit (ECU).
(Intermediate-term bonds generally have maturities between three and eight
years, and long-term bonds generally have maturities of greater than eight
years.) Portfolio investments will be selected on the basis of, among other
things, yields, credit quality, and the fundamental outlooks for currency and
interest rate trends in different parts of the globe, taking into account the
ability to hedge a degree of currency or local bond price risk. At least 65% of
the Fund's investments will consist of high-grade debt securities, which are
those rated in one of the three highest rating categories of one of the major
U.S. rating services or, if unrated, considered to be of equivalent quality in
local currency terms as determined by the Adviser. The Fund may also invest up
to 15% of its net assets in debt securities rated BBB by S&P or Baa by Moody's
and lower, or unrated securities considered to be of equivalent quality by the
Adviser. Securities rated below Baa by Moody's or BBB by S&P are commonly
referred to as "junk bonds." The Fund will not invest in any securities rated B
or lower.
The Fund may invest in debt securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities; obligations issued or guaranteed
by foreign national governments, their agencies, instrumentalities or political
subdivisions; and debt securities issued or guaranteed by supranational
organizations such as the European Investment Bank, Inter-American Development
Bank and The World Bank. The Fund may also invest in non-government securities
including corporate debt securities, bank or bank holding company obligations
(e.g., certificates of deposit and bankers acceptances), and mortgage and other
asset-backed issues.
Scudder GNMA Fund is a diversified investment company which seeks to provide
high current income and safety of principal from a portfolio of high quality,
U.S. Government guaranteed mortgage-backed securities and U.S. Treasury
securities. Under normal conditions, the Fund invests at least 65% of its total
assets in mortgage-backed securities issued or guaranteed by the Government
National Mortgage Association ("GNMA" or "Ginnie Mae"). Such guarantees are
supported by the full faith and credit of the U.S. Government. These guarantees
apply only to the timely payment of both principal and interest of the GNMA
securities held in the Fund's portfolio. Up to 35% of the Fund's total assets
may be held in cash, cash equivalents or invested in securities issued or
directly guaranteed by the U.S. Government, including U.S. Treasury bills, notes
and bonds.
The market values of the Fund's investments and correspondingly the Fund's share
price will vary inversely with changes in prevailing interest rates and in
response to other bond market factors, such as changes in the supply and demand
for mortgage-backed securities.
Scudder High Yield Bond Fund is a diversified investment company which seeks a
high level of current income and, secondarily, capital appreciation through
investment primarily in below investment-grade domestic debt securities. In
pursuit of its investment objectives, the Fund, under normal market conditions,
invests at least 65% of its total assets in high yield, below investment-grade
domestic debt securities, sometimes referred to as "junk" bonds. Such bonds
involve a greater risk of default and price volatility than U.S. Government
bonds and other high quality fixed-income securities. Please refer to the
attached Appendix for further information.
The Fund defines "domestic debt securities" as securities of companies domiciled
in the U.S. or organized under the laws of the U.S. or for which the U.S.
trading market is a primary market. The Fund may invest up to 25% of its total
assets in foreign securities, including those of emerging markets. The Fund
considers "emerging markets" to include any country that is defined as an
9
<PAGE>
Description of the Underlying Scudder Funds (cont'd)
emerging or developing economy by any one of the International Bank for
Reconstruction and Development (i.e., the World Bank), the International Finance
Corporation or the United Nations or its authorities. The Fund invests primarily
in medium- and long-term fixed- income securities. However, there is no
limitation as to weighted average maturity of the Fund's portfolio and no
restriction on the maturity of any individual security held in the portfolio.
Scudder Income Fund is a diversified investment company which seeks a high level
of income, consistent with the prudent investment of capital, through a flexible
investment program emphasizing high-grade bonds.
The Fund invests primarily in a broad range of high-grade, income-producing
securities such as corporate bonds and government securities. All bonds
purchased by the Fund will be investment-grade bonds. The majority of the Fund's
assets are usually invested in intermediate and longer term fixed-income
securities. The Fund may invest up to 25% of its assets in bonds rated Baa by
Moody's or BBB by S&P, or, if unrated, in bonds of equivalent quality as
determined by the Adviser.
Scudder International Bond Fund is a non-diversified investment company which
seeks to provide income primarily by investing in a managed portfolio of
high-grade debt securities denominated in foreign currencies. As a secondary
objective, the Fund seeks protection and possible enhancement of principal value
by actively managing currency, bond market and maturity exposure and by security
selection.
To achieve its objectives, the Fund primarily invests in a managed portfolio of
high-grade debt securities denominated in foreign currencies, including bonds
denominated in the European Currency Unit (ECU). Portfolio investments will be
selected on the basis of, among other things, yield, credit quality, and the
fundamental outlooks for currency and interest rate trends in different parts of
the globe, taking into account the ability to hedge a degree of currency or
local bond price risk. The Fund will normally invest at least 65% of its total
assets in bonds denominated in foreign currencies. The Fund will invest no more
than 35% of the value of its total assets in U.S. debt securities. The Fund will
invest no more than 15% of its total assets in debt securities rated below
investment-grade, but no lower than B.
Please refer to the attached Appendix for further information.
Scudder Short Term Bond Fund is a diversified investment company which seeks to
provide a high level of income consistent with a high degree of principal
stability by investing primarily in high quality, short-term bonds. The
dollar-weighted average effective maturity of the Fund's portfolio may not
exceed three years. The net asset value of the Fund is expected to fluctuate
with changes in interest rates and bond market conditions, although this
fluctuation should be more moderate than that of a fund with a longer average
maturity. The Adviser, however, will attempt to minimize principal fluctuation
through, among other things, diversification, credit analysis and security
selection, and adjustment of the Fund's average portfolio maturity.
The Fund emphasizes high quality investments. Under normal market conditions, at
least 65% of the Fund's net assets will be invested in (1) obligations of the
U.S. Government, its agencies or instrumentalities, and (2) debt securities
rated, at the time of purchase, in one of the two highest categories of S&P or
Moody's.
In addition, the Fund will not invest in any debt security rated at the time of
purchase below investment-grade.
10
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The following Underlying Scudder Fund is an equity mutual fund which seeks a
combination of income and growth of capital.
Scudder Growth and Income Fund is a diversified investment company which seeks
long-term growth of capital, current income and growth of income. The Fund
attempts to achieve its investment objective by investing primarily in
dividend-paying common stocks, preferred stocks and securities convertible into
common stocks of companies with long-standing records of earnings growth. The
Fund may also purchase securities which do not pay current dividends but which
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 its objective.
The following Underlying Scudder Funds are equity mutual funds which seek
long-term growth of capital.
Scudder Classic Growth Fund is a diversified investment company which seeks to
provide long-term growth of capital and to keep the value of its shares more
stable than other growth mutual funds.
Under normal market conditions, the Fund invests primarily in a diversified
portfolio of common stocks which the Adviser believes offers above-average
appreciation potential yet, as a portfolio, offers the potential for less share
price volatility than other growth mutual funds.
In seeking such investments, the Adviser focuses its investment in high quality,
medium-to-large sized U.S. companies with leading competitive positions.
The Fund allocates its investments widely 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 that meet the criteria applicable to domestic
investments.
The Fund can purchase other types of equity securities including securities
convertible into common stocks, preferred stocks, rights and warrants. The Fund
may invest up to 20% of its net assets in debt securities when the Adviser
anticipates that the 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.
Scudder Development Fund is a diversified investment company which seeks
long-term growth of capital by investing primarily in securities of emerging
growth companies. The Fund generally invests in equity securities, including
common stocks and convertible securities, of relatively small or little-known
companies, commonly referred to as emerging growth companies, that the Adviser
believes have above-average earnings growth potential and/or may receive greater
market recognition.
To help reduce risk, the Fund allocates its investments among many companies and
different industries. In selecting industries and companies for investment, the
Adviser will consider overall growth prospects, financial condition, competitive
position, technology, research and development, productivity, labor costs, raw
material costs and sources, profit margins, return on investment, structural
changes in local economies, capital resources, the degree of governmental
regulation or deregulation, management and other factors.
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 when the anticipated performance of
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Description of the Underlying Scudder Funds (cont'd)
foreign securities is believed by the Adviser to offer equal or more potential
than domestic alternatives in keeping with the investment objective of the Fund.
However, the Fund has no current intention of investing more than 20% of its net
assets in foreign securities.
Scudder Emerging Markets Growth Fund is a non-diversified investment company
which seeks long-term growth of capital primarily through equity investment in
emerging markets around the globe. The Fund will invest in the Asia-Pacific
region, Latin America, less developed nations in Europe, the Middle East and
Africa, focusing investments in countries and regions where there appear to be
the best value and appreciation potential, subject to considerations of
portfolio diversification and liquidity. At least 65% of the Fund's total assets
will be invested in the equity securities of emerging market issuers. The Fund
considers "emerging markets" to include any country that is defined as an
emerging or developing economy by any one of the International Bank for
Reconstruction and Development (i.e., the World Bank), the International Finance
Corporation or the United Nations or its authorities. The Fund intends to
allocate its investments among at least three countries at all times, and does
not expect to concentrate in any particular industry. The Fund deems an issuer
to be located in an emerging market if:
o the issuer is organized under the laws of an emerging market country;
o the issuer's principal securities trading market is in an emerging market;
o or at least 50% of the issuer's non-current assets, capitalization, gross
revenue or profit in any one of the two most recent fiscal years is derived
(directly or indirectly through subsidiaries) from assets or activities
located in emerging markets.
The Fund's equity investments are common stock, preferred stock (either
convertible or non-convertible), depository receipts and warrants. Equity
securities may also be purchased through rights. Securities may be listed on
securities exchanges, traded over-the-counter, or have no organized market. The
Fund may invest in illiquid securities.
The Fund may invest up to 35% of its total assets in emerging market and
domestic debt securities if the Adviser determines that the capital appreciation
of debt securities is likely to equal or exceed the capital appreciation of
equity securities. Under normal market conditions, the Fund may invest up to 35%
of its assets in equity securities of issuers in the U.S. and other developed
markets.
Scudder Global Discovery Fund is a diversified investment company which seeks
above-average capital appreciation over the long term by investing primarily in
the equity securities of small companies located throughout the world.
In pursuit of its objective, the Fund generally invests in small, rapidly
growing companies which offer the potential for above-average returns relative
to larger companies, yet are frequently overlooked and thus undervalued by the
market. The Fund has the flexibility to invest in any region of the world. It
can invest in companies based in emerging markets, typically the Far East, Latin
America and lesser developed countries in Europe, as well as in firms operating
in developed economies, such as those of the United States, Japan and Western
Europe.
Under normal circumstances, the Fund invests at least 65% of its total assets in
the equity securities of small companies. While the Adviser believes that
smaller, lesser-known companies can offer greater growth potential than larger,
more established firms, the former also involve greater risk and price
volatility. To help reduce risk, the Fund expects, under normal market
conditions, to diversify its portfolio widely by company, industry and country.
12
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The Fund intends to allocate investments among at least three countries at all
times, one of which may be the U.S. The Fund invests primarily in companies
whose individual equity market capitalization would place them in the same size
range as companies in approximately the lowest 20% of world market
capitalization as represented by the Salomon Brothers Broad Market Index, an
index comprised of equity securities of more than 6,500 small-, medium- and
large-sized companies based in 22 markets around the globe. Based on this
policy, the companies held by the Fund typically will have individual equity
market capitalizations of between approximately $50 million and $2 billion
(although the Fund will be free to invest in smaller capitalization issues that
satisfy the Fund's size standard). Furthermore, the median market capitalization
of the companies in which the Fund invests will not exceed $750 million.
The Fund may invest up to 35% of its total assets in equity securities of larger
companies located throughout the world and in investment-grade debt securities
if the Adviser determines that the capital appreciation of debt securities is
likely to exceed the capital appreciation of equity securities. The Fund may
invest up to 5% of its net assets in debt securities rated below
investment-grade.
Scudder Global Fund is a diversified investment company which seeks long-term
growth of capital through a diversified portfolio of marketable securities,
primarily equity securities, including common stocks, preferred stocks and debt
securities convertible into common stocks. The Fund invests on a worldwide basis
in equity securities of companies which are incorporated in the U.S. or in
foreign countries. It also may invest in the debt securities of U.S. and foreign
issuers.
The Fund will be invested usually in securities of issuers located in at least
three countries, one of which may be the U.S. It is expected that investments
will include companies of varying size as measured by assets, sales or
capitalization. The Fund generally invests in equity securities of established
companies listed on U.S. or foreign securities exchanges, but also may invest in
securities traded over-the-counter. It also may invest in debt securities
convertible into common stock, convertible and non-convertible preferred stock,
and fixed-income securities of governments, government agencies, supranational
agencies and companies when the Adviser believes the potential for appreciation
will equal or exceed that available from investments in equity securities. These
debt and fixed-income securities will be investment-grade, except that the Fund
may invest up to 5% of its total assets in debt securities rated below
investment-grade.
Scudder Gold Fund is a non-diversified investment company which seeks maximum
return (principal change and income) consistent with investing in a portfolio of
gold-related equity securities and gold.
The Fund pursues its objective primarily through a portfolio of gold-related
investments. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in (1) equity securities (defined as common stock,
investment-grade preferred stock and debt securities that are convertible into
or exchangeable for common stock) of U.S. and foreign companies primarily
engaged in the exploration, mining, fabrication, processing or distribution of
gold, (2) gold bullion, and (3) gold coins. A company will be considered
"primarily engaged" in a business or an activity if it devotes or derives at
least 50% of its assets, revenues and/or operating earnings from that business
or activity. The remaining 35% of the Fund's assets may be invested in any
precious metals other than gold; in equity securities of companies engaged in
activities primarily relating to precious metals and minerals other than gold;
in investment-grade debt securities, including zero coupon bonds, of companies
engaged in activities relating to gold or other precious metals and minerals;
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<PAGE>
Description of the Underlying Scudder Funds (cont'd)
in certain debt securities, a portion of the return on which is indexed to the
price of precious metals. In addition, the Fund may engage in Strategic
Transactions and, to a limited extent, may invest in illiquid and restricted
securities.
Up to 10% of the Fund's total assets may be invested directly in gold, silver,
platinum and palladium bullion and in gold and silver coins. In addition, the
Fund's assets may be invested in wholly owned subsidiaries of the Scudder Mutual
Funds, Inc., of which the Fund is a series, that invest in gold, silver,
platinum and palladium bullion and in gold and silver coins.
Scudder International Fund is a diversified investment company which seeks
long-term growth of capital primarily through a diversified portfolio of
marketable foreign equity securities. The Fund invests in companies, wherever
organized, which do business primarily outside the United States. The Fund
intends to diversify investments among several countries and to have represented
in the portfolio, in substantial proportions, business activities in not less
than three different countries. The Fund does not intend to concentrate
investments in any particular industry.
The Fund's investments are generally denominated in foreign currencies. The
strength or weakness of the U.S. dollar against these currencies is responsible
for part of the Fund's investment performance.
The Fund may invest up to 20% of its total assets in investment-grade debt
securities except that the Fund may not invest more than 5% of its total assets
in debt securities which are rated below investment-grade.
Scudder Large Company Value Fund is a diversified investment company which seeks
to maximize long-term capital appreciation through a value-driven investment
program. The Fund invests in marketable securities, principally common stocks
and, consistent with its objective of long-term capital appreciation, preferred
stocks. The Fund is free to invest in a wide range of marketable securities
which the Adviser believes offer the potential for long-term, above-average
appreciation. The Fund will normally invest at least 65% of its assets in the
equity securities of large U.S. companies, i.e. those with $1 billion or more in
total market capitalization. The Fund looks for companies whose securities
appear to present a favorable relationship between market price and opportunity.
These may include securities of companies whose fundamentals or products may be
of only average promise. The Fund may invest up to 20% of its net assets in debt
securities when management anticipates that the 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. Such debt securities may be rated below investment-grade, or of
equivalent quality as determined by the Adviser. However, the Fund will invest
no more than 10% of its net assets in securities rated B or lower.
Scudder Latin America Fund is a non-diversified investment company which seeks
to provide long-term capital appreciation through investment primarily in the
securities of Latin American issuers.
The Fund involves above-average investment risk. The Fund seeks to benefit from
economic and political trends emerging throughout Latin America. These trends
are supported by governmental initiatives designed to promote freer trade and
market-oriented economies. The Adviser believes that efforts by Latin American
countries to, among other things, reduce government spending and deficits,
control inflation, lower trade barriers, stabilize currency exchange rates,
increase foreign and domestic investment and privatize state-owned companies,
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<PAGE>
will set the stage for attractive investment returns over time.
At least 65% of the Fund's total assets will be invested in the securities of
Latin American issuers, and 50% of the Fund's total assets will be invested in
Latin American equity securities. To meet its objective to provide long-term
capital appreciation, the Fund normally invests at least 65% of its total assets
in equity securities. The Fund considers Latin American countries to include
Mexico, Central America, South America and the Spanish-speaking islands of the
Caribbean. The Fund defines securities of Latin American issuers as follows:
o Securities of companies organized under the laws of a Latin American
country or for which the principal securities trading market is in Latin
America;
o Securities issued or guaranteed by the government of a country in Latin
America, its agencies or instrumentalities, political subdivisions or the
central bank of such country;
o Securities of companies, wherever organized, when at least 50% of an
issuer's non-current assets, capitalization, gross revenue or profit in any
one of the two most recent fiscal years represents (directly or indirectly
through subsidiaries) assets or activities located in Latin America; or
o Securities of Latin American issuers, as defined above, in the form of
depositary shares.
The Fund may invest in debt securities when management anticipates that the
potential for capital appreciation is likely to equal or exceed that of equity
securities, and which are unrated, rated or the equivalent of those rated below
investment-grade although the Fund will not invest more than 10% of its net
assets in securities rated B or lower by Moody's and S&P and may invest in
securities rated C by Moody's or D by S&P. Please refer to the attached Appendix
for further information.
Scudder Micro Cap Fund is a diversified investment company which seeks long-term
growth of capital by investing primarily in a diversified portfolio of U.S.
micro-capitalization ("micro-cap") common stocks.
The Fund seeks to provide long-term growth of capital by investing, under normal
market conditions, at least 80% of its assets in common stocks issued by U.S.
micro-cap companies. The Fund will typically invest in companies that, at the
time of purchase, are smaller than the smallest stocks in the Russell 2000 Index
at its annual reconstitution. The median market capitalization (i.e., current
stock price times shares outstanding) of the portfolio is not expected to exceed
$125 million.
While the Fund invests predominantly in common stocks, it can purchase other
types of securities, including preferred stocks, convertible or non-convertible
securities, 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.
Treasuries, agency and instrumentality obligations, may enter into repurchase
agreements and may engage in strategic transactions to increase stock market
participation, enhance liquidity and manage transaction costs.
Scudder Pacific Opportunities Fund is a non-diversified investment company which
seeks long-term growth of capital through investment primarily in the equity
securities of Pacific Basin companies, excluding Japan.
The Fund invests, under normal market conditions, at least 65% of its assets in
the equity securities of Pacific Basin companies. Pacific Basin countries
include Australia, the Peoples Republic of China, India, Indonesia, Malaysia,
New Zealand, the Philippines, Sri Lanka, Pakistan and Thailand, as well as Hong
Kong, Singapore, South Korea and Taiwan--the so-called "four tigers." The Fund
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<PAGE>
Description of the Underlying Scudder Funds (cont'd)
may invest in other countries in the Pacific Basin when their markets become
sufficiently developed. The Fund will not, however, invest in Japanese
securities. The Fund intends to allocate investments among at least three
countries at all times and does not expect to concentrate investments in any
particular industry. The Fund defines securities of Pacific Basin companies as
follows:
o Securities of companies organized under the laws of a Pacific Basin country
or for which the principal securities trading market is in the Pacific
Basin; or
o Securities of companies, wherever organized, when at least 50% of a
company's non-current assets, capitalization, gross revenue or profit in any
one of the two most recent fiscal years represents (directly or indirectly
through subsidiaries) assets or activities located in the Pacific Basin.
Under normal market conditions, the Fund may invest up to 35% of its assets in
equity securities of U.S. and other non-Pacific Basin issuers (excluding Japan).
The Fund may invest up to 35% of its total assets in foreign and domestic
high-grade debt securities if the Adviser determines that the capital
appreciation of debt securities is likely to equal or exceed the capital
appreciation of equity securities.
Scudder Quality Growth Fund is a diversified investment company which seeks to
provide long-term growth of capital through investment primarily in the equity
securities of seasoned, financially-strong U.S. growth companies.
The Fund's equity investments consist of common stocks, preferred stocks and
securities convertible into common stocks of companies which are of
above-average financial quality and offer the prospect for above-average growth
in earnings, cash flow or assets relative to the overall market as defined by
the Standard & Poor's 500 Composite Price Index ("S&P 500").
The Fund invests at least 65% of its total assets in the equity securities of
seasoned, financially- strong U.S. growth companies which are considered to be
of above-average financial quality. The common stocks issued by these companies
qualify, at the time of purchase, for one of the three highest equity ranking
categories (A+, A or A-) of S&P or, if not ranked by S&P, are judged to be of
comparable quality by the Adviser. Rankings by S&P are not an appraisal of a
company's creditworthiness, as is true for S&P's debt security ratings, nor are
these rankings intended as a forecast of future stock market performance. In
addition to using S&P rankings of earnings and dividends of common stocks, the
Adviser conducts its own analysis of a company's history, current financial
position, and earnings prospects.
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. The Fund
may invest in convertible securities which must be investment-grade.
Scudder Small Company Value Fund is a diversified investment company which
invests for long-term growth of capital by seeking out undervalued stocks of
small U.S. companies. In pursuit of long-term growth of capital, the Fund
invests, under normal circumstances, at least 80% of its assets in the common
stock of small U.S. companies. The Fund will invest in securities of companies
that are similar in size to those in the Russell 2000(R) Index of small stocks.
The median market capitalization (i.e., current stock price times shares
outstanding) of the portfolio will be below $500 million. The Fund may continue
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<PAGE>
to hold securities which have grown in market capitalization above the Russell
2000(R) Index, but will generally not add to these holdings.
Companies represented in the portfolio of the Fund typically have the following
characteristics:
o Attractive valuations relative to the Russell 2000 Index--a widely used
benchmark of small stock performance--based on measures such as price to
earnings, price to book value and price to cash flow ratios.
o Favorable trends in earnings growth rates and stock price momentum.
While the Fund invests predominantly in common stocks, it can purchase other
types of equity securities including preferred stocks (either convertible or
nonconvertible), rights and warrants. Securities may be listed on national
exchanges or, more commonly, 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 engage in strategic transactions, using
such derivatives contracts as index options and futures, to increase stock
market participation, enhance liquidity and manage transaction costs.
Scudder 21st Century Growth Fund is a diversified investment company which seeks
long-term growth of capital by investing primarily in the securities of emerging
growth companies poised to be leaders in the 21st century.
The Fund generally invests in equity securities, including common stocks and
convertible securities, of relatively small or little-known companies, commonly
referred to as emerging growth companies, with market capitalization typically
below $750 million. The Adviser believes these companies are well-positioned for
above-average earnings growth and/or greater market recognition. Such favorable
prospects may be a result of new or innovative products or services a given
company is developing or provides, products or services that have the potential
to impact significantly the industry in which the company competes or to change
dramatically customer behavior into the 21st century.
To help reduce risk in its search for high quality, emerging growth companies,
the Adviser allocates the Fund's investments among many companies and different
industries in the U. S. and, where opportunity warrants, abroad as well.
Emerging growth companies are those with the ability, in the Adviser's opinion,
to expand earnings per share by at least 15% per annum over the next three to
five years at a minimum.
Scudder Value Fund is a diversified investment company which seeks long-term
growth of capital through investment in undervalued equity securities. The Fund
invests primarily in the equity securities of medium- to large-sized domestic
companies with annual revenues or market capitalization of at least $600
million. The Adviser uses in-depth fundamental research and a proprietary
computerized quantitative model to identify companies that are currently
undervalued in relation to current and estimated future earnings and dividends.
The investment process also involves an assessment of business risk, including
the Adviser's analysis 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. The Fund invests in the securities of companies that,
in the opinion of its Adviser, are undervalued in the marketplace in relation to
current and estimated future earnings and dividends. These companies generally
sell at price-earnings ratios below the market average, as defined by the S&P
500. The Fund invests at least 80% of its assets in equity securities, which
consist of common stocks, preferred stocks and securities convertible into
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<PAGE>
Description of the Underlying Scudder Funds (cont'd)
common stocks. While the Fund emphasizes U.S. investments, it can invest its
assets in securities of foreign companies which meet the same criteria
applicable to domestic investments. The Fund may invest up to 20% of its total
assets in debt obligations, including zero coupon securities, may enter into
repurchase agreements and may also engage in strategic transactions for hedging
purposes and to seek to increase gain.
The debt securities in which the Fund may invest may be rated below
investment-grade, although the Fund will invest no more than 10% of its net
assets in securities rated B or lower by S&P or Moody's, and may not invest more
than 5% of its net assets in securities rated C by Moody's or D by S&P.
Information about policies, investments and risks
In pursuing their investment objectives, each of the Underlying Scudder Funds is
permitted to engage in a wide range of investment policies. The Underlying
Scudder Funds' risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. Certain of these policies
are described below. Further information about the Underlying Scudder Funds is
contained in the Appendix to this prospectus, and in the Statement of Additional
Information. Also, detailed information is presented in the prospectuses of such
funds.
Foreign securities. Each Underlying Scudder Fund (except Scudder Cash Investment
Trust and Scudder GNMA Fund) may invest in foreign securities. Investments in
foreign securities involve special considerations due to more limited
information, higher brokerage costs, different accounting standards, thinner
trading markets and the likely impact of foreign taxes on the income from
securities. They may also entail certain other risks, such as the possibility of
one or more of the following: imposition of dividend or interest withholding or
confiscatory taxes; currency blockages or transfer restrictions; expropriation,
nationalization or other adverse political or economic developments; less
government supervision and regulation of securities exchanges, brokers and
listed companies; and the difficulty of enforcing obligations in other
countries. Purchases of foreign securities are usually made in foreign
currencies and, as a result, an Underlying Scudder Fund may incur currency
conversion costs and may be affected favorably or unfavorably by changes in the
value of foreign currencies against the U.S. dollar. Further, it may be more
difficult for an Underlying Scudder 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. Certain markets may require payment for securities before delivery.
An Underlying Scudder Fund's ability and decisions to purchase and sell
portfolio securities may be affected by laws or regulations relating to the
convertibility of currencies and repatriation of assets. These risks are greater
in emerging markets.
Debt securities. In general, the prices of debt securities rise when interest
rates fall, and vice versa. This effect is usually more pronounced for longer
term debt securities.
The debt securities in which certain of the Underlying Scudder Funds may invest
are rated, or determined by the Adviser to be the equivalent of those rated, by
two nationally recognized rating organizations, Moody's and S&P. High quality
securities are those rated in the two highest categories by Moody's (Aaa or Aa)
or S&P (AAA or AA). High-grade securities are those rated in the three highest
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categories by Moody's (Aaa, Aa, or A) or by S&P (AAA, AA, or A).
Investment-grade securities are those rated in the four highest categories by
Moody's (Aaa, Aa, A, or Baa) or by S&P (AAA, AA, A or BBB).
Certain Underlying Scudder Funds may invest in debt securities which are rated
below investment-grade; that is, rated below Baa by Moody's or BBB by S&P
(commonly referred to as "junk bonds"). The lower the ratings of such debt
securities, the greater their risks render them like equity securities. Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics. Certain Underlying Scudder Funds may also make
a portion of their below investment-grade investments in securities which are
rated D by S&P or, if unrated, are of equivalent quality. Securities rated D may
be in default with respect to payment of principal or interest. Additional
information regarding the ratings of debt securities and the identity of those
Underlying Scudder Funds that can invest in investment-grade or below
investment-grade debt securities may be found in the section entitled
"Description of the Underlying Scudder Funds" and in the Appendix to this
prospectus.
To the extent an Underlying Scudder Fund invests in high-grade securities, it
will be unable to avail itself of opportunities for higher income which may be
available with lower grade investments. Conversely, although some lower-grade
securities have produced higher yields in the past than the investment-grade
securities, lower-grade securities are considered to be predominantly
speculative and, therefore, carry greater risk. Please refer to the attached
Appendix for further information.
Strategic Transactions and derivatives. Each Underlying Scudder Fund (except for
Scudder Cash Investment Trust) may, but is not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates, currency exchange rates, and broad or specific equity
or fixed-income market movements), to manage the effective maturity or duration
of fixed-income securities in each Underlying Scudder Fund's portfolio or to
enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, each Underlying Scudder
Fund may purchase and sell exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars, and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of an Underlying Scudder Fund's assets
will be committed to Strategic Transactions entered into for non-hedging
purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to an
Underlying Scudder 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
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Information about policies, investments and risks (cont'd)
amount of appreciation an Underlying Scudder Fund can realize on its investments
or cause an Underlying Scudder Fund to hold a security it might otherwise sell.
The use of currency transactions can result in the Underlying Scudder 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 an Underlying Scudder Fund creates the possibility that
losses on the hedging instrument may be greater than gains in the value of an
Underlying Scudder 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, an Underlying Scudder Fund might
not be able to close out a transaction without incurring substantial losses, if
at all. Although the use of futures contracts and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized. The Strategic Transactions that an Underlying Scudder Fund
may use and some of their risks are described more fully in Pathway Series'
Statement of Additional Information and the Statement of Additional Information
of certain Underlying Scudder Funds.
Investment restrictions of the Portfolios
The Portfolios have adopted certain fundamental policies which may not be
changed without a vote of shareholders and which are designed to reduce the
Portfolios' investment risk. Each Portfolio may not borrow money except as a
temporary measure for extraordinary or emergency purposes, or through reverse
repurchase agreements and may not make loans except through the purchase of
portfolio securities or through repurchase agreements. A complete description of
these and other policies and restrictions is contained under "Investment
Restrictions" in the Portfolios' Statement of Additional Information.
Risks of investing in the Portfolios
The Portfolios' risks are determined by the nature of the securities held by the
Underlying Scudder Funds as well as the proportion of investment in each
Underlying Scudder Fund pursuant to the portfolio management strategies used by
the Adviser. The following are descriptions of certain risks related to
investments in the Portfolios.
o As the investments in each Portfolio are concentrated within a group of
Underlying Scudder Funds, the performance of that Portfolio is directly
related to the investment performance of those Underlying Scudder Funds. The
ability of a Portfolio to meet its investment objective is directly related
to the ability of the Underlying Scudder Funds to meet their objectives as
well as the allocation among those Underlying Scudder Funds by the
Portfolios' portfolio management team.
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o Each Portfolio's share price and yield will fluctuate in response to various
market and economic factors related to both the stock and bond markets. Some
of the Underlying Scudder Funds invest in debt securities making them
subject to credit risk, interest rate risk and pre-payment risk. Also, each
Portfolio invests in Underlying Scudder Funds that are in turn invested in
international securities and thus are subject to additional risks of these
investments including changes in foreign currency exchange rates and
political risk.
For information about the investment techniques and the risks involved in the
Underlying Scudder Funds, please refer to "Additional Information about
policies, investments and risks" and the Appendix to this prospectus.
Distribution and performance information
Dividends and capital gains distributions
The Conservative Portfolio and Balanced Portfolio each intend to distribute
dividends from net investment income quarterly in April, July, October and
December. The Growth Portfolio intends to distribute net investment income in
November or December. Each Portfolio intends to distribute net realized capital
gains, if any, in November or December to prevent application of federal excise
tax, although an additional distribution may be made within three months of a
Portfolio's fiscal year end, if necessary. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared.
According to preference, shareholders may receive distributions in cash or have
them reinvested in additional shares of a Portfolio. If an investment in a
Portfolio is in the form of a retirement plan, then all distributions will
automatically be reinvested in additional shares of that Portfolio.
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable as
long-term capital gains for federal income tax purposes, regardless of the
length of time shareholders have owned their shares.
Short-term capital gains and any other taxable income distributions are taxable
as ordinary income. Distributions received by a Portfolio from an Underlying
Scudder Fund generally will be ordinary income dividends, includible in that
Portfolio's net investment income, if paid from the Underlying Scudder Fund's
net investment income, short-term capital gains or other taxable income.
Distributions paid from an Underlying Scudder Fund's long-term capital gains,
however, generally will be treated by a Portfolio as long-term capital gains for
federal income tax purposes, regardless of how long that Portfolio held the
Underlying Scudder Fund's shares.
Each Portfolio sends detailed tax information to shareholders about the amount
and type of its distributions by January 31 of the following year. It is
anticipated that each Portfolio's turnover rate will not exceed 50% for the
initial fiscal year.
Performance information
From time to time, quotations of a Portfolio's performance may be included in
advertisements, sales literature, or shareholder reports. All performance
figures are historical, show the performance of a hypothetical investment and
are not intended to indicate future performance.
For the Conservative Portfolio and Balanced Portfolio, the "SEC yield" is an
annualized expression of the net income generated by a Portfolio over a
specified 30-day (one month) period, as a percentage of a Portfolio's share
price on the last day of that period. This yield is calculated according to
methods required by the Securities and Exchange Commission (the "SEC"), and
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Distribution and performance information (cont'd)
therefore may not equate to the level of income paid to shareholders. Yield is
expressed as an annualized percentage. For all Portfolios, "total return" is the
change in value of an investment in a Portfolio for a specified period. The
"average annual total return" of a Portfolio is the average annual compound rate
of return of an investment in a Portfolio assuming the investment has been held
for one year, and the life of a Portfolio as of a stated ending date.
"Cumulative total return" represents the cumulative change in value of an
investment in a Portfolio for various periods. Total return calculations assume
that all dividends and capital gains distributions during the period were
reinvested in shares of a Portfolio. "Capital change" measures return from
capital, including reinvestment of any capital gains distributions but does not
include the reinvestment of dividends.
Performance will vary based upon, among other things, changes in market
conditions and the level of the Underlying Scudder Funds' expenses.
Provided below are performance figures for the Scudder Managed Retirement
Trust-Income (the "MRT/Income"), the Scudder Managed Retirement Trust-Balanced,
(the "MRT/Balanced") and the Scudder Managed Retirement Trust-Growth (the
"MRT/Growth") (collectively, the "MRTs"), each a collective investment trust for
defined contribution plans offered by the Adviser. The MRTs invest their assets
within the Scudder Family of Funds and have the same investment adviser and same
lead portfolio manager as the Portfolios. MRT/Income, MRT/Balanced and
MRT/Growth have substantially similar investment objectives, policies and
strategies as Conservative Portfolio, Balanced Portfolio and Growth Portfolio,
respectively.
Unlike the Portfolios, however, the MRTs impose a trustee fee and an audit fee
at the trust level. Of course, the following performance figures are not
necessarily indicative of the future performance of a Portfolio.
Average Annual Total Returns for periods ended October 31, 1996
1 Year 3 Years Life of Fund
MRT/Income 10.62% 7.37% 7.43%*
MRT/Balanced 13.89% 9.51% 10.89%@
MRT/Growth 15.92% 11.03% 11.51%*
*For the period beginning August 23, 1993.
@ For the period beginning August 31, 1991.
Portfolio organization
Scudder Pathway Series (the "Trust") is a diversified, open-end management
investment company, commonly referred to as a "mutual fund," registered under
the Investment Company Act of 1940 (the "1940 Act"). The Trust was organized as
a Massachusetts business trust on July 1, 1994.
The Trust offers four portfolios: Conservative Portfolio, Balanced Portfolio,
Growth Portfolio and International Portfolio. The Declaration of Trust provides
that each Portfolio can offer additional classes of shares and the Board of
Trustees has the ability to offer additional portfolios. Each Portfolio
represents a separate series of shares and has different objectives and
investment policies. Each Portfolio intends to qualify separately as a regulated
investment company for the purposes of Subchapter M of the Internal Revenue
Code.
The Portfolios' activities are supervised by its Board of Trustees. Shareholders
have one vote for each share held on matters on which they are entitled to vote.
The Portfolios are not required to hold, and have no current intention of
holding, annual shareholder meetings, although special meetings may be called
for purposes such as electing or removing Trustees, changing fundamental
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investment policies or approving an investment management contract.
Special Servicing Agreement
All the expenses of the Portfolios will be paid for in accordance with a Special
Servicing Agreement (the "Agreement") entered into by the Adviser, the
Underlying Scudder Funds, Scudder Service Corporation, Scudder Fund Accounting
Corporation, Scudder Investor Services, Inc., Scudder Trust Company and the
Portfolios. Under the Agreement, the Adviser will arrange for all services
pertaining to the operation of the Portfolios including the services of Scudder
Service Corporation and Scudder Fund Accounting Corporation as the Shareholder
Servicing Agent and the Accounting Agent, respectively, for the Portfolios. If
the officers of an Underlying Scudder Fund determine that the aggregate expenses
of a Portfolio are less than the estimated savings to the Underlying Scudder
Fund from the operation of that Portfolio, the Underlying Scudder Fund will bear
those expenses in proportion to the average daily value of its shares owned by
the Portfolio. Consequently, no Underlying Scudder Fund will be expected to
carry expenses that are in excess of the estimated savings to it. The estimated
savings are expected to result from the reduction of shareholder servicing costs
due to the elimination of separate shareholder accounts which either currently
are or have potential to be invested in the Underlying Scudder Funds. The
estimated savings produced by the operation of a Portfolio will most likely
suffice to offset most, if not all, the expenses incurred by that Portfolio.
In the event that the aggregate financial benefits to the Underlying Scudder
Funds do not exceed the costs of a Portfolio, the Adviser will pay, on behalf of
that Portfolio, that portion of costs determined to be greater than the
benefits.
All expenses of the Portfolios, excluding certain non-recurring and
extraordinary expenses, will be paid for in accordance with the Agreement,
including fees and expenses incurred in connection with membership in investment
company organizations; fees and expenses of the Portfolios' accounting agent;
brokers' commissions; legal, auditing and accounting expenses; taxes and
governmental fees; the fees and expenses of the transfer agent; the expenses of
and the fees for registering or qualifying securities for sale; the fees and
expenses of Trustees, officers and employees of the Portfolios who are not
affiliated with the Adviser; the cost of printing and distributing reports and
notices to shareholders; and the fees and disbursements of custodians.
Certain Underlying Scudder Funds impose a fee upon the redemption or exchange of
shares held less than one year. The fees, which range between 1% and 2% of the
net asset value of the shares being redeemed or exchanged, are assessed and
retained by the Underlying Scudder Funds for the benefit of the remaining
shareholders. The fee is intended to encourage long-term investment in the Fund.
The fee is not a deferred sales charge, is not a commission paid to the Adviser
of its subsidiary and does not benefit the Adviser in any way. The Fund reserves
the right to modify the terms of or terminate this fee at any time. As a
shareholder of such Underlying Scudder Funds, the Portfolios will be subject to
such fees. Under normal market conditions, each Portfolio will seek to avoid
taking action that would result in the imposition of such a fee. However, in the
event that a fee is incurred, the net assets of a Portfolio would be reduced by
the amount of such fees that are assessed and retained by the Underlying Scudder
Funds for the benefit of their shareholders.
Investment adviser
The Portfolios retain the investment management firm of Scudder, Stevens &
Clark, Inc., a Delaware corporation, to manage the Portfolios' daily investment
and business affairs subject to the policies established by the Board of
Trustees. The Trustees have overall responsibility for the management of the
Trust under Massachusetts law.
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Portfolio organization (cont'd)
Scudder, Stevens & Clark, Inc. is located at Two International Place, Boston,
Massachusetts.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Portfolios.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Portfolios'
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of the Portfolios. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Portfolio accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Portfolios.
Custodian
State Street Bank and Trust Company is the custodian for the Portfolios.
Transaction information
For concise instruction on how to purchase, exchange or redeem shares, refer to
pages 34 and 35.
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Portfolios' transfer agent receives the purchase request in good order.
Purchases are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
a Portfolio may hold redemption proceeds until the purchase check has cleared.
If you purchase shares by federal funds wire, you may avoid this delay.
Redemption requests by telephone prior to the expiration of the seven-day period
will not be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and the Portfolio account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the Portfolio in which the money is to be invested,
- -- the account number of the Portfolio, and
- -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.You may also make additional investments of $100 or more
to your existing account by wire.
By telephone order. Existing shareholders may purchase shares at a certain day's
price by calling 1-800-225-5163 before the close of regular trading on the New
York Stock Exchange (the "Exchange"), normally 4 p.m. eastern time, on that day.
Orders must be for $10,000 or more and cannot be for an amount greater than four
times the value of your account at the time the order is placed. A confirmation
with complete purchase information is sent shortly after your order is received.
You must include with your payment the order number given at the time the order
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is placed. If payment by check or wire is not received within three business
days, the order is subject to cancellation and the shareholder will be
responsible for any loss to a Portfolio resulting from this cancellation.
Telephone orders are not available for shares held in Scudder IRA accounts and
most other Scudder retirement plan accounts.
By "AutoBuy." If you elected "AutoBuy" for your account, you can call toll-free
to purchase shares. The money will be automatically transferred from your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoBuy," call
1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases must be for at
least $250 but not more than $250,000. Proceeds in the amount of your purchase
will be transferred from your bank checking account in two or three business
days following your call. For requests received by the close of regular trading
on the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. "AutoBuy" 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 "AutoBuy" and redeem them within seven days of the
purchase, a Portfolio 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. "AutoBuy" transactions are not
available for Scudder IRA accounts and most other retirement plan accounts.
By exchange. Your new account will have the same registration and address as
your existing account.
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges on SAIL, the Scudder Automated Information Line, by
calling 1-800-343-2890.
Redeeming shares
The Portfolios allow you to redeem shares (i.e., sell them back to a Portfolio)
without redemption fees.
By telephone. This is the quickest and easiest way to sell Portfolio shares. If
you elected telephone redemption to your bank on your application, you can call
to request that federal funds be sent to your authorized bank account. If you
did not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions on SAIL by calling 1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Portfolio's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.
Transaction information (cont'd)
In the event that you are unable to reach a Portfolio by telephone, you should
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Transaction information (cont'd)
write to that Portfolio; see "How to contact Scudder" for the address.
By "AutoSell." If you elected "AutoSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoSell,"
call 1-800-225-5163 for more information.
To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "AutoSell" 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.
"AutoSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $100,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (The Portfolios reserve the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations, or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $100,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be wired
to a predesignated bank account. The Portfolio uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If a Portfolio does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Portfolios will not be liable for acting upon
instructions communicated by telephone that they reasonably believe to be
genuine.
Share price
Purchases and redemptions, including exchanges, are made at each Portfolio's net
asset value. Scudder Fund Accounting Corporation determines net asset value per
share as of the close of regular trading on the Exchange, normally 4 p.m.
eastern time, on each day the Exchange is open for trading. Net asset value per
share is calculated by dividing the value of total assets of a Portfolio, less
its liabilities, by the total number of shares of that Portfolio outstanding.
Processing time
All purchase and redemption requests must be received in good order by the
Portfolios' transfer agent. Those requests received by the close of regular
trading on the Exchange are executed at the net asset value per share calculated
at the close of trading that day.
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Purchase and redemption requests received after the close of regular trading on
the Exchange will be executed the following business day.
If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.
Each Portfolio will normally send your redemption proceeds within one business
day following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
Trust and Scudder Investor Services, Inc. each reserves the right to reject
purchases of Portfolio shares (including exchanges) for any reason including
when a pattern of frequent purchases and sales made in response to short-term
fluctuations in a Portfolio's share price appears evident.
Tax information
A redemption of shares, including an exchange into another Portfolio or Scudder
fund, is a sale of shares and may result in a gain or loss for income tax
purposes.
Tax identification number
Be sure to complete the Tax Identification Number section of the Portfolios'
application when you open an account. Federal tax law requires each Portfolio to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. Each Portfolio reserves the right to reject new account
applications without a certified Social Security or tax identification number.
Each Portfolio also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing a Portfolio
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500, which amount
may be changed by the Board of Trustees. Scudder retirement plans and certain
other accounts have similar or lower minimum balance requirements. The initial
investment and minimum account balance for fiduciary accounts such as IRAs is
$1,000 per fund account, and the subsequent minimum investment is $50. A
shareholder may open a regular account with a minimum of $1,000, if an
investment program of at least $100 per month is established.
Shareholders with non-fiduciary accounts who maintain an account balance of less
than $2,500 in a Portfolio without establishing a regular investment program may
be assessed an annual $10.00 per fund charge with the fee to be paid to that
Portfolio. The $10.00 charge will not apply to shareholders with a combined
household account balance (same surname, same address) in any of the Scudder
Funds of $25,000 or more. Each Portfolio reserves the right, following 60 days'
written notice to shareholders, to redeem all shares in accounts below $250,
where a reduction in value has occurred due to a redemption or exchange out of
the account. The shareholder may restore the share balance to $250 or more
during the 60-day notice period and must maintain it at no lower than that
minimum to avoid an involuntary redemption. Each Portfolio will mail the
proceeds of the redeemed account to the shareholder. Reductions in value that
result solely from market activity will not trigger an involuntary redemption.
Retirement accounts and certain other accounts will not be assessed the $10.00
charge or be subject to automatic liquidation. Please refer to "Exchanges and
Redemptions -- Other information" in the Portfolio's Statement of Additional
Information.
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Shareholder benefits
Third party transactions
If purchases and redemptions of Portfolio shares are arranged and settlement is
made at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
Experienced professional management
Scudder Stevens & Clark, Inc., one of the nation's most experienced investment
management firms, actively manages your Scudder fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.
A team approach to investing
The Portfolios are managed by a team of Scudder investment professionals who
each play an important role in the Portfolios' management process. Team members
work together to develop investment strategies and select Underlying Funds for
each Portfolio. They are supported by Scudder's large staff of portfolio
managers, economists, research analysts, traders and other investment
specialists. Scudder believes its team approach benefits the Portfolios'
investors by bringing together many disciplines and leveraging Scudder's
extensive resources. All members of the Pathway investment team are members of
Scudder's Global Asset Allocation Committee. This group is responsible for
analyzing the global economy and capital markets, integrating information from
the firm's equity and fixed income specialists, and developing the outlook for
the investment characteristics of the major markets in which a Portfolio
invests.
Lead Portfolio Manager Benjamin W. Thorndike, who has 17 years of investment
experience, joined Scudder in 1983 as a portfolio manager. Since 1986, he has
served as a portfolio manager for Scudder Growth and Income Fund. Mr. Thorndike
will develop portfolio strategy utilizing the research, analysis and guidance
provided by other members of the investment team. Cornelia Small, Portfolio
Manager, is Director of Global Equity Investments and Chairman of the Capital
Markets Group, and has also served as Director of Global Equity Research.
Margaret (Peg) Hadzima, Portfolio Manager, is Director of Scudder's
Institutional Group, which includes a focus on asset allocation strategy. Ms.
Hadzima has 23 years of experience in fixed-income investing during which she
has served as Director of Global Bond Research and Chairman of Global Bond
Strategy. Philip Fortuna, Portfolio Manager, joined Scudder in 1986 as manager
of institutional equity accounts. He has served as Director of Quantitative
Research and Director of Investment Operations. Mr. Fortuna is Lead Portfolio
Manager for Scudder Small Company Value Fund, as well as a portfolio manager for
Scudder Micro Cap Fund. Maureen Allyn, Portfolio Manager, is Scudder's Chief
Economist, a position she has held since 1989, and is responsible for analyzing
both the world and U.S. economies.
SAIL(TM)--Scudder Automated Information Line
For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund or portfolio
accounts, or to obtain information on any Scudder fund or portfolio,
shareholders can call Scudder's Automated Information Line (SAIL) at
1-800-343-2890, 24 hours a day. During periods of extreme economic or market
changes, or other conditions, it may be difficult for you to effect telephone
transactions in your account. In such an event you should write to the
Portfolio; please see "How to contact Scudder" for the address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
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tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Portfolio or the transfer agent. In some
cases, the transfer agent or Scudder Investor Services, Inc. may impose
additional conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Portfolio shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.To reduce the volume of mail you receive, only one copy of
most Portfolio reports, such as the Portfolio's Annual Report, may be mailed to
your household (same surname, same address). Please call 1-800-225-5163 if you
wish to receive additional shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
New York and San Francisco.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
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Scudder tax-advantaged retirement plans
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
o Scudder No-Fee IRAs. These retirement plans allow a maximum annual
contribution of $2,000 per person for anyone with earned income. Many people
can deduct all or part of their contributions from their taxable income, and
all investment earnings accrue on a tax deferred basis. The Scudder No-Fee
IRA charges no annual custodial fee.
o 401(k) Plans. 401(k) plans allow employers and employees to make
tax-deductible retirement contributions. Scudder offers a full service
program that includes recordkeeping, prototype plan, employee communications
and trustee services, as well as investment options.
o Profit Sharing and Money Purchase Pension Plans. These plans allow
corporations, partnerships and people who are self-employed to make annual,
tax-deductible contributions of up to $30,000 for each person covered by the
plans. Plans may be adopted individually or paired to maximize
contributions. These are sometimes known as Keogh plans.
o 403(b) Plans. Retirement plans for tax-exempt organizations and school
systems to which employers and employees may both contribute.
o SEP-IRAs. Easily administered retirement plans for small businesses and
self-employed individuals. The maximum annual contribution to SEP-IRA
accounts is adjusted each year for inflation.
o SIMPLE IRAs. A flexible, easily administered retirement plan for small
businesses which can be funded by contributions from employees and matching
contributions from employers.
o Scudder Horizon Plan. A no-load variable annuity that lets you build assets
by deferring taxes on your investment earnings. You can start with $2,500 or
more.
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, Profit Sharing
or Pension Plan accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life Insurance
Company (in New York State, Intramerica Life Insurance Company [S 1802]). The
contract is offered by Scudder Insurance Agency, Inc. (in New York State, Nevada
and Montana, Scudder Insurance Agency of New York, Inc.). CNL, Inc. is the
Principal Underwriter. Scudder Horizon Plan is not available in all states.
30
<PAGE>
Trustees and Officers
David S. Lee*
President and Trustee
Daniel Pierce*
Vice President and Trustee
Edgar R. Fiedler
Trustee; Vice President and Economic
Counsellor, The Conference Board, Inc.
Dr. J.D. Hammond
Trustee; Dean, Smeal College of Business
Administration, Pennsylvania State University
Richard M. Hunt
Trustee; University Marshal and Senior
Lecturer, Harvard University
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Kathryn L. Quirk*
Vice President and Assistant Secretary
*Scudder, Stevens & Clark, Inc.
31
<PAGE>
Investment products and services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Limited
Term Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
Scudder Pennsylvania Tax Free Fund*
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Zero Coupon 2000 Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund
Scudder Quality Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund
Retirement Programs
- -------------------
IRA
SEP IRA
SIMPLE IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan *++++++
(a variable annuity)
Closed-End Funds#
- -----------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder World Income Opportunities
Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed from expected
least to most risk. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *Not available in all states.
++++++A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance agencies,
1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc., are
traded on various stock exchanges.
32
<PAGE>
How to contact Scudder
Account Service and Information:
For existing account service and transactions
Scudder Investor Relations -- 1-800-225-5163
For 24 hour account information, fund information, exchanges, and an overview
of all the services available to you
Scudder Electronic Account Services -- http://funds.scudder.com
For personalized information about your Scudder accounts, exchanges and
redemptions
Scudder Automated Information Line (SAIL) -- 1-800-343-2890
Investment Information:
For information about the Scudder funds, including additional
applications and prospectuses, or for answers to investment questions
Scudder Investor Relations -- 1-800-225-2470
[email protected]
Scudder's World Wide Web Site -- http://funds.scudder.com
For establishing 401(k) and 403(b) plans
Scudder Defined Contribution Services -- 1-800-323-6105
Scudder Brokerage Services:
To receive information about this discount brokerage service and to obtain an
application
Scudder Brokerage Services** -- 1-800-700-0820
Please address all correspondence to:
The Scudder Funds
P.O. Box 2291
Boston, Massachusetts
02107-2291
Or Stop by a Scudder Funds Center:
Many shareholders enjoy the personal, one-on-one service of the Scudder
Funds Centers. Check for a Funds Center near you--they can be found in
the following cities:
Boca Raton Chicago San Francisco
Boston New York
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
** Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061--
Member NASD/SIPC.
33
<PAGE>
<TABLE>
<CAPTION>
Purchases
- -----------------------------------------------------------------------------------------------------------------------
Opening Minimum initial investment: $2,500; IRAs $1,000
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
<S> <C> <C>
Make checks o By Mail Send your completed and signed application and check
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds Scudder Shareholder Service
P.O. Box 2291 Center
Boston, MA 42 Longwater Drive
02107-2291 Norwell, MA
02061-1612
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.
Then call 1-800-225-5163 for instructions.
o In Person Visit one of our Funds Centers to complete your application
with the help of a Scudder representative. Funds Center
locations are listed under Shareholder benefits.
- -----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete
to Scudder Funds." Fund name, the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares-- By
wire for details, including the ABA wire transfer number.
o In Person Visit one of our Funds Centers to make an additional
investment in your Scudder fund account. Funds Center
locations are listed under Shareholder benefits.
o By Telephone Please see Transaction information--Purchasing shares--
By AutoBuy or By telephone order for more details.
o By Automatic You may arrange to make investments on a regular basis
Investment Plan through automatic deductions from your bank checking account.
Please call 1-800-225-5163 ($50 minimum) for more information and an enrollment form.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Exchanges and redemptions
- -----------------------------------------------------------------------------------------------------------------------
Exchanging shares Minimum investments: $2,500 to establish a new account;
$100 to exchange among existing accounts
<S> <C> <C>
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds Scudder Shareholder 1-800-821-6234
P.O. Box 2291 Service Center
Boston, MA 02107-2291 42 Longwater Drive
Norwell, MA
02061-1612
-----------------------------------------------------------------------------------------------------------------------
Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day). You may have
redemption proceeds sent to your predesignated bank account, or redemption
proceeds of up to $100,000 sent to your address of record.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
A signature guarantee is required for redemptions over $100,000.
See Transaction information--Redeeming shares.
o By Automatic You may arrange to receive automatic cash payments periodically.
Withdrawal Call 1-800-225-5163 for more information and an enrollment form.
Plan
</TABLE>
35
<PAGE>
Appendix
Descriptions Of Certain Risks Related To Various Securities Invested In, And
Investment Techniques Employed By, The Underlying Scudder Funds In Which The
Portfolios May Invest
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, an Underlying Scudder Fund's right to dispose of the securities may
be restricted. In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the securities before repurchase of
the securities under a repurchase agreement, an Underlying Scudder Fund may
encounter delay and incur costs before being able to sell the securities. Also,
if a seller defaults, the value of such securities may decline before an
Underlying Scudder Fund is able to dispose of them.
Convertible securities. While convertible securities generally offer lower
yields than non-convertible debt securities of similar quality, their prices may
reflect changes in the value of the underlying common stock. Convertible
securities entail less credit risk than the issuer's common stock.
Non-diversified investment company. Certain Underlying Scudder Funds are
classified as non-diversified investment companies under the Investment Company
Act of 1940 (the "1940 Act"), which means that an Underlying Scudder Fund is not
limited by the 1940 Act in the proportion of its assets that it may invest in
the obligations of a single issuer. The investment of a large percentage of an
Underlying Scudder Fund's assets in the securities of a small number of issuers
may cause an Underlying Scudder Fund's share price to fluctuate more than that
of a diversified investment company.
Dollar roll transactions. If the broker/dealer to whom an Underlying Scudder
Fund sells the securities underlying a dollar roll transaction becomes
insolvent, an Underlying Scudder Fund's right to purchase or repurchase the
securities may be restricted; the value of the securities may change adversely
over the term of the dollar roll; the securities that an Underlying Scudder Fund
is required to repurchase may be worth less than securities that an Underlying
Scudder Fund originally held, and the return earned by an Underlying Scudder
Fund with the proceeds of a dollar roll may not exceed transaction costs.
Zero coupon securities. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current cash distributions of interest.
Illiquid or restricted investments. The absence of a trading market can make it
difficult to ascertain a market value for illiquid or restricted investments.
Disposing of illiquid or restricted investments may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for an
Underlying Scudder Fund to sell them promptly at an acceptable price.
Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, an Underlying Scudder Fund
will bear the market risk of the reference instrument.
Mortgage and other asset-backed securities. Unscheduled or early payments on the
A-1
<PAGE>
underlying mortgages may shorten the securities' effective maturities and lessen
their growth potential. An Underlying Scudder Fund may agree to purchase or sell
these securities with payment and delivery taking place at a future date. A
decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and expose an Underlying Scudder Fund to a lower rate of
return upon reinvestment. To the extent that such mortgage-backed securities are
held by an Underlying Scudder Fund, the prepayment right of mortgagors may limit
the increase in net asset value of an Underlying Scudder Fund because the value
of the mortgage-backed securities held by an Underlying Scudder Fund may not
appreciate as rapidly as the price of non-callable debt securities. Asset-backed
securities are subject to the risk of prepayment and the risk that the
underlying loans will not be repaid.
Investing in emerging markets. Securities of many issuers in emerging markets
may be less liquid and more volatile than securities of comparable domestic
issuers. Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of an Underlying Scudder Fund is
uninvested and no return is earned thereon. The inability of an Underlying
Scudder Fund to make intended security purchases due to settlement problems
could cause an Underlying Scudder Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to an Underlying Scudder Fund due to
subsequent declines in value of the portfolio security or, if an Underlying
Scudder Fund has entered into a contract to sell the security, in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in U.S.
securities. Such transactions also involve additional costs for the purchase or
sale of foreign currency.
Foreign investment in certain emerging market debt obligations is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in certain emerging market debt obligations and
increase the costs and expenses of an Underlying Scudder Fund. Certain emerging
markets require prior governmental approval of investments by foreign persons,
and/or impose additional taxes on foreign investors. These markets may also
restrict investment opportunities in issuers in industries deemed important to
national interests.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. An Underlying Scudder Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to an Underlying Scudder Fund of any restrictions on investments.
Throughout the last decade many emerging markets have experienced and continue
to experience high rates of inflation. In certain countries inflation has at
times accelerated rapidly to hyperinflationary levels, creating a negative
interest rate environment and sharply eroding the value of outstanding financial
assets in those countries. Increases in inflation could have an adverse effect
on an Underlying Scudder Fund's non-dollar denominated securities and on the
issuers of debt obligations generally. Individual foreign economies may differ
A-2
<PAGE>
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position. The securities markets,
values of securities, yields and risks associated with securities markets in
different countries may change independently of each other.
Investment in sovereign debt can involve a high degree of risk. Holders of
sovereign debt (including an Underlying Scudder Fund) may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign debt
on which governmental entities have defaulted may be collected in whole or in
part. Securities traded in certain emerging European securities markets may be
subject to risks due to the inexperience of financial intermediaries, the lack
of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims on which have not been entirely settled. There can be no assurance that
an Underlying Scudder Fund's investments in Eastern Europe would not also be
expropriated, nationalized or otherwise confiscated. Finally, any change in the
leadership or policies of Eastern European countries, or the countries that
exercise a significant influence over those countries, may halt the expansion of
or reverse the liberalization of foreign investment policies now occurring and
adversely affect existing investment opportunities.
High yield/high risk securities. Certain Underlying Scudder Funds may invest in
debt securities which are rated below investment-grade (hereinafter referred to
as "lower rated securities") or which are unrated, but equivalent to those rated
below investment- grade. The lower the ratings of such debt securities, the
greater their risks render them like equity securities. These debt instruments
generally offer a higher current yield than that available from higher grade
issues, but typically involve greater risk and lesser liquidity.
The lack of a liquid secondary market for certain securities may also make it
more difficult for an Underlying Scudder Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Lower rated and unrated securities are especially subject to adverse
changes in general economic conditions, to changes in the financial condition of
their issuers, and to price fluctuation in response to changes in interest
rates. During periods of economic downturn or rising interest rates, issuers of
these instruments may experience financial stress that could adversely affect
their ability to make payments of principal and interest and increase the
possibility of default. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may also decrease the values and liquidity of
these securities especially in a market characterized by only a small amount of
trading. Perceived credit quality in this market can change suddenly and
unexpectedly, and may not fully reflect the actual risk posed by a particular
lower rated or unrated security.
Securities lending. From time to time certain Underlying Scudder Funds may lend
their portfolio securities to registered broker/dealers as described above. The
risks of lending portfolio securities, as with other extensions of secured
credit, consist of possible delays in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will be made to registered broker/dealers
deemed by the Adviser to be of good standing and will not be made unless, in the
judgment of the Adviser, the consideration to be earned from such loans would
justify the risk.
Investing in emerging growth companies. The investment risk associated with
A-3
<PAGE>
emerging growth companies is higher than that normally associated with larger,
older companies due to the greater business risks of small size, the relative
age of the company, limited product lines, distribution channels and financial
and managerial resources. Further, there is typically less publicly available
information concerning smaller companies than for larger, more established ones.
The securities of small companies are often traded over-the-counter and may not
be traded in the volumes typical on a national securities exchange.
Consequently, in order to sell this type of holding, an Underlying Scudder Fund
may need to discount the securities from recent prices or dispose of the
securities over a long period of time. The prices of this type of security may
be more volatile than those of larger companies which are often traded on a
national securities exchange.
Precious metals. Investments in precious metals and in precious metals-related
securities and companies involve a relatively high degree of risk. Prices of
gold and other precious metals can be influenced by a variety of global
economic, financial and political factors and may fluctuate markedly over short
periods of time. Among other things, precious metals values can be affected by
changes in inflation, investment speculation, metal sales by governments or
central banks, changes in industrial and commercial demand, and any governmental
restrictions on private ownership of gold or other precious metals.
Correlation of gold and gold securities. The Adviser believes that the value of
the securities of firms that deal in gold will correspond generally, over time,
with the prices of the underlying metal. At any given time, however, changes in
the price of gold may not strongly correlate with changes in the value of
securities related to gold, which are expected to constitute part of certain
Underlying Scudder Funds' assets. In fact, there may be periods in which the
price of gold stocks and gold will move in different directions. The reason for
this potential disparity is that political and economic factors, including
behavior of the stock market, may have differing impacts on gold versus gold
stocks.
Investing in Latin America. The Adviser believes that investment opportunities
may result from recent trends in Latin America encouraging greater market
orientation and less governmental intervention in economic affairs. Investors,
however, should be aware that the Latin American economies have experienced
considerable difficulties in the past decade. Although there have been
significant improvements in recent years, the Latin American economies continue
to experience challenging problems, including high inflation rates and high
interest rates relative to the U.S. The emergence of the Latin American
economies and securities markets will require continued economic and fiscal
discipline which has been lacking at times in the past, as well as stable
political and social conditions. Recovery may also be influenced by
international economic conditions, particularly those in the U.S., and by world
prices for oil and other commodities. There is no assurance that recent economic
initiatives will be successful.
Certain risks associated with international investments and investing in
smaller, developing capital markets are heightened for investments in Latin
American countries. For example, some of the currencies of Latin American
countries have experienced steady devaluations relative to the U.S. dollar, and
major adjustments have been made in certain of these currencies periodically. In
addition, although there is a trend toward less government involvement in
commerce, governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government still owns or controls many companies,
including some of the largest in the country. Accordingly, government actions
A-4
<PAGE>
in the future could have a significant effect on economic conditions in Latin
American countries, which could affect private sector companies and an
Underlying Scudder Fund, as well as the value of securities in an Underlying
Scudder Fund's portfolio.
Most Latin American countries have experienced substantial, and in some periods,
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain Latin American
countries.
Certain Latin American countries are among the largest debtors to commercial
banks and foreign governments. Some of these countries have in the past
defaulted on their sovereign debt. Holders of sovereign debt (including an
Underlying Scudder Fund) may be requested to participate in the rescheduling of
such debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
The limited size of many Latin American securities markets and limited trading
volume in issuers compared to the volume of trading in U.S. securities could
cause prices to be erratic for reasons apart from factors that affect the
quality of securities.
The portion of an Underlying Scudder Fund's assets invested directly in Chile
may be less than the portions invested in other countries in Latin America
because, at present, capital invested in Chile normally cannot be repatriated
for as long as five years.
Borrowing. Although the principal of an Underlying Scudder Fund's borrowing will
be fixed, an Underlying Scudder Fund's assets may change in value during the
time a borrowing is outstanding, increasing exposure to capital risk.
Investing in the Pacific Basin. Certain Underlying Scudder Funds are susceptible
to political and economic factors affecting issuers in Pacific Basin countries.
Many of the countries of the Pacific Basin are developing both economically and
politically. Pacific Basin countries may have relatively unstable governments,
economies based on only a few commodities or industries, and securities markets
trading infrequently or in low volumes. Some Pacific Basin countries restrict
the extent to which foreigners may invest in their securities markets.
Securities of issuers located in some Pacific Basin countries tend to have
volatile prices and may offer significant potential for loss as well as gain.
Further, certain companies in the Pacific Basin may not have firmly established
product markets, may lack depth of management, or may be more vulnerable to
political or economic developments such as nationalization of their own
industries.
Corporate and Municipal Bond Ratings. The following is a description of the
ratings given by S&P and Moody's to corporate and municipal bonds. Should the
rating of a portfolio security held by an Underlying Scudder Fund be downgraded,
the Adviser will determine whether it is in the best interest of the Underlying
Scudder Fund to retain or dispose of such security.
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
A-5
<PAGE>
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
outweighted 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
A-6
<PAGE>
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 other good and bad times over the future.
Uncertainty of position characterizes bonds in this class. Bonds which are rated
B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
A-7
