Filed electronically with the Securities and Exchange
Commission on December 31, 1998.
File No. 33-86070
File No. 811-8606
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 / /
Pre-Effective Amendment No / /
-
Post-Effective Amendment No. 5 / /
-
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 7 / /
-
Scudder Pathway Series.
-----------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place
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Boston, Massachusetts 02110-4103
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2567
--------------
Thomas F. McDonough
Scudder Kemper Investments, Inc.
Two International Place, Boston MA 02110-4103
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/ / days after filing pursuant to paragraph (a)(2)
/ / On ___________ pursuant to paragraph (a)(1)
/ / days after filing pursuant to paragraph (a)(1)
/ / On ____________ pursuant to paragraph (b)
/ X / On January 1, 1999 pursuant to paragraph (a)(3) of Rule 485.
If Appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
SCUDDER
Offering a broad range of
investment opportunities by
investing in a select mix of
Scudder mutual funds.
Pure no-load(TM)/No sales charges
Scudder
Pathway Series
o Conservative Portfolio (080)
o Balanced Portfolio (081)
o Growth Portfolio (082)
o International Portfolio (083)
Prospectus
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
January 1, 1999
The Securities and Exchange
Commission has not approved or
disapproved these securities or
passed upon the adequacy of this
prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
2 Portfolio Summaries
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An overview of each 2 Investment objectives and principal
portfolio's goal and strategies
strategy, main risks,
performance, expenses 2 Principal risks
and financial highlights
3 Conservative portfolio -- Past
performance
4 Balanced portfolio -- Past performance
5 Growth portfolio -- Past performance
7 International portfolio -- Past
performance
8 Fee and expense information for the
portfolios
10 Financial highlights
14 About the Portfolios
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Additional 14 Principal strategies, investments and
information that additional principal risks
you should know
about the portfolios 16 Underlying Scudder funds
23 A message from the President
24 Investment adviser
26 Distributions
27 Taxes
28 About Your Investment
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Information about 28 Transaction information
managing your portfolio
account 29 Buying and selling shares
30 Purchases
31 Exchanges and redemptions
32 Investment Products and Services
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<PAGE>
Portfolio Summaries
Investment objectives and principal strategies
Scudder Pathway Series consists of four professionally managed portfolios --
Conservative, Balanced, Growth and International -- each with a distinct
investment objective. The investment objectives of the portfolios are as
follows:
o Pathway Conservative Portfolio seeks current income and, as a secondary
objective, long-term growth of capital. The portfolio invests
substantially in bond funds, and, to a lesser extent, equity funds. This
portfolio may be suitable for investors with an investment time horizon of
3-5 years or more.
o Pathway Balanced Portfolio seeks a balance of current income and growth of
capital. The portfolio invests in a mix of money market, bond and equity
funds. This portfolio may be suitable for investors with an investment
time horizon of 5-10 years.
o Pathway Growth Portfolio seeks long-term growth of capital. The portfolio
invests predominantly in equity funds that pursue this goal. This
portfolio may be suitable for investors with an investment time horizon of
10 years or more.
o Pathway International Portfolio seeks to maximize total return. The
portfolio invests in a select mix of international and global funds. This
portfolio may be appropriate for investors with an investment time horizon
of 10 years or more who are looking for broad exposure to investment
opportunities outside the U.S.
Rather than investing in individual securities like a traditional mutual fund,
each portfolio seeks to achieve its particular objective by investing in a
carefully selected combination of underlying Scudder mutual funds that in turn
invest in a wide range of securities. Therefore, an investment in one of the
portfolios may be diversified over hundreds, or even thousands, of individual
securities.
Except as otherwise indicated, each portfolio's investment objective and
policies may be changed without a vote of shareholders.
Principal risks
Each portfolio's ability to achieve its objective depends on the performance of
the underlying Scudder funds in which it invests, as well as the allocation of
the portfolio's assets among these funds. The performance of these underlying
Scudder funds, in turn, depends upon the performance of the securities in which
they invest.
2
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A portfolio's return and net asset value will go up and down, and it is possible
to lose money invested in a portfolio. Movements in either the stock or bond
market will affect a portfolio's share price on a daily basis. Declines are
possible both in the overall market and in the value of the underlying funds
held by a portfolio. The portfolio management team's skill in choosing the
appropriate mix of underlying Scudder funds will determine in large part a
portfolio's ability to achieve its objective.
An investment in a portfolio is subject to varying degrees of potential
investment risk and reward. The more aggressive portfolios are designed for
investors with longer investment time horizons and a high degree of risk
tolerance. In pursuing higher investment returns, these portfolios incur greater
risks and more dramatic fluctuations in value. In contrast, the more
conservative portfolios are designed for investors with shorter investment time
horizons or a lower degree of risk tolerance.
Because the portfolios invest in underlying Scudder funds, each portfolio will
indirectly bear its pro rata share of fees and expenses incurred by the
underlying funds in which it is invested. This may result in total returns that
are lower than if a portfolio had directly invested in the underlying funds'
portfolio securities.
Conservative portfolio
Past performance
The chart and table below provide some indication of the risks of investing in
the portfolio by illustrating how the portfolio has performed, and comparing
this information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total return for year ended December 31
[GRAPHIC OMITTED]
1997.......... 14.36%
3
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For the period included in the bar chart, the fund's highest return for a
calendar quarter was 7.47% (the second quarter of 1997), and its lowest return
for a calendar quarter was 0.70% (the fourth quarter of 1997).
The portfolio's year-to-date total return as of September 30, 1998 was 0.21%.
Average annual total returns
Lehman Brothers Aggregate Bond
(LBAB) Index (60%), S&P 500 Index
For periods ended (25%), 3-Month T-Bill (10%) and MSCI
December 31, 1997 Portfolio All Country (ex U.S.) Index (5%)
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One Year 14.36% 14.54%
Since Inception (11/15/96) 13.91% 12.21%*
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* Index comparisons begin November 30, 1996.
The Lehman Brothers Aggregate Bond (LBAB) Index is a market value-weighted
measure of treasury issues, agency issues, corporate bond issues and
mortgage-backed securities. The S&P 500 Index is an unmanaged
capitalization-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange and American Stock Exchange and traded in the Nasdaq
Stock Market, Inc. The MSCI All Country (ex U.S.) Index is a market
value-weighted measure of stocks of 46 countries. Index returns assume
reinvestment of dividends and do not reflect any fees or expenses.
Balanced portfolio
Past performance
The chart and table below provide some indication of the risks of investing in
the portfolio by illustrating how the portfolio has performed, and comparing
this information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
4
<PAGE>
Total return for year ended December 31
[GRAPHIC OMITTED]
1997.......... 13.33%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 9.46% (the second quarter of 1997), and its lowest return
for a calendar quarter was -1.65% (the fourth quarter of 1997).
The portfolio's year-to-date total return as of September 30, 1998 was -3.10%.
Average annual total returns
S&P 500 Index (50%),
Lehman Brothers Aggregate Bond
(LBAB) Index (35%), MSCI All
For periods ended Country (ex U.S.) Index (10%)
December 31, 1997 Portfolio and 3-Month T-Bill (5%)
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One Year 13.33% 20.16%
Since Inception (11/15/96) 12.99% 16.90%*
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* Index comparisons begin November 30, 1996.
The S&P 500 Index is an unmanaged capitalization-weighted measure of 500 widely
held common stocks listed on the New York Stock Exchange and American Stock
Exchange and traded on the Nasdaq Stock Market, Inc. The Lehman Brothers
Aggregate Bond (LBAB) Index is a market value-weighted measure of treasury
issues, agency issues, corporate bond issues and mortgage-backed securities. The
MSCI All Country (ex U.S.) Index is a market value-weighted measure of stocks of
46 countries. Index returns assume reinvestment of dividends and do not reflect
any fees or expenses.
Growth portfolio
Past performance
The chart and table below provide some indication of the risks of investing in
the portfolio by illustrating how the portfolio has performed, and comparing
this information to a broad measure of
5
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market performance. Of course, past performance is not necessarily an indication
of future performance.
Total return for year ended December 31
[GRAPHIC OMITTED]
1997.......... 14.93%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 12.92% (the second quarter of 1997), and its lowest return
for a calendar quarter was -3.18% (the fourth quarter of 1997).
The portfolio's year-to-date total return as of September 30, 1998 was -5.82%.
Average annual total returns
S&P 500 Index (60%), MSCI All
Country (ex U.S.) Index (20%),
Lehman Brothers Aggregate Bond
For periods ended (LBAB) Index (15%) and 3-Month
December 31, 1997 Portfolio T-Bill (5%)
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One Year 14.93% 21.60%
Since Inception (11/15/96) 14.91% 18.05%*
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* Index comparisons begin November 30, 1996.
The S&P 500 Index is an unmanaged capitalization-weighted measure of 500 widely
held common stocks listed on the New York Stock Exchange and American Stock
Exchange and traded on the Nasdaq Stock Market, Inc. The MSCI All Country (ex
U.S.) Index is a market value-weighted measure of stocks of 46 countries. The
Lehman Brothers Aggregate Bond (LBAB) Index is a market value-weighted measure
of treasury issues, agency issues, corporate bond issues and mortgage-backed
securities. Index returns assume reinvestment of dividends and do not reflect
any fees or expenses.
6
<PAGE>
International portfolio
Past performance
The chart and table below provide some indication of the risks of investing in
the portfolio by illustrating how the portfolio has performed, and comparing
this information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total return for year ended December 31
[GRAPHIC OMITTED]
1997.......... 6.97%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 11.21% (the first quarter of 1997), and its lowest return
for a calendar quarter was -6.33% (the fourth quarter of 1997).
The portfolio's year-to-date total return as of September 30, 1998 was -6.71%.
Average annual total returns
MSCI All Country
(ex U.S.) Index (75%), JP Morgan
For periods ended Non-U.S. Global Government Bond
December 31, 1997 Portfolio Index (20%) and 3-Month T-Bill (5%)
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One Year 6.97% 1.02%
Since Inception (11/15/96) 8.13% 0.02%*
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* Index comparisons begin November 30, 1996.
The MSCI All Country (ex U.S.) Index is a market value-weighted measure of
stocks of 46 countries. The JP Morgan Non-U.S. Global Government Bond Index is a
market value-weighted measure of bonds excluding U.S. bonds. Index returns
assume reinvestment of dividends and do not reflect any fees or expenses.
7
<PAGE>
Fee and expense information for the portfolios
Scudder Family of Funds pure no-load(TM) funds
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the portfolios.
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Shareholder fees: Fees paid directly from your investment.
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Maximum sales charge (load) imposed on purchases NONE
(as % of offering price)
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Maximum deferred sales charge (load) NONE
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Maximum sales charge (load) imposed on reinvested NONE
dividends/distributions
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Redemption fee (as % of amount redeemed, if applicable) NONE*
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Exchange fee NONE
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Annual portfolio operating expenses (expenses that are deducted from portfolio
assets):
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Management fee NONE
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Distribution (12b-1) fees NONE
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Other expenses NONE
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Total annual portfolio operating expenses NONE
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* You may redeem by writing or calling the portfolio. If you wish to receive
your redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "About Your Investment -- Exchanges
and Redemptions."
Each portfolio expects 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 a portfolio
is invested. Expected expense ratios of the underlying funds are provided as a
range since the average assets of the portfolios invested in each of the
underlying funds will fluctuate.
Example
This example is to help you compare the cost of investing in each portfolio with
the cost of investing in other mutual funds.
This example illustrates the impact of the total pro rata fees and expenses on
an account with an initial investment of $10,000, based on the midpoint of the
range of expenses shown below borne by the underlying funds in each portfolio.
It assumes a 5% annual return, the reinvestment of all dividends and
distributions and "annual portfolio operating expenses" remaining the same each
year. 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. The expenses would be the same whether you sold your shares at the
end of each period or continued to hold them.
8
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Portfolio Expense Range 1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
Conservative Portfolio 0.15% - 1.75% $97 $303 $525 $1,166
Balanced Portfolio 0.30% - 1.85% $110 $343 $595 $1,317
Growth Portfolio 0.71% - 1.95% $135 $421 $729 $1,601
International Portfolio 1.06% - 2.00% $156 $483 $834 $1,824
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Expense ratios are stated as of the most current fiscal year end for each of the
underlying funds.
Actual expenses and returns of each underlying Scudder fund vary from year to
year, and may be higher or lower than those shown above.
9
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand each
portfolio's financial performance for the fiscal periods indicated. Certain
information reflects financial results for a single portfolio share outstanding
throughout the period (a). The total return figures represent the rate that an
investor would have earned (or lost) on an investment in each portfolio assuming
reinvestment of all dividends and distributions. This information has been
audited by PricewaterhouseCoopers LLP whose report, along with each portfolio's
financial statements, is included in each portfolio's annual report, which is
available upon request by calling Scudder Investor Relations at 1-800-225-2470
or, for existing investors, call the Scudder Automated Information Line (SAIL)
at 1-800-343-2890.
Conservative portfolio
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For the Period
November 15, 1996
For the (commencement of
Eleven Months Ended operations) to
August 31, 1998 (a)(d) September 30, 1997
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Net asset value, beginning ----------------------------------------
of period ......................... $ 13.27 $ 12.00
----------------------------------------
Income from investment operations:
Net investment income ............... .51 .39
Net realized and unrealized gain on
investment transactions ........... (.63) 1.36
----------------------------------------
Total from investment operations .... (.12) 1.75
----------------------------------------
Less distributions:
From net investment income .......... (.57) (.33)
From net realized gain on
investments ....................... (.30) (.15)
----------------------------------------
Total distributions ................. (.87) (.48)
----------------------------------------
----------------------------------------
Net asset value, end of period ...... $ 12.28 $ 13.27
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Total Return (%) (c) ................ (1.10)** 14.99**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ...................... 29 17
Ratio of operating expenses to
average daily net assets (%) (b) .. -- --
Ratio of net investment income to
average daily net assets (%) ...... 4.21* 3.67*
Portfolio turnover rate (%) ......... 31.5* 42.0*
(a) Based on monthly average shares outstanding during the period.
(b) This Portfolio invests in other Scudder Funds, and although the Portfolio
did not incur any direct expenses for the period, the Portfolio did bear
its share of the operating, administrative and advisory expenses of the
Underlying Scudder Funds.
(c) Total return would have been lower if the Adviser had not maintained some
Underlying Funds' expenses.
(d) On August 12, 1998, the Board of Trustees of the Portfolio changed the
fiscal year end from September 30 to August 31.
* Annualized
** Not annualized
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10
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Financial highlights
Balanced portfolio
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For the Period
November 15, 1996
For the (commencement of
Eleven Months Ended operations) to
August 31, 1998 (a)(d) September 30, 1997
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Net asset value, beginning ----------------------------------------
of period ......................... $ 13.56 $ 12.00
----------------------------------------
Income from investment operations:
Net investment income ............... .39 .37
Net realized and unrealized gain
on investment transactions ........ (1.26) 1.59
----------------------------------------
Total from investment operations .... (.87) 1.96
----------------------------------------
Less distributions:
From net investment income .......... (.42) (.33)
From net realized gain on
investments ....................... (.21) (.07)
----------------------------------------
Total distributions ................. (.63) (.40)
----------------------------------------
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Net asset value, end of period ...... $ 12.06 $ 13.56
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Total Return (%) (c) ................ (6.78)** 16.67**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ...................... 222 192
Ratio of operating expenses to
average daily net assets (%) (b) .. -- --
Ratio of net investment income to ... 3.15* 2.96*
average daily net assets (%)
Portfolio turnover rate (%) ......... 28.2* 24.3*
(a) Based on monthly average shares outstanding during the period.
(b) This Portfolio invests in other Scudder Funds, and although the Portfolio
did not incur any direct expenses for the period, the Portfolio did bear
its share of the operating, administrative and advisory expenses of the
Underlying Scudder Funds.
(c) Total return would have been lower if the Adviser had not maintained some
Underlying Funds' expenses.
(d) On August 12, 1998, the Board of Trustees of the Portfolio changed the
fiscal year end from September 30 to August 31.
* Annualized
** Not annualized
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11
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Financial highlights
Growth portfolio
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For the Period
November 15, 1996
For the (commencement of
Eleven Months Ended operations) to
August 31, 1998 (a)(d) September 30, 1997
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Net asset value, beginning ------------------------------------------
of period ......................... $ 14.15 $ 12.00
------------------------------------------
Income from investment operations:
Net investment income ............... .23 .29
Net realized and unrealized gain
on investment transactions ........ (1.74) 2.15
------------------------------------------
Total from investment operations .... (1.51) 2.44
------------------------------------------
Less distributions:
From net investment income .......... (.21) (.16)
From net realized gain on
investments ....................... (.26) (.13)
------------------------------------------
Total distributions ................. (.47) (.29)
------------------------------------------
------------------------------------------
Net asset value, end of period ...... $ 12.17 $ 14.15
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Total Return (%) (c) ................ (10.94)** 20.79**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ...................... 64 50
Ratio of operating expenses to
average daily net assets (%) (b) .. -- --
Ratio of net investment income to
average daily net assets (%) ...... 1.78* 2.09*
Portfolio turnover rate (%) ......... 23.8* 15.1*
(a) Based on monthly average shares outstanding during the period.
(b) This Portfolio invests in other Scudder Funds, and although the Portfolio
did not incur any direct expenses for the period, the Portfolio did bear
its share of the operating, administrative and advisory expenses of the
Underlying Scudder Funds.
(c) Total return would have been lower if the Adviser had not maintained some
Underlying Funds' expenses.
(d) On August 12, 1998, the Board of Trustees of the Portfolio changed the
fiscal year end from September 30 to August 31.
* Annualized
** Not annualized
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12
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Financial highlights
International portfolio
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For the Period
November 15, 1996
For the (commencement of
Eleven Months Ended operations) to
August 31, 1998 (a)(e) September 30, 1997
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Net asset value, beginning -----------------------------------------
of period ......................... $ 13.59 $ 12.00
-----------------------------------------
Income from investment operations: .. .17 .31
Net investment income
Net realized and unrealized gain
(loss) on investment transactions . (1.55) 1.63(b)
-----------------------------------------
Total from investment operations .... (1.38) 1.94
-----------------------------------------
Less distributions: ................. (.16) (.25)
From net investment income
From net realized gain (loss) on
investments ....................... (.35) (.10)
-----------------------------------------
Total distributions ................. (.51) (.35)
-----------------------------------------
-----------------------------------------
Net asset value, end of period ...... $ 11.70 $ 13.59
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Total Return (%) (d) ................ (10.31)** 16.58**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ...................... 9 12
Ratio of operating expenses to
average daily net assets (%) (c) .. -- --
Ratio of net investment income to
average daily net assets (%) ...... 1.42* 1.23*
Portfolio turnover rate (%) ......... 52.0* 35.1*
(a) Based on monthly average shares outstanding during the period.
(b) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating market values
during the period.
(c) This Portfolio invests in other Scudder Funds, and although the Portfolio
did not incur any direct expenses for the period, the Portfolio did bear
its share of the operating, administrative and advisory expenses of the
Underlying Scudder Funds.
(d) Total return would have been lower if the Adviser had not maintained some
of the Underlying Funds' expenses.
(e) On August 12, 1998, the Board of Trustees of the Portfolio changed the
fiscal year end from September 30 to August 31.
* Annualized
** Not annualized
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13
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About The Portfolios
Principal strategies, investments and additional principal risks
Principal strategies and investments
Each portfolio allocates its assets among a diverse group of underlying Scudder
funds. These underlying funds fall within three broad categories: equity funds
(domestic and international), bond funds (domestic and international) and money
market funds. (See "Underlying Scudder Funds" for a brief description of these
funds.) The primary difference among the portfolios is their asset allocations
among these underlying funds. The portfolios invest within the following
investment ranges (ranges are expressed in terms of total assets):
o Pathway Conservative Portfolio invests 40-80% in bond funds, 20-50% in
equity funds and 0-15% in a money market fund, cash or cash equivalents.
This portfolio invests primarily in Scudder domestic and global bond funds
and, to a lesser extent, equity funds. Through this combination of
investments, the portfolio attempts to provide current income and,
secondarily, long-term growth of capital.
o Pathway Balanced Portfolio invests 40-70% in equity funds, 25-60% in bond
funds and 0-10% in a money market fund, cash or cash equivalents. This
portfolio invests primarily in Scudder domestic and global equity and bond
funds in attempting to provide its shareholders with a balance of current
income and growth of capital.
o Pathway Growth Portfolio invests 60-90% in equity funds, 10-40% in bond
funds and 0-5% in a money market fund, cash or cash equivalents. This
portfolio pursues long-term growth of capital by investing in Scudder's
growth-oriented equity funds and, to a lesser extent, bond funds, which
have the potential for capital appreciation as well as income.
o Pathway International Portfolio invests 60-100% in equity funds, 10-40% in
bond funds and 0-20% in a money market fund, cash or cash equivalents. In
seeking to maximize total return (i.e., capital growth and income), this
portfolio invests in a select mix of Scudder's international and global
funds. At least 65% of this portfolio's total assets will be invested in
underlying funds investing primarily in non-domestic securities.
14
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The portfolio management team uses fundamental and quantitative research to
determine the appropriate underlying funds in which to invest and the percentage
of the portfolio's assets to commit to each of these underlying funds. This
analysis looks at business and financial data of global economies and capital
markets, as well as companies, industries and regions throughout the world in
order to determine the appropriate investment mix for each portfolio. A
portfolio may modify its investment allocation in the underlying funds in
response to changing market conditions, to maintain or change the percentages of
its investment mix, or to accommodate purchases and sales of its shares.
From time to time, each portfolio may invest, without limit, in cash and cash
equivalents for temporary defensive purposes. Because this defensive policy
differs from each portfolio's investment objective, a portfolio may not achieve
its goals during a defensive period.
More information about investments and strategies of the portfolios, as well as
a detailed description of the expense ratios for the underlying funds, is
provided in the Statement of Additional Information. Of course, there can be no
guarantee that by following its particular investment strategies, a portfolio
will achieve its objective.
Additional principal risks
Each portfolio's risks are directly related to the risks of the securities held
by the underlying Scudder funds, as well as the proportion of the portfolio's
assets invested in each of these underlying funds. The principal risks of the
securities held by underlying Scudder funds include the following:
Equity investing risk. An investment in the common stock of a company represents
a proportionate ownership interest in that company. Therefore, a fund
participates in the success or failure of any company in which it holds stock.
Compared to other classes of financial assets, such as bonds or cash
equivalents, common stocks have historically offered a greater potential for
gain on investment. However, the market value of common stock can fluctuate
significantly, reflecting such things as the business performance of the issuing
company, investors' perceptions of the company or the overall stock market and
general economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless.
15
<PAGE>
Income investing risk. The principal risks involved with investments in bonds
include interest rate risk, credit risk and pre-payment risk. Interest rate risk
refers to the likely decline in the value of bonds as interest rates rise.
Generally, longer-term securities are more susceptible to changes in value as a
result of interest-rate changes than are shorter-term securities. Credit risk
refers to the risk that an issuer of a bond may default with respect to the
payment of principal and interest. The lower a bond is rated, the more it is
considered to be a speculative or risky investment. Pre-payment risk is commonly
associated with pooled debt securities, such as mortgage-backed securities and
asset-backed securities, but may affect other debt securities as well. When the
underlying debt obligations are prepaid ahead of schedule, the return on the
security will be lower than expected. Pre-payment rates usually increase when
interest rates are falling.
Foreign investing risk. Investing in foreign securities, and to a greater extent
emerging markets, involves risks in addition to those associated with investing
in securities in the U.S. To the extent that investments are denominated in
foreign currencies, adverse changes in the values of foreign currencies may have
a significant negative effect on any returns from these investments. Investing
in foreign securities exposes a fund to an increased risk of political and
economic instability.
Other risks of investing in foreign securities include limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
Inflation risk. There is a possibility that the rising prices of goods and
services may have the effect of offsetting a fund's real return. This is likely
to have a greater impact on the returns of bond funds and money market funds,
which historically have had more modest returns in comparison to equity funds.
Manager's risk. There is a risk that a portfolio or underlying fund may not
achieve its objective because its portfolio management team may not effectively
execute its investment strategies.
Underlying Scudder funds
The portfolios may invest in the following Scudder funds:
Equity Funds
Classic Growth Fund (Scudder Shares) (not available for the International
portfolio) seeks to provide long-term growth of capital with reduced share price
volatility compared to other growth mutual funds. Under normal market
conditions, the fund invests primarily in a diversified portfolio of common
stocks. The fund focuses on high quality, medium- to large- sized U.S. companies
with leading
16
<PAGE>
competitive positions. In addition, the fund looks for companies with strong and
sustainable earnings growth, solid management with a proven ability to add value
over time, and reasonable stock market valuations.
Scudder Development Fund (not available for the International portfolio) seeks
long-term growth of capital by investing primarily in securities of medium-size
companies with the potential for sustainable above-average earnings growth. The
fund generally invests in equity securities, including common stocks and
convertible securities, of medium-size or mid-capitalization companies, that
appear to have above-average earnings growth potential and/or may receive
greater market recognition. Medium-sized companies are those companies with
market capitalizations similar to those of companies included in the Standard &
Poor's Corporation Mid-Cap 400 Index.
Scudder Emerging Markets Growth Fund 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 on investments in countries and
regions where there appears 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.
Scudder Global Discovery Fund seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
located throughout the world. The fund generally invests in small, rapidly
growing companies that offer the potential for above-average returns relative to
larger companies, yet are frequently overlooked and thus undervalued by the
market.
Scudder Global Fund seeks long-term growth of capital through a diversified
portfolio of marketable securities, primarily equity securities, including
common stocks, preferred stocks, and debt securities convertible into common
stocks. The fund invests in equity securities of companies that appear to have
the potential to benefit from global economic trends, promising technologies or
products and specific country opportunities resulting from changing
geopolitical, currency or economic relationships. It is expected that
investments will be spread broadly around the world.
Scudder Gold Fund seeks maximum return (principal change and income) consistent
with investing in a portfolio of gold-related equity securities and gold. When
making portfolio investments, the fund emphasizes the potential for growth of
the proposed investment, although it may also consider the income generating
capacity of a stock
17
<PAGE>
as one factor among others in evaluating investment opportunities. Under normal
market conditions, the fund invests at least 65% of its total assets in the
following: equity securities of U.S. and foreign companies primarily engaged in
the exploration, mining, fabrication, processing or distribution of gold; gold
bullion; and gold coins.
Scudder Greater Europe Growth Fund seeks long-term growth of capital through
investments primarily in the equity securities of European companies. Although
its focus is on long-term growth, the fund may provide current income
principally through holdings in dividend-paying securities. The fund invests,
under normal market conditions, at least 80% of its total assets in the equity
securities of European companies.
Scudder Growth and Income Fund (not available for the International portfolio)
seeks long-term growth of capital, current income and growth of income. The fund
invests primarily in common stocks, preferred stocks and securities convertible
into common stocks of companies which offer the prospect for growth of earnings
while paying current dividends. Many of these companies are mainstays of the
U.S. economy.
Scudder International Fund seeks long-term growth of capital primarily from
foreign equity securities. The fund generally invests in equity securities of
established companies, listed on foreign exchanges. 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 other than the U.S.
Scudder International Growth and Income Fund seeks long-term growth of capital
and current income primarily from foreign equity securities. The fund invests
generally in common stocks of established companies listed on foreign exchanges,
which offer prospects for growth of earnings while paying relatively high
current dividends. The fund intends to diversify investments among several
countries and normally to have investments in securities of at least three
different countries other than the U.S.
Scudder Large Company Growth Fund (not available for the International
portfolio) 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 invests primarily in the equity securities issued by
large-sized domestic companies that offer above-average appreciation potential.
The fund utilizes a combination of qualitative and quantitative research
techniques to identify companies that have above-average quality and growth
characteristics and that are deemed to be selling at attractive market
valuations.
18
<PAGE>
Scudder Large Company Value Fund (not available for the International portfolio)
seeks to maximize long-term capital appreciation through a value-driven
investment program. The fund normally will 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.
Scudder Latin America Fund seeks to provide long-term capital appreciation
through investment primarily in the securities of Latin American issuers. The
fund attempts to benefit from economic and political trends emerging throughout
Latin America. 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. The fund intends to allocate
investments among at least three countries at all times.
Scudder Micro Cap Fund (not available for the International portfolio) seeks
long-term growth of capital. The fund invests, under normal market conditions,
at least 80% of its assets in common stocks issued by U.S. micro-cap companies.
The fund is actively managed using a quantitative, value-oriented investment
approach. The median market capitalization of the fund's portfolio is not
expected to exceed $125 million.
Scudder Pacific Opportunities Fund seeks long-term growth of capital through
investment primarily in the equity securities of Pacific Basin companies,
excluding Japan. The fund's investment program focuses on the smaller, emerging
markets in this region of the world. The fund seeks to identify companies with
favorable potential for appreciation through growing earnings or market
recognition over time.
Scudder Small Company Value Fund (not available for the International portfolio)
pursues long-term growth of capital by investing primarily in undervalued stocks
of small U.S. companies. The fund is actively managed using a disciplined,
value-oriented investment management approach. In addition, the fund attempts to
manage its risk exposure by, among other things, generally investing in over 150
small companies across a broad range of U.S. industries.
Scudder 21st Century Growth Fund (not available for the International portfolio)
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
normally invests at least 80% of its assets in common stocks. Companies in which
the fund invests generally are similar in size to those included in the Russell
2000 Index. The fund may continue to hold securities of companies that have
grown in
19
<PAGE>
market value above the maximum market value of the companies in the Russell 2000
Index, but will generally not add to these holdings.
Scudder Value Fund (not available for the International portfolio) 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 fund 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 Japan Fund, Inc. seeks long-term capital appreciation by investing primarily
in equity securities (including American Depositary Receipts) of Japanese
companies. Under normal market conditions, the fund invests at least 80% of its
assets in Japanese securities, that is, securities issued by entities that are
organized under the laws of Japan, securities of affiliates of these Japanese
companies, wherever organized or traded, and securities of issuers not organized
under the laws of Japan but deriving 50% or more of their revenues from Japan.
The fund currently intends to focus its investments in select Japanese
companies, whether large or small, that have an active market for their shares
and that show a potential for greater-than average growth.
Bond Funds
Scudder Corporate Bond Fund (not available for the International portfolio)
seeks a high level of current income through investment primarily in
investment-grade corporate debt securities. The fund invests, under normal
market conditions, at least 65% of its total assets in investment-grade debt
securities. The fund focuses its investments in securities issued by
investment-grade companies that are established in their industries, have stable
cash flows and strong balance sheets.
Scudder Emerging Markets Income Fund has dual investment objectives. The fund's
primary investment objective is to provide investors with 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 debt
securities issued by governments and corporations in emerging markets.
Scudder Global Bond Fund seeks to provide total return with an emphasis on
current income by investing primarily in high-grade bonds denominated in foreign
currencies and the U.S. dollar. As a secondary objective, the fund seeks capital
appreciation. The fund invests in a managed portfolio of high-grade
intermediate- and long-term bonds denominated in the U.S. dollar and foreign
currencies, including bonds denominated in the European Currency Unit. The fund
intends to select its investments from a number of country and market sectors.
20
<PAGE>
Scudder GNMA Fund (not available for the International portfolio) seeks high
current income primarily from U.S. Government guaranteed mortgage-backed
securities. The fund invests primarily in mortgage-backed securities issued or
guaranteed by the Government National Mortgage Association ("GNMA" or "Ginnie
Mae").
Scudder High Yield Bond Fund (not available for the International portfolio)
seeks a high level of current income, and secondarily, capital appreciation
through investment primarily in below investment-grade domestic debt securities.
The fund invests, under normal market conditions, at least 65% of its total
assets in high yield, below investment-grade domestic debt securities. The fund
invests primarily in medium- and long-term fixed-income securities.
Scudder Income Fund (not available for the International portfolio) 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. The majority of the fund's assets are
usually invested in intermediate- and long-term fixed-income securities.
Scudder International Bond Fund 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. The fund invests primarily in a
managed portfolio of high-grade debt securities that are denominated in foreign
currencies, including bonds denominated in the European Currency Unit.
Scudder Short Term Bond Fund 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 fund invests at least 65% of its net assets in a
managed portfolio of bonds consisting of: U.S. Government securities including
bonds, notes and bills issued by the U. S. Treasury, and securities issued by
agencies and instrumentalities of the U.S. Government; corporate debt
securities, such as bonds, notes and debentures; mortgage-backed securities; and
other asset-backed securities.
21
<PAGE>
Money Market Fund
Scudder Cash Investment Trust seeks to maintain stability of capital and,
consist therewith, to maintain liquidity of capital and to provide current
income. The fund also seeks to maintain a constant net asset value of $1.00 per
share and declare dividends daily. The fund purchases U.S. dollar-denominated
money market securities with remaining maturities of 397 calendar days or less,
except in the case of U.S. Government securities which may have remaining
maturities of 762 calendar days or less.
Scudder Money Market Series -- Scudder Premium Money Market Shares seeks to
provide investors with as high a level of current income as is consistent with
its investment policies and with preservation of capital and liquidity. The fund
invests exclusively in a broad range of short-term money market instruments that
have remaining maturities of not more than 397 calendar days and certain
repurchase agreements. The fund will maintain a dollar-weighted average maturity
of 90 days or less in an effort to maintain a constant net asset value of $1.00
per share, but there is no assurance that it will be able to do so.
The underlying funds may utilize other investments and investment techniques
which may impact portfolio performance, including options, futures and other
strategic transactions. The underlying funds are limited to 5% of net assets for
initial margin and premium amounts on futures positions considered speculative
by the Commodities Futures Trading Commission. More information about these and
other investments and strategies of the underlying funds is contained in the
Statement of Additional Information.
22
<PAGE>
A message from the President
[PHOTO OMITTED]
Edmond D. Villani, President
and CEO, Scudder Kemper
Investments, Inc.
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $230 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage 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 numerous other open- and closed-end funds that invest in this
country and other 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: IRAs, 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(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/ Edmond D. Villani
23
<PAGE>
Investment adviser
Each portfolio retains the investment management firm of Scudder Kemper
Investments, Inc. (the "Adviser"), Two International Place, Boston, MA, to
manage each portfolio's daily investment and business affairs subject to the
policies established by the Board of Trustees. The Adviser actively manages your
investment in the portfolio. Professional management can be an important
advantage for investors who do not have the time or expertise to invest directly
in individual securities.
Portfolio management
Each portfolio is managed by a team of investment professionals who each plays
an important role in the portfolio's management process. Team members work
together to develop investment strategies and select underlying Scudder funds
for the portfolio. They are supported by the Adviser's large staff of
economists, research analysts, traders and other investment specialists who work
in the Adviser's offices across the United States and abroad. The Adviser
believes its team approach benefits portfolio investors by bringing together
many disciplines and leveraging its extensive resources.
The following investment professionals are associated with each portfolio as
indicated:
Joined the
Name and Title Portfolio Background
- --------------------------------------------------------------------------------
Benjamin W. Thorndike 1996 Mr. Thorndike, who joined the
Lead Manager Adviser as a portfolio manager in
1983, will develop portfolio
strategy utilizing the research,
analysis and guidance provided by
other members of the investment
team. Since 1986, Mr. Thorndike has
served as a portfolio manager for
Scudder Growth and Income Fund, and
has over 18 years of investment
experience.
Maureen F. Allyn 1996 Ms. Allyn is the Adviser's Chief
Manager Economist, a position she has held
since 1989, and is responsible for
analyzing both the world and U.S.
economies.
- --------------------------------------------------------------------------------
24
<PAGE>
Joined the
Name and Title Portfolio Background
- --------------------------------------------------------------------------------
Edward Baldini 1998 Mr. Baldini joined the Adviser in
Manager 1995 as a member of the Growth and
Income Equity Management Group,
focusing on institutional client
management. In addition, Mr. Baldini
is a member of Scudder's
Institutional Asset Allocation
Committee. Prior to joining the
Adviser, he served as an Assistant
Strategist at an unaffiliated
investment management firm.
Philip S. Fortuna 1996 Mr. Fortuna, who joined the Adviser
Manager in 1986 as manager of institutional
equity accounts, has served as
Director of Quantitative Research
and Director of Investment
Operations. Mr. Fortuna is a Lead
Manager for both Scudder Small
Company Value Fund and Scudder Micro
Cap Fund.
- --------------------------------------------------------------------------------
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
portfolios could be adversely affected if computer systems on which the
portfolios rely, which primarily include those used by the Adviser, its
affiliates or other service providers, are unable to correctly process
date-related information on and after January 1, 2000. The risk is commonly
called the Year 2000 issue. Failure to successfully address the Year 2000 issue
could result in interruptions to and other material adverse effects on the
portfolios' businesses and operations, such as problems with calculating net
asset value and difficulties in implementing the fund's purchase and redemption
procedures. The Adviser has commenced a review of the Year 2000 issue as it may
affect the portfolios and is taking steps it believes are reasonably designed to
address the Year 2000 issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 issue will not have an adverse effect on the issuers whose securities are
held by the portfolios or on global markets or economies generally.
25
<PAGE>
Euro conversion
The planned introduction of a new European currency, the Euro, may result in
uncertainties for European securities in the markets in which they trade and
with respect to the operation of those portfolios indirectly investing in these
markets. Currently, the Euro is expected to be introduced on January 1, 1999 by
eleven European countries that are members of the European Economic and Monetary
Union (EMU). The introduction of the Euro will require the redenomination of
European debt and equity securities over a period of time, which may result in
various accounting differences and/or tax treatments that otherwise would not
likely occur. Additional questions are raised by the fact that certain other EMU
members, including the United Kingdom, will not officially be implementing the
Euro on January 1, 1999. If the introduction of the Euro does not take place as
planned, there could be negative effects, such as severe currency fluctuations
and market disruptions.
The Adviser is working to address Euro-related issues and understands that other
key service providers are taking similar steps. However, at this time no one
knows precisely what the degree of impact will be. To the extent that the market
impact or effect on a portfolio holding is negative, it could hurt the
portfolio's performance.
Distributions
Dividends and capital gains distributions
The Conservative Portfolio and the Balanced Portfolio intend to distribute
dividends from their net investment income quarterly, in March, June, September
and December, while the Growth Portfolio and the International Portfolio intend
to distribute these dividends annually, in November or December. Each portfolio
intends to distribute net realized capital gains after utilization of capital
loss carryforwards, if any, in November or December. An additional distribution
may be made at a later date, if necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such 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.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of a portfolio. If an investment is in the form
of a retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account. Distributions are generally taxable,
whether received in cash or reinvested. Exchanges among portfolios are also
taxable events.
26
<PAGE>
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time
shareholders have owned shares. Short-term capital gains and any other taxable
income distributions are taxable as ordinary income. Distributions received by a
portfolio from an underlying fund generally will be ordinary income dividends,
includable in that portfolio's net investment income, if paid from the
underlying fund's net investment income, short-term capital gains or other
taxable income. Distributions paid from an underlying fund's long-term capital
gains, however, generally will be treated by a portfolio as long-term capital
gains. A portion of dividends from ordinary income may qualify for the
dividends-received deduction for corporations.
Unless your investment is in a tax-deferred account, you may want to avoid
investing a large amount close to the date of a distribution because you may
receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss which may be long-term or short-term, generally depending on how long
you owned the shares.
Each portfolio sends detailed tax information to its shareholders about the
amount and type of its distributions by January 31 of the following year.
Each portfolio may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to provide
the portfolio with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Any such withheld amounts may be credited against
the shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on portfolio
distributions and dispositions of portfolio shares. You should consult your tax
advisor regarding the particular consequences of an investment in a portfolio.
27
<PAGE>
About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
a portfolio as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading. Net asset value per share is calculated by dividing the value of
total portfolio assets, less all liabilities, by the total number of shares
outstanding. The assets of each portfolio consist primarily of the underlying
Scudder funds, which are valued at their respective net asset values at the time
of computation. In general, the underlying Scudder funds value their portfolio
securities using market prices. If market prices are not readily available for a
security or if a security's price is not considered to be market indicative, the
underlying funds may value that security by another method that their Boards or
their delegates believe accurately reflects fair value. In those circumstances
where a security's price is not considered to be market indicative, the
security's valuation may differ from an available market quotation.
To the extent that the underlying Scudder funds invest in foreign securities,
these securities may be listed on foreign exchanges that trade on days when the
portfolios do not price their shares. As a result, the net asset value of a
portfolio may change at a time when shareholders are not able to purchase or
redeem their shares.
Processing time
All purchase and redemption requests received in good order at the portfolios'
transfer agent 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. All
other requests that are in good order will be executed the following business
day.
Signature guarantees
A signature guarantee is required for redemptions over $100,000. You can obtain
one from most brokerage houses and financial institutions, although not from a
notary public. The portfolios will normally send 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). For more
information, please call 1-800-225-5163.
28
<PAGE>
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only.
Scudder Pathway Series and Scudder Investor Services, Inc. each reserves the
right to reject purchases of portfolio shares (including exchanges) for any
reason, including when there is evidence of a pattern of frequent purchases and
sales made in response to short-term fluctuations in a portfolio's share price.
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in a portfolio and have not established an automatic investment plan
will be assessed an annual $10.00 per portfolio charge; this fee is paid to the
portfolio. Each portfolio reserves the right, following 60 days written notice
to shareholders, to redeem all shares in accounts that have a value below $1,000
where such a reduction has occurred due to a redemption, exchange or transfer
out of the account.
Third party transactions
If you buy and sell shares of a portfolio through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell
portfolio shares. Additional information, including special investment features,
may be found in the Shareholder Services Guide. For information about No-Fee
IRAs, Roth IRAs and other retirement options, call Scudder Investor Relations at
1-800-225-2470. For information on establishing 401(k) and 403(b) plans, call
Scudder Defined Contribution Services at 1-800-323-6105.
29
<PAGE>
Purchases
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send your completed and signed application and check
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to complete your
application with the help of a Scudder representative.
Investor Centers are located in Boca Raton, Boston,
Chicago, New York and San Francisco.
- --------------------------------------------------------------------------------
To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send a check with a Scudder investment slip, or with a
letter of instruction including your account number and the
complete fund name, to the appropriate address listed above.
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor Center
locations are listed above.
- --------------------------------------------------------------------------------
By Telephone Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
- --------------------------------------------------------------------------------
30
<PAGE>
Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Print or type your instructions and include:
or Fax - the name of the fund and class 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 and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions The Scudder Funds
by regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
- --------------------------------------------------------------------------------
To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAILTM, The Scudder
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.
- --------------------------------------------------------------------------------
By Mail Send your instructions for redemption to the appropriate address
or Fax or fax number above and include:
- the name of the fund and class 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.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
31
<PAGE>
Investments products and services
The Scudder Family of Funds[
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market Series -- Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series -- Managed Shares*
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 Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
- ----------------
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
32
<PAGE>
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **[[
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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 in order from expected least risk to
most risk. Certain Scudder funds or classes thereof may not be available
for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to federal,
state and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
++ Only the International Shares of the fund are part of the Scudder Family of
Funds.
[[ 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 Kemper Investments, Inc., are traded on the
New York Stock Exchange and, in some cases, on various foreign stock
exchanges.
33
<PAGE>
Additional information about each portfolio may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on portfolio investments and operations. The Shareholder Services Guide contains
more information about purchases and sales of portfolio shares. The semiannual
and annual shareholder reports contain a discussion of the market conditions and
the investment strategies that significantly affected each portfolio's
performance during the last fiscal year, as well as a listing of portfolio
holdings and financial statements. These and other portfolio documents may be
obtained without charge from the following sources:
- --------------------------------------------------------------------------------
By Phone Call Scudder Investor Relations at 1-800-225-2470
or
For existing Scudder investors, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-8606
[PRINTED WITH SOY LOGO] [RECYCLE LOGO] Printed on recycled paper
319-2-19
PRO80199
<PAGE>
SCUDDER PATHWAY SERIES
Two International Place
Boston, Massachusetts 02110
Scudder Pathway Series is a professionally managed,
open-end investment company which offers four
investment portfolios.
CONSERVATIVE PORTFOLIO
BALANCED PORTFOLIO
GROWTH PORTFOLIO
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1999
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus. The
combined prospectus of Scudder Pathway Series Portfolios dated January 1, 1999,
as amended from time to time, may be obtained without charge by writing to
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
The Annual Report to Shareholders of each Portfolio dated August 31, 1998,
is incorporated by reference and are hereby deemed to be part of this Statement
of Additional Information.
<PAGE>
TABLE OF CONTENTS
Page
SCUDDER PATHWAY SERIES' INVESTMENT OBJECTIVES AND POLICIES.....................1
General Investment Objectives and Policies...............................1
Master/feeder Fund Structure.............................................2
The Underlying Scudder Funds.............................................2
Risk Factors of Underlying Scudder Funds................................17
Investment Restrictions of the Portfolios...............................17
PURCHASES.....................................................................18
Additional Information About Opening An Account.........................18
Minimum balances........................................................18
Additional Information About Making Subsequent Investments..............19
Additional Information About Making Subsequent Investments by
QuickBuy.............................................................19
Checks..................................................................19
Wire Transfer of Federal Funds..........................................20
Share Price.............................................................20
Share Certificates......................................................20
Other Information.......................................................20
EXCHANGES AND REDEMPTIONS.....................................................21
Exchanges...............................................................21
Redemption By Telephone.................................................21
Redemption by QuickSell.................................................22
Redemption by Mail or Fax...............................................23
Redemption-in-Kind......................................................23
Other Information.......................................................23
FEATURES AND SERVICES OFFERED BY THE TRUST....................................24
The Pure No-Load(TM) Concept............................................24
Internet access.........................................................25
Dividends and Capital Gains Distribution Options........................25
Scudder Investor Centers................................................26
Reports to Shareholders.................................................26
Transaction Summaries...................................................26
THE SCUDDER FAMILY OF FUNDS...................................................26
SPECIAL PLAN ACCOUNTS.........................................................31
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals.........31
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for
Corporations and Self-Employed Individuals...........................32
Scudder IRA: Individual Retirement Account.............................32
Scudder Roth IRA: Individual Retirement Account........................33
Scudder 403(b) Plan.....................................................33
Automatic Withdrawal Plan...............................................33
Group or Salary Deduction Plan..........................................34
Automatic Investment Plan...............................................34
Uniform Transfers/Gifts to Minors Act...................................34
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.....................................34
PERFORMANCE INFORMATION.......................................................35
Average Annual Total Return.............................................35
Cumulative Total Return.................................................36
Total Return............................................................36
Comparison of Fund Performance..........................................36
TRUST ORGANIZATION............................................................39
INVESTMENT ADVISER............................................................40
Personal Investments by Employees of the Adviser........................43
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
Management Fees of Underlying Scudder Funds.............................43
SPECIAL SERVICING AGREEMENT...................................................44
TRUSTEES AND OFFICERS.........................................................45
REMUNERATION..................................................................47
DISTRIBUTOR...................................................................47
TAXES.........................................................................48
Taxation of the Portfolios and Their Shareholders.......................48
Taxation of the Underlying Scudder Funds................................50
PORTFOLIO TRANSACTIONS........................................................50
Portfolio Turnover......................................................50
NET ASSET VALUE...............................................................51
ADDITIONAL INFORMATION........................................................52
Experts.................................................................52
Shareholder Indemnification.............................................52
Other Information.......................................................52
FINANCIAL STATEMENTS..........................................................53
GLOSSARY......................................................................54
ii
<PAGE>
SCUDDER PATHWAY SERIES' INVESTMENT OBJECTIVES AND POLICIES
(See "PORTFOLIO SUMMARIES -- Investment Objectives and Strategies of the
Portfolios" and "ABOUT THE PORTFOLIOS Principal Strategies, Investments and
Related Risks" in the Portfolios' combined prospectus.)
General Investment Objectives and Policies
Scudder Pathway Series (the "Trust") is an open-end management investment
company composed of six separate diversified portfolios (the "Portfolios"), four
of which are currently offered, which invest primarily in existing, pure
no-load(TM) Scudder Funds (the "Underlying Scudder Funds"), according to
well-defined investment objectives. The Portfolios may also invest in money
market instruments to provide for redemptions and for temporary or defensive
purposes. It is impossible to accurately predict how long such alternate
strategies may be utilized. Each Portfolio offers a professionally managed,
long-term investment program that can, with the exception of the "International
Portfolio," serve as a complete investment program or as a core part of a larger
portfolio. Achievement of each Portfolio's objective cannot be assured.
The Portfolios are professionally managed portfolios which allocate their
investments among select funds in the Scudder Family of Funds. Each Portfolio is
designed for investors seeking a distinct investment style: a conservative
investment approach ("Pathway Series: Conservative Portfolio"), a balance of
growth and income ("Pathway Series: Balanced Portfolio"), growth of capital
("Pathway Series: Growth Portfolio"), or international exposure ("Pathway
Series: International Portfolio"). The Portfolios have been created in response
to increasing demand by mutual fund investors for a simple and effective means
of structuring a diversified mutual fund investment program suited to their
general needs. As has been well documented in the financial press, the
proliferation of mutual funds over the last several years has left many
investors confused and in search of a simpler means to manage their investments.
Many mutual fund investors realize the value of diversifying their investments
in a number of mutual funds (e.g., a money market fund for liquidity and price
stability, a growth fund for long-term appreciation, an income fund for current
income and relative safety of principal, an international fund for greater
diversification), but need professional management to decide such questions as
which mutual funds to select, how much of their assets to commit to each fund
and when to allocate their selections. The Portfolios will allow investors to
rely on Scudder Kemper Investments, Inc. (the "Adviser") to determine (within
clearly explained parameters) the amount to invest in each of several Underlying
Scudder Funds and the timing of such investments. The Portfolios may each borrow
money for temporary, emergency or other purposes, including investment leverage
purposes, as determined by the Trustees. The Investment Company Act of 1940 (the
"1940 Act") requires borrowings to have 300% asset coverage. The Portfolios may
each also enter into reverse repurchase agreements.
The investment objectives of the four Portfolios are as follows:
Conservative Portfolio
The Conservative Portfolio seeks current income and , as a secondary
objective, long-term growth of capital . The Portfolio invests substantially in
bond funds, and, to a lesser extent, equity funds. This portfolio may be
suitable for investors with an investment time horizon of 3-5 years or more.
Balanced Portfolio
The Balanced Portfolio seeks a balance of current income and growth of
capital. The portfolio invests in a mix of money market, bond and equity funds.
This portfolio may be suitable for investors with an investment time horizon of
5-10 years.
Growth Portfolio
The Growth Portfolio seeks long-term growth of capital . The portfolio
invests predominantly in equity funds that pursue this goal. This portfolio may
be suitable for investors with an investment time horizon of 10 years or more.
<PAGE>
International Portfolio
The International Portfolio seeks to maximize total return. The portfolio
invests in a select mix of international and global funds. This portfolio may be
appropriate for investors with an investment time horizon of 10 years or more
who are looking for broad exposure to investment opportunities outside the U.S.
Master/feeder Fund Structure
At a special meeting of shareholders, a majority of the shareholders of
each Portfolio approved a proposal which gives the Board of Trustees the
discretion to retain the current distribution arrangement for the Portfolios
while investing in a master fund in a master/feeder fund structure as described
below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
The Underlying Scudder Funds
Each Portfolio will purchase or sell securities to: (a) accommodate
purchases and sales of each Portfolio's shares, (b) change the percentages of
each 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 each Portfolio's assets in accordance with the investment mixes
described below.
Portfolio managers will allocate Portfolio assets among the Underlying
Scudder Funds in accordance with predetermined percentage ranges, based on the
Adviser's outlook for the financial markets, the world's economies and the
relative performance potential of the Underlying Scudder Funds. The Underlying
Scudder Funds have been selected to represent a broad spectrum of investment
options for the Portfolios, subject to the following investment ranges:
(Conservative) 40-80% bond mutual funds, 20-50% equity mutual funds, 0-15% money
market funds; (Balanced) 40-70% equity mutual funds, 25-60% bond mutual funds,
0-10% money market funds; (Growth) 60-90% equity mutual funds, 10-40% bond
mutual funds, 0-5% money market funds; (International) 60-100% equity mutual
funds, 0-40% bond mutual funds, 0-20% money market funds.
2
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Conservative Portfolio Balanced Portfolio Growth Portfolio International Portfolio
Underlying Scudder Funds Underlying Scudder Funds Underlying Scudder Funds Underlying Scudder Funds
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond Mutual Funds Equity Mutual Funds Equity Mutual Funds Equity Mutual Funds
Scudder Corporate Bond Fund Scudder Classic Growth Fund Scudder Classic Growth Fund Scudder Emerging Markets
Scudder Emerging Markets Scudder Development Fund Scudder Development Fund Growth Fund
Income Fund Scudder Emerging Markets Scudder Emerging Markets Scudder Global Discovery
Scudder Global Bond Fund Growth Fund Growth Fund Fund
Scudder GNMA Fund Scudder Global Discovery Fund Scudder Global Discovery Fund Scudder Global Fund
Scudder High Yield Bond Fund Scudder Global Fund Scudder Global Fund Scudder Gold Fund
Scudder Income Fund Scudder Gold Fund Scudder Gold Fund Scudder Greater Europe
Scudder International Bond Scudder Greater Europe Growth Scudder Greater Europe Growth Fund
Fund Fund Growth Fund Scudder International Fund
Scudder Short Term Bond Fund Scudder Growth and Income Fund Scudder Growth and Income Scudder International
Equity Mutual Funds Scudder International Fund Fund Growth and Income Fund
Scudder Classic Growth Fund Scudder International Growth Scudder International Fund Scudder Latin America Fund
Scudder Development Fund and Income Fund Scudder International Growth Scudder Pacific
Scudder Emerging Markets Scudder Large Company Growth and Income Fund Opportunities Fund
Growth Fund Fund Scudder Large Company Growth The Japan Fund
Scudder Global Discovery Fund Scudder Large Company Value Fund Bond Mutual Funds
Scudder Global Fund Fund Scudder Large Company Value Scudder Emerging Markets
Scudder Gold Fund Scudder Latin America Fund Fund Income Fund
Scudder Greater Europe Scudder Micro Cap Fund Scudder Latin America Fund Scudder Global Bond Fund
Growth Fund Scudder Pacific Opportunities Scudder Micro Cap Fund Scudder International Bond
Scudder Growth and Income Fund Scudder Pacific Fund
Fund Scudder Small Company Value Opportunities Fund Scudder Short Term Bond
Scudder International Fund Fund Scudder Small Company Value Fund
Scudder International Growth Scudder 21st Century Growth Fund Money Market Funds
and Income Fund Fund Scudder 21st Century Growth Scudder Cash Investment Trust
Scudder Large Company Growth Scudder Value Fund Fund Scudder Money Market Series
Fund The Japan Fund Scudder Value Fund -- Scudder Premium
Scudder Large Company Value Bond Mutual Funds The Japan Fund Money Market Shares
Fund Scudder Corporate Bond Fund Bond Mutual Funds
Scudder Latin America Fund Scudder Emerging Markets Scudder Corporate Bond Fund
Scudder Micro Cap Fund Income Fund Scudder Emerging Markets
Scudder Pacific Scudder Global Bond Fund Income Fund
Opportunities Fund Scudder GNMA Fund Scudder Global Bond Fund
Scudder Small Company Value Scudder High Yield Bond Fund Scudder GNMA Fund
Fund Scudder Income Fund Scudder High Yield Bond Fund
Scudder 21st Century Growth Scudder International Bond Scudder Income Fund
Fund Fund Scudder International Bond
Scudder Value Fund Scudder Short Term Bond Fund Fund
The Japan Fund Money Market Funds Scudder Short Term Bond Fund
Money Market Funds Scudder Cash Investment Trust Money Market Funds
Scudder Cash Investment Trust Scudder Money Market Series Scudder Cash Investment Trust
Scudder Money Market Series -- Scudder Premium Money Scudder Money Market Series
-- Scudder Premium Money Market Shares -- Scudder Premium Money
Market Shares Market Shares
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following Underlying Scudder Funds are the money market funds in which
the Portfolios may invest and will likely serve as the primary cash reserve
portion of each Portfolio.
Scudder Cash Investment Trust (SCIT) seeks to maintain stability of
capital and, consistent therewith, to maintain liquidity of capital and to
provide current income. The Fund seeks to achieve its objectives by investing in
money market securities. The Fund seeks to maintain a constant net asset value
of $1.00 per share and declares dividends daily. There can be no assurance that
the stable net asset value will be maintained and shares of the Fund are not
insured or guaranteed by the U.S. Government. The Fund purchases domestic and
foreign 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 Corporation ("S&P") and Fitch
Investors Service, Inc. ("Fitch"). 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 or less. The
dollar-weighted average maturity of the Fund's portfolio investments varies with
money market conditions, but is always 90 days or less. As a money market
3
<PAGE>
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.
SCIT may invest in short-term securities consisting of: obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities;
obligations of supranational organizations such as the International Bank for
Reconstruction and Development (the World Bank); obligations of domestic banks
and foreign branches of domestic banks, including bankers' acceptances,
certificates of deposit, deposit notes and time deposits; and obligations of
savings and loan institutions.
SCIT may also invest in: instruments whose credit has been enhanced by
banks (letters of credit), insurance companies (surety bonds) or other corporate
entities (corporate guarantees); corporate obligations, including commercial
paper, notes, bonds, loans and loan participations; securities with variable or
floating interest rates; when-issued securities, asset-backed securities,
including certificates, participations and notes; municipal securities,
including notes, bonds and participation interests, either taxable or tax free;
and illiquid securities. SCIT has adopted 144a procedures for the valuation of
illiquid securities.
In addition, SCIT may invest in repurchase agreement and securities with
put features. The Fund has adopted 144a procedures for the valuation of illiquid
securities.
Scudder Money Market Series - Scudder Premium Money Market Shares seeks to
provide investors with as high a level of current income as is consistent with
its investment policies and with preservation of capital and liquidity. The Fund
invests exclusively in a broad range of short-term money market instruments that
have remaining maturities of not more than 397 calendar days and certain
repurchase agreements. These money market securities consist of obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, taxable and tax-exempt municipal obligations, corporate and
bank obligations, certificates of deposit ("CD's"), bankers' acceptances and
variable amount master demand notes. The fund will maintain a dollar-weighted
average maturity of 90 days or less in an effort to maintain a constant net
asset value of $1.00 per share, but there is no assurance that it will be able
to do so.
The bank obligations in which the Fund may invest include negotiable
certificates of deposit, bankers' acceptances, fixed time deposits or other
short-term bank obligations. Generally, the Fund may not invest less than 25% of
the current value of its total assets in bank obligations (including bank
obligations subject to repurchase agreements). The Fund limits its investments
in U.S. bank obligations to banks (including foreign branches, the obligations
of which are guaranteed by the U.S. parent) that have at least $1 billion in
total assets at the time of investment. "U.S. banks" include commercial banks
that are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation. In addition, the Fund may invest in obligations of
savings banks and savings and loan associations insured by the Federal Deposit
Insurance Corporation that have total assets in excess of $1 billion at the time
of the investment. The Fund may invest in U.S. dollar-denominated obligations of
foreign banks subject to the following conditions: the foreign banks (based upon
their most recent annual financial statements) at the time of investment (i)
have more than U.S. $10 billion, or the equivalent in other currencies, in total
assets; (ii) are among the 100 largest banks in the world as determined on the
basis of assets; and (iii) have branches or agencies in the U.S.; and (iv) are
obligations which, in the opinion of the Adviser, are of an investment quality
comparable to obligations of U.S. banks in which the Fund may invest. Such
investments may involve greater risks than those affecting U.S. bank or Canadian
affiliates of U.S. banks. In addition, foreign banks are not subject to
examination by any U.S. government agency or instrumentality.
The Fund may invest in U.S. dollar-denominated certificates of deposit and
promissory notes issued by Canadian affiliates of U.S. banks under circumstances
where the instruments are guaranteed as to principal and interest by the U.S.
bank. While foreign obligations generally involve greater risks than those of
domestic obligations, such as risks relating to liquidity, marketability,
foreign taxation, nationalization and exchange controls, generally the Adviser
believes that these risks are substantially less in the case of instruments
issued by Canadian affiliates that are guaranteed by U.S. banks than in the case
of other foreign money market instruments.
There is no limitation on the amount of the Fund's assets that may be
invested in obligations of foreign banks that meet the conditions set forth
above. Such investments may involve greater risks than those affecting U.S.
banks or Canadian affiliates of U.S. banks. In addition, foreign banks are not
subject to examination by any U.S. Governmental agency or instrumentality.
4
<PAGE>
Except for obligations of foreign banks and foreign branches of U.S.
banks, the Fund will not invest in the securities of foreign issuers. Generally,
the Fund may not invest less than 25% of the current value of its total assets
in bank obligations (including bank obligations subject to repurchase
agreements).
Generally, the commercial paper purchased by the Fund is limited to direct
obligations of domestic corporate issuers, including bank holding companies,
which obligations, at the time of investment, are (i) rated "P-1" by Moody's
Investors Service, Inc. ("Moody's"), "A-1" or better by Standard & Poor's
Corporation ("S&P") or "F-1" by Fitch Investors Service, Inc. ("Fitch"), (ii)
issued or guaranteed as to principal and interest by issuers having an existing
debt security rating of "Aa" or better by Moody's or "AA" or better by S&P or
Fitch, or (iii) securities that, if not rated, are of comparable investment
quality as determined by the Adviser in accordance with procedures adopted by
the Corporation's Board of Directors.
All of the securities in which the Fund will invest must meet credit
standards applied by the Adviser pursuant to procedures established by the Board
of Directors. Should an issue of securities cease to be rated or if its rating
is reduced below the minimum required for purchase by the Fund, the Adviser will
dispose of any such security, as soon as practicable, unless the Directors of
the Corporation determine that such disposal would not be in the best interests
of the Fund.
In addition, the Fund may invest in variable or floating rate obligations,
obligations backed by bank letters of credit, when-issued securities and
securities with put features. The Fund has adopted 144a procedures for the
valuation of illiquid securities.
The following Underlying Scudder Funds are bond mutual funds which seek to
provide current income.
Scudder Corporate Bond Fund: seeks a high level of current income through
investment primarily in investment-grade corporate debt securities. The Fund
invests in a broad range of investment-grade, income producing securities and,
to a lesser extent, below investment-grade bonds. The Fund is designed as a
long-term investment for shareholders who can bear some credit, interest rate,
and other bond market risks in exchange for the potential for high current
income.
The Fund invests, under normal market conditions, at least 65% of its
total assets in investment-grade debt securities. Investment-grade securities
are those that are rated Aaa, Aa, A, or Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A, or BBB by Standard & Poor's Corporation ("S&P"), or
if unrated, are of equivalent quality as determined by the Fund's investment
adviser, Scudder Kemper Investments, Inc. (the "Adviser"). In addition, the Fund
may invest up to 35% of its net assets in high yield, below investment-grade
securities. Below investment-grade securities are those rated lower than Baa or
BBB. Below investment-grade securities are considered predominantly speculative
with respect to their capacity to pay interest and repay principal. They
generally involve a greater risk of default and, at times, can have more price
volatility than higher rated securities.
Scudder Corporate Bond Fund invests primarily in intermediate-term
corporate bonds, but can also hold short-term and long-term issues. The
dollar-weighted average maturity of the Fund's portfolio is expected to range
from five to ten years. Longer-term bonds generally are more volatile than bonds
with shorter maturities. While the Fund emphasizes corporate bonds and notes, it
can also invest in U.S. Treasury and Agency securities, convertible and
preferred securities, debt securities issued by real estate investment trusts
("REITs"), dollar rolls, trust preferred securities, mortgage-backed and other
asset-backed securities, zero coupon securities, dollar-denominated debt of
international agencies or investment-grade foreign institutions, American
Depositary Receipts and other depositary receipts, and money market instruments
such as commercial paper, bankers acceptances, and certificates of deposit
issued by domestic and foreign branches of U.S. banks. The Fund may invest up to
20% of total assets in foreign debt securities denominated in currencies other
than the U.S. dollar. While it is anticipated that the majority of the Fund's
foreign investments will be denominated in the U.S. dollar, the Fund may invest,
within the aforementioned limit, in foreign bonds denominated in local
currencies, including those issued in emerging markets. The Fund considers
"emerging markets" to include any country that is defined as an emerging or
developing economy by any one of the International Bank for Reconstruction and
Development (i.e., the World Bank), the International Finance Corporation or the
United Nations or its authorities. The Fund may also invest in when-issued
securities, indexed securities, repurchase agreements, reverse repurchase
agreements, illiquid securities, and may engage in strategic transactions. The
value of fixed income investments will fluctuate with changes in interest rates
and bond market conditions, tending to rise as interest rates decline and
decline as interest rates rise.
5
<PAGE>
For temporary defensive purposes, Scudder Corporate Bond Fund may invest
all or a substantial portion of its assets in money market and short-term
instruments when the Adviser deems such a position advisable in light of
economic or market conditions. It is impossible to predict accurately how long
such a defensive strategy may be utilized.
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 at least 50% of its total assets 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 will invest 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. 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.
In addition, Scudder Emerging Markets Income Fund, may invest up to 35% of
its total assets in securities other than debt obligations issued in emerging
markets. These holdings include debt securities and money market instruments
issued by corporations and governments based in developed markets, including up
to 20% of total assets in U.S. fixed income-instruments. The Fund has adopted
144a procedures for the valuation of illiquid securities.
The Fund may for temporary, defensive or emergency purposes invest without
limit in U.S. debt securities including short-term money market securities. It
is impossible to accurately predict how long such alternative strategies may be
utilized. In addition, the Fund may invest in shares of closed end investment
companies, warrants, reverse repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
Scudder GNMA Fund 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 value 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 GNMA Fund may for temporary defensive purposes invest without
limit in short-term U.S. Government obligations. It is impossible to accurately
predict how long such alternative strategies may be utilized. In addition, the
Fund may invest in warrants, when-issued securities, zero coupon securities and
illiquid securities and may enter into dollar roll transactions and reverse
repurchase agreements and repurchase agreements, and may engage in securities
lending and strategic transactions including derivatives.
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
invests principally in a managed portfolio of high-grade 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
are 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 or BB by S&P or Baa or Ba by Moody's, or unrated
securities considered to be of equivalent quality by the Adviser. The Fund does
not invest in any securities rated B or lower. Under
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normal market conditions, the Fund will invest at least 15% of its total assets
in U.S. dollar-denominated securities, issued domestically or abroad. 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 Global Bond Fund may for temporary defensive purposes invest
without limit in U.S. Government debt securities including short-term money
market securities. It is impossible to accurately predict how long such
alternative strategies may be utilized. In addition, the Fund may invest in
warrants, zero coupon securities mortgage and asset-backed securities, illiquid
securities, reverse repurchase agreements, repurchase agreements and may engage
in securities lending, strategic transactions including derivatives.
Scudder High Yield Bond Fund 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.
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 in a variety of other
securities including convertible and preferred securities, U.S. Treasury and
Agency bonds, Brady bonds, mortgage-backed and asset-backed securities, common
stocks and warrants, securities issued by real estate investment trusts, trust
preferred securities, bank loans, loan participations, dollar rolls, indexed
securities and restricted securities, such as those acquired through private
placements. The Fund may invest up to 25% of its total assets in foreign
securities. 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.
Scudder High Yield Bond Fund may for temporary defensive purposes invest
without limit in cash or money market instruments or high quality domestic debt
securities. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in warrants,
securities lending, illiquid securities, reverse repurchase agreements,
repurchase agreements, may purchase securities on a when-issued or forward
delivery basis and may engage in strategic transactions including derivatives.
The Fund has adopted 144a procedures for the valuation of illiquid
securities.
Scudder Income Fund 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.
Under normal market conditions, the Fund will invest at least 65% of its assets
in securities rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or if unrated, in bonds judged
by the Adviser, to be of comparable quality at the time of purchase. The Fund
may invest up to 20% of its assets in debt securities rated lower than Baa 3 or
BBB or, if unrated, of equivalent quality as determined by the Adviser, but will
not purchase bonds rated below B by Moody's or S&P or their equivalent.
Scudder Income Fund may invest in bonds, notes, zero coupon securities,
adjustable rate bonds, convertible bonds, preferred and convertible preferred
securities, U.S. Government securities, commercial paper, debt securities issued
by real estate investment trusts ("REITs"), mortgage and asset-backed securities
and other money market instruments and illiquid securities such as certain
securities issued in private placements, foreign securities and certificates of
deposit issued by foreign and domestic branches of U.S. banks. It may also
invest in warrants, when-issued or forward delivery securities, indexed
securities, repurchase agreements, reverse repurchase agreements, and may engage
in dollar-roll transactions, securities lending and strategic transactions
including derivatives.
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 debt securities denominated in foreign currencies, including bonds
denominated in the European Currency Unit (ECU). Portfolio investments are
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
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account the ability to hedge a degree of currency or local bond price risk. The
Fund normally invests at least 65% of its total assets in bonds denominated in
foreign currencies. The Fund invests no more than 35% of the value of its total
assets in U.S. debt securities. The Fund invests no more than 15% of its total
assets in debt securities rated below investment-grade, but no lower than B.
Scudder International Bond Fund may for temporary defensive purposes
invest without limit in U.S. Government debt securities, cash and cash
equivalents. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in warrants,
illiquid securities, reverse repurchase agreements, repurchase agreements,
dollar roll transactions, may purchase securities on a when-issued or forward
delivery basis and may engage in securities lending and strategic transactions
including derivatives.
Scudder Short Term Bond Fund 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. Within this limitation, the
Fund may purchase individual securities with remaining stated maturities of
greater than 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.
When, in the opinion of the Adviser, economic or other conditions warrant, for
temporary defensive purposes the Fund may invest more than 35% of its assets in
money market instruments. The Fund emphasizes high quality investments. 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.
Scudder Short Term Bond Fund may for temporary defensive purposes invest
without limit in money market assets. It is impossible to accurately predict how
long such alternative strategies may be utilized. In addition, the Fund may
invest in warrants, indexed securities, zero coupon securities, trust preferred
securities, illiquid securities, reverse repurchase agreements, repurchase
agreements, dollar roll transactions, may purchase securities on a when-issued
or forward delivery basis and may engage in securities lending and strategic
transactions including derivatives.
The following Underlying Scudder Funds are equity mutual funds which seek
a combination of income and growth.
Scudder Growth and Income Fund 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.
Scudder Growth and Income Fund may for temporary defensive purposes invest
without limit in cash and cash equivalents. It is impossible to accurately
predict how long such alternative strategies may be utilized. In addition, the
Fund may invest in warrants, foreign securities, real estate investment trusts,
illiquid securities, reverse repurchase agreements, repurchase agreements and
may engage in securities lending and strategic transactions including
derivatives.
Scudder International Growth and Income Fund is a diversified investment
company which seeks long-term growth of capital and current income primarily
from foreign equity securities. The Fund invests generally in common stocks of
established companies listed on foreign exchanges, which offer prospects for
growth of earnings while paying relatively high current dividends. The Fund can
also invest in other types of equity securities, including preferred stocks and
securities convertible into common stock. The Fund can invest throughout the
world, but will emphasize investments in developed economies other than the U.S.
In pursuing its dual objective, at least 80% of the Fund's net assets will be
invested in the equity securities of established non-U.S. companies. The Fund
generally invests in equity securities of established companies listed on
foreign securities exchanges, but also may invest in securities traded
over-the-counter. The Fund's equity investments include common stock,
convertible and non-convertible preferred stock, sponsored and unsponsored
depository receipts, and warrants.
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Scudder International Growth and Income Fund may for temporary defensive
purposes hold up to 20% of its net assets in U.S. and foreign fixed income
securities and may invest without limit in cash or cash equivalents including
domestic and foreign money market instruments, short-term government and
corporate obligations and repurchase agreements. It is impossible to accurately
predict how long such alternative strategies may be utilized. In addition, the
Fund may invest in warrants, illiquid securities, reverse repurchase agreements,
repurchase agreements and may engage in securities lending and strategic
transactions including derivatives.
The following Underlying Scudder Funds are equity mutual funds which seek
long-term growth or capital appreciation.
Classic Growth Fund -- Scudder Shares seeks to provide long-term growth of
capital and to keep the value of its shares more stable than other capital
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 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 the Fund's 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.
Classic Growth Fund -- Scudder Shares may for temporary defensive purposes
invest without limit in high quality money market securities, including U.S.
Treasury bill, repurchase agreements, commercial paper, certificates of deposit
issued by domestic and foreign branches of U.S. banks, bankers' acceptances, and
other debt securities, such as U.S. Government obligations and corporate debt
instruments. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in illiquid
securities, reverse repurchase agreements, repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth. The Fund generally invests in equity securities,
including common stocks and convertible securities, of companies that the
Adviser believes have potential for sustainable above-average earnings growth
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 foreign securities is believed by
the Adviser to offer 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 Development Fund may for temporary defensive purposes invest
without limit in cash and may invest in high quality debt securities without
equity features, U.S. Government securities and money market instruments which
are rated in the two highest categories by Moody's Investor Services, Inc. or
Standard and Poor's Corporations, or, if unrated, are deemed by the Adviser to
be of equivalent quality. It is impossible to accurately predict how long such
alternative strategies may be utilized. In addition, the Fund may invest in
warrants, convertible bonds, preferred stocks, illiquid securities, reverse
repurchase agreements, repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
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
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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; or
o 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 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 Emerging Markets Growth Fund may for temporary defensive purposes
invest without limit in debt instruments, cash and cash equivalents, including
foreign and domestic money market instruments, short-term government and
corporate obligations, and repurchase agreements. It is impossible to accurately
predict how long such alternative strategies may be utilized. In addition, the
Fund may invest in debt instruments such as warrants, bonds, notes, bills,
debentures, convertible securities, bank obligations, short-term paper, loan
participations, loan assignments and trust interests. The Fund may also invest
in closed end investment companies, illiquid securities, purchase securities on
a when-issued or forward delivery basis, enter into reverse repurchase
agreements, repurchase agreements and may engage in securities lending and
strategic transactions including derivatives.
The Fund has adopted 144a procedures for the valuation of illiquid
securities.
Global Discovery Fund -- Scudder Shares 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. 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. The Fund intends to allocate investments among
at least three countries at all times, one of which may be the United States.
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.
Global Discovery Fund -- Scudder Shares may for temporary defensive
purposes invest without limit in cash and cash equivalents. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in common stocks, preferred stocks (either
convertible or non-convertible), rights and warrants, closed end investment
companies, bonds, notes, debentures, government securities, zero coupon bonds
(any of which may be convertible or nonconvertible), foreign securities,
American Depositary Receipts, purchase securities on a when-issued or forward
delivery basis, and enter into reverse repurchase agreements, repurchase
agreements and may engage in securities lending and strategic transactions
including derivatives.
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Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity securities,
including common stocks, preferred stocks and debt securities convertible into
common stocks. 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 Global Fund may for temporary defensive purposes invest without
limit in cash and cash equivalents. It is impossible to accurately predict how
long such alternative strategies may be utilized. In addition, the Fund may
invest in warrants, zero-coupon securities, illiquid securities, reverse
repurchase agreements, repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
Scudder Greater Europe Growth Fund is a non-diversified investment company
which seeks long-term growth of capital through investments primarily in the
equity securities of European companies. Although its focus is on long-term
growth, the Fund may provide current income principally through holdings in
dividend-paying securities. The Fund will invest, under normal market
conditions, at least 80% of its total assets in the equity securities of
European companies.
The Fund defines a European company as follows:
o A company organized under the laws of a European country or for
which the principal securities trading market is in Europe; or
o A company, wherever organized, where at least 50% of the company's
non-current assets, capitalization, gross revenue or profit in its
most recent fiscal year represents (directly or indirectly through
subsidiaries) assets or activities located in Europe.
The Fund may invest, under normal market conditions, up to 20% of its
total assets in European debt securities. Within this 20% limit, the Fund may
invest in debt securities which are unrated, rated, or the equivalent of those
rated below investment-grade.
Scudder Greater Europe Growth Fund may hold foreign or U.S. debt
instruments as well as cash or cash equivalents, including foreign and domestic
money market instruments, short-term government and corporate obligations, and
repurchase agreements without limit for temporary defensive purposes and up to
20% to maintain liquidity. It is impossible to accurately predict how long such
alternative strategies may be utilized. In addition, the Fund may invest in
closed end investment companies, warrants, when-issued securities, illiquid
securities, reverse repurchase agreements, repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.
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, warrants 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 warrants, zero coupon bonds, of
companies engaged in activities relating to gold or other precious metals and
minerals; in certain debt securities, a portion of the return on which is
indexed to the price of precious metals; and, for hedging purposes, in precious
metals; and utilize various other strategic transactions. Consistent with
applicable state securities
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laws, 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
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 Gold Fund may hold cash, high quality cash equivalents (including
foreign money market instruments such as bankers' acceptances, certificates of
deposit, commercial paper, short-term government and corporate obligations, and
repurchase agreements, obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities without limit for temporary defensive purposes
and up to 30% to maintain liquidity. In addition, the Fund may invest in
warrants, foreign currencies in the form of bank deposits, short sales against
the box, illiquid securities, reverse repurchase agreements, repurchase
agreements and may engage in securities lending and strategic transactions
including derivatives.
Scudder International Fund 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
other than the U.S. 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 invest up to 5% of its total assets in debt securities which
are rated below investment-grade.
Scudder International Fund may for temporary defensive purposes invest
without limits in Canadian or U.S. Government obligations or currencies, or
securities of companies incorporated in and having their principal activities in
Canada or the U.S. It is impossible to accurately predict how long such
alternative strategies may be utilized. In addition, the Fund may invest in
warrants, trust preferred securities, fixed-income securities, illiquid
securities, reverse repurchase agreements, repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of seasoned,
financially-strong U.S. growth companies. The Fund's equity investments consist
of common stocks, preferred stocks and securities convertible into common
stocks, rights and warrants 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 Large Company Growth Fund may for temporary defensive purposes
invest without limit in cash and cash equivalents. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in warrants, foreign securities, illiquid
securities, reverse repurchase agreements, repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.
Scudder Large Company Value Fund seeks to maximize long-term capital
growth through a broad and flexible investment program. The Fund invests in
marketable securities, principally common stocks and, consistent with its
objective of long-term capital growth, 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 growth. The Fund will normally invest
at least 65% of its assets in the equity securities of large U.S. companies. 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
12
<PAGE>
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 Large Company Value Fund may for temporary defensive purposes
invest without limit in debt securities, short-term indebtedness, cash and cash
equivalents. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in rights,
warrants, convertible securities, illiquid securities, reverse repurchase
agreements, repurchase agreements and may engage in securities lending and
strategic transactions including derivatives.
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, 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 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
or S&P and may invest in securities rated C by Moody's or D by S&P.
Scudder Latin America Fund may for temporary defensive purposes invest
without limit in cash and cash equivalents and money market instruments, or in
securities of U.S. or other non-Latin American issuers. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in closed end investment companies primarily in
Latin America, warrants, loan participations and assignments, when-issued
securities, convertible securities, illiquid securities, reverse repurchase
agreements, repurchase agreements and may engage in securities lending and
strategic transactions including derivatives.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in micro-cap common stocks. The micro-cap sector represents the stocks
of America's smallest public companies -- companies with a stock market value
(or "market capitalization") of approximately $200 million or less. The
companies that normally comprise this sector include companies that may be in
the earliest stages of development, that offer unique products, services or
technologies, or that serve special or rapidly expanding niches. The fund
normally invests at least 80% of its assets in U.S. micro-cap common stocks.
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.
13
<PAGE>
Scudder Micro Cap Fund may for temporary defensive purposes invest without
limit in cash and cash equivalents. It is impossible to accurately predict how
long such alternative strategies may be utilized. In addition, the Fund may
invest in illiquid securities, reverse repurchase agreements, repurchase
agreements and may engage in securities lending and strategic transactions
including derivatives.
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
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 Pacific Opportunities Fund may for temporary defensive purposes
invest without limit in debt instruments as well as cash and cash equivalents,
including foreign and domestic money market instruments, short-term government
and corporate obligations, and repurchase agreements. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in common stock, preferred stock (either
convertible or non-convertible), depository receipts, rights, warrants, illiquid
securities, when-issued securities, reverse repurchase agreements, repurchase
agreements and may engage in securities lending and strategic transactions
including derivatives.
Scudder Small Company Value Fund pursues long-term growth of capital by
investing in undervalued stocks of small U.S. companies. The fund normally
invests at least 90% of its assets in common stocks of companies that are
similar in size to those included in the Russell 2000 index--a widely used
benchmark of small stock performance. Typically, these companies have a stock
market value of less than $1.5 billion. 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 predominately in common stocks, it can purchase
other types of equity securities including preferred stocks (convertible
securities), rights, warrants and illiquid securities. 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 Small Company Value Fund may for temporary defensive purposes
invest without limit in cash and cash equivalents. It is impossible to
accurately predict how long such alternative strategies may be utilized.
Scudder 21st Century Growth Fund pursues long-term growth of capital by
investing in emerging growth companies that have the potential to be leaders in
the next century. Emerging growth companies tend to be small or
14
<PAGE>
little-known companies that have strong prospects for growth because they may
offer such things as cutting edge products, unique services, innovative
distribution channels or technological advances. The fund normally invests at
least 80% of its assets in common stocks of companies that are similar in size
to those included in the Russell 2000 index -- a widely used benchmark of small
stock performance. Typically, these companies have a stock market value of less
than $1.5 billion. 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 in 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.
The Fund may for temporary, defensive or emergency purposes invest without
limit in cash and high quality debt securities without equity features, which
are rated Aaa, Aa or A by Moody's or AAA, AA or A by S&P, or , if unrated, are
deemed by the Adviser to be of equivalent quality, U.S. Government securities
and invest in money market instruments which are rated in the two highest
categories by Moody's or S&P or, if unrated, are deemed by the Adviser to be of
equivalent quality. It is impossible to accurately predict how long such
alternative strategies may be utilized. In addition, the Fund may invest in
shares of preferred stocks, convertible securities, rights, warrants, reverse
repurchase agreements and may engage in securities lending and strategic
transactions including derivatives.
The Fund has adopted 144a procedures for the valuation of illiquid
securities.
Value Fund -- Scudder Shares 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 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,
securities convertible into common stocks, rights and warrants. 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, reverse repurchase
agreements and may also engage in strategic transactions including derivatives
for hedging purposes and to seek to increase gain. The debt securities in which
the Fund may be invested 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.
Value Fund -- Scudder Shares may for temporary defensive purposes invest
without limit in cash and cash equivalents. It is impossible to accurately
predict how long such alternative strategies may be utilized. In addition, the
Fund may invest in illiquid securities and may engage in securities lending.
The Japan Fund is a diversified mutual fund which seeks to achieve
long-term capital appreciation by investing primarily in equity securities
(including American Depositary Receipts) of Japanese companies. Equity
securities are defined as common and preferred stock, debt securities
convertible into common stock (sometimes referred to as "convertible
debentures") and common stock purchase warrants. Under normal conditions, the
Fund will invest at least 80% of its assets in Japanese securities, that is,
securities issued by entities that are organized under the laws of Japan
("Japanese companies"), securities of affiliates of Japanese companies, wherever
organized or traded, and securities of issuers not organized under the laws of
Japan but deriving 50% or more of their revenues from Japan. These securities
may include debt securities (Japanese government debt securities and debt
securities of Japanese companies) when the Adviser believes that the potential
for capital appreciation from investment in debt securities equals or exceeds
that available from investment in equity securities. The Fund may also invest up
to 30% of its net assets in equity securities of Japanese companies which are
traded in an over-the-counter market. These are generally securities of
relatively small or little-known companies that the Adviser believes have
above-average earnings growth potential. The Fund may invest up to 20% of its
assets in cash or short-term government or other short-term prime obligations in
order to have funds readily available for general corporate purposes, including
the payment of operating expenses, dividends and redemptions, or the investment
in securities through exercise of rights or otherwise, or in repurchase
agreements. Where the Adviser determines that market or economic conditions so
warrant, the Fund may, for temporary defensive purposes, invest more than 20% of
its assets in cash or such securities. It is impossible to predict for how long
15
<PAGE>
such alternate strategies may be utilized. In addition, the Fund may invest in
illiquid securities, options, futures contracts, warrants, reverse repurchase
agreements and may engage in securities lending and strategic transactions.
If you require more detailed information about an Underlying Scudder Fund
call Scudder Investor Relations at 1-800-225-2470 to obtain the complete
prospectus and statement of additional information for that fund.
The following chart shows the Average Annual Total Returns for each of the
Underlying Scudder Funds for their most recent one-, five-, ten-year periods or
the life of fund if shorter.
<TABLE>
<CAPTION>
Assets
as of Average Annual Total Returns(1)
11/5/98
Inception (in One Five Ten
Date millions) Year Years Years Life of Fund
--------- --------- ---- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund
Scudder Cash Investment Trust 7/23/76 1,201.8 4.92% 2.77% % --
Bond Mutual Funds
Scudder Corporate Bond Fund* 8/31/98 30.1 -- -- -- --
Scudder Emerging Markets Income Fund 12/31/93 226.2 % -- -- %
Scudder Global Bond Fund 3/1/91 106.9 % % -- %
Scudder GNMA Fund 7/5/85 393.2 8.78% 6.34% 8.20% --
Scudder High Yield Bond Fund 6/28/96 190.7 3.94% -- -- 10.73%
Scudder Income Fund 5/10/28 789.2 9.00% 6.45% 8.93% --
Scudder International Bond Fund 7/1/88 148.9 0.10% 0.92% 7.61% --
Scudder Short Term Bond Fund 4/2/84 1,027.5 5.52% 4.44% 7.19% --
Equity Mutual Funds
Scudder Classic Growth Fund 9/9/96 120.4 -2.72% -- -- 19.11%
Scudder Development Fund 1/18/71 694.0 17.86% 19.93% 14.66% --
Scudder Emerging Markets Growth Fund 5/8/96 129.9 -28.54% -- -- -5.52%
Scudder Global Discovery Fund 9/10/91 325.1 % % -- %
Scudder Global Fund 7/23/86 1,601.8 14.93% 15.60% 14.18% --
Scudder Gold Fund 8/22/88 145.9 -35.45% -3.63% -1.67% --
Scudder Greater Europe Growth Fund 10/10/94 1,176.3 24.68% -- -- 22.35%
Scudder Growth and Income Fund 3/15/29 177.1 20.66% 20.53% 17.24% --
Scudder International Fund 6/15/54 2,854.6 -3.10% 8.64% 10.30% --
Scudder International Growth and Income Fund 6/5/97 52.2 1.70% -- -- -1.08%
Scudder Large Company Growth Fund 5/15/91 528.7 18.86% 17.85% -- 16.50%
Scudder Large Company Value Fund 6/6/56 2,237.4 -4.54% 12.97% 14.21 --
Scudder Latin America Fund 12/08/92 545.1 -20.23% 3.05% -- 10.30%
Scudder Micro Cap Fund 8/12/96 102.4 -13.96% -- -- 9.46%
Scudder Pacific Opportunities Fund 12/08/92 113.2 -24.16% -11.53% -- -5.15%
Scudder Small Company Value Fund 10/6/95 276.7 -8.45% -- -- 15.08%
Scudder 21st Century Growth Fund 9/9/96 34.9 -22.5% -- -- -8.31%
Scudder Value Fund 12/31/92 526.2 -2.09% 16.08% -- 16.01%
The Japan Fund 4/19/62** 363.3 -22.09% -5.01% -0.97% --
</TABLE>
(1) As of each Underlying Scudder Fund's most recent fiscal reporting period.
* Financial information will be available after the fund's initial fiscal year
ending on January 31, 1999.
** From April 19, 1962 until August 14, 1987, the Fund operated as a closed-end
diversified management investment company.
16
<PAGE>
All total return calculations assume that dividends and capital gains
distributions, if any, were reinvested. Performance figures are historical and
are not intended to indicate future investment performance.
Risk Factors of Underlying Scudder Funds
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 in the "Glossary" and further information about the
Underlying Scudder Funds is contained in the prospectuses of such funds. Because
each Portfolio invests in certain of the Underlying Scudder Funds, shareholders
of each Portfolio will be affected by these investment policies in direct
proportion to the amount of assets each Portfolio allocates to the Underlying
Scudder Funds pursuing such policies.
Investment Restrictions of the Portfolios
The policies set forth below are fundamental policies of each Portfolio
and may not be changed with respect to each of the Portfolios without the
approval of a majority of such Portfolio's outstanding shares. As used in this
combined Statement of Additional Information, a "majority of the outstanding
voting securities of a Portfolio" means the lesser of (1) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities of such Portfolio are present or represented
by proxy; or (2) more than 50% of the outstanding voting securities of such
Portfolio.
Each Portfolio has elected to be classified as a diversified series of an
open-end investment company. In addition, as a matter of fundamental policy,
each Portfolio will not:
(1) borrow money, except as permitted under the Investment Company Act
of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(3) engage in the business of underwriting securities issued by others,
except to the extent that a Portfolio may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
(4) concentrate its investments in investment companies, as the term
"concentrate" is used in the Investment Company Act of 1940, as
amended and interpreted by regulatory authority having jurisdiction
from time to time; except that each Portfolio may concentrate in an
underlying Fund. However, each Underlying Scudder Fund in which each
Portfolio will invest may concentrate its investments in a
particular industry;
(5) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the
Portfolio reserves freedom of action to hold and to sell real estate
acquired as a result of the Portfolio's ownership of securities;
(6) purchase physical commodities or contracts relating to physical
commodities; or
(7) make loans except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
Nonfundamental policies may be changed by the Trustees of the Trust
without shareholder approval. As a matter of nonfundamental policy, each
Portfolio does not currently intend to:
(a) invest in companies for the purpose of exercising management or
control.
(b) (i) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes and (ii) by engaging in
reverse repurchase agreements, entering into dollar rolls, or making
17
<PAGE>
other investments or engaging in other transactions which may be
deemed to be borrowings but are consistent with each Portfolio's
investment objective.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Portfolios.
PURCHASES
(See "Purchases" and "Transaction information" in the Portfolios'
combined prospectus.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Portfolio
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Portfolio name, amount to be wired ($2,500 minimum), name of bank
or trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Portfolio
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500 ($1,000
for fiduciary accounts such as IRAs, and custodial accounts such as Uniform Gift
to Minor Act, and Uniform Trust to Minor Act accounts), which amount may be
changed by the Board of Trustees. A shareholder may open an account with at
least $1,000 ($500 for fiduciary/custodial accounts), if an automatic investment
plan (AIP) of $100/month ($50/month for fiduciary/custodial accounts) is
established. Scudder group retirement plans and certain other accounts have
similar or lower minimum share balance requirements.
Each Portfolio reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Portfolio charge (with the fee to be paid to the
Portfolio) for any non-fiduciary/non-custodial account without an
automatic investment plan (AIP) in place and a balance of less than
$2,500; and
o redeem all shares in Portfolio accounts below $1,000 where a reduction in
value has occurred due to a redemption, exchange or transfer out of the
account. The 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. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
18
<PAGE>
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Portfolio's combined prospectus. A
confirmation of the purchase will be mailed out promptly following receipt of a
request to buy. Federal regulations require that payment be received within
three business days. If payment is not received within that time, the order is
subject to cancellation. In the event of such cancellation or cancellation at
the purchaser's request, the purchaser will be responsible for any loss incurred
by the Portfolio or the principal underwriter by reason of such cancellation. If
the purchaser is a shareholder, the Trust shall have the authority, as agent of
the shareholder, to redeem shares in the account in order to reimburse the
Portfolio or the principal underwriter for the loss incurred. Net losses on such
transactions which are not recovered from the purchaser will be absorbed by the
principal underwriter. Any net profit on the liquidation of unpaid shares will
accrue to the Portfolio.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Portfolio by telephone.
Through this service shareholders may purchase up to $250,000. To purchase
shares by QuickBuy, shareholders should call before the close of regular trading
on the New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern
time. Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the 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. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
Each Portfolio employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that each Portfolio does not follow such procedures, it may be liable for losses
due to unauthorized or fraudulent telephone instructions. A Portfolio will not
be liable for acting upon instructions communicated by telephone that it
reasonably believes to be genuine.
Checks
A certified check is not necessary, but checks are only accepted subject
to collection at full face value in U.S. funds and must be drawn on, or payable
through, a U.S. bank.
If shares of a Portfolio are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse a Portfolio or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
19
<PAGE>
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to each Portfolio prior to the close of regular trading on the
Exchange (normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge for
the service. Presently, the Distributor pays a fee for receipt by State Street
Bank and Trust Company (the "Custodian") of "wired funds," but the right to
charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may be
open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of a Portfolio.
Share Price
Purchases will be filled without sales charge at the net asset value next
computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than a
Portfolio, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Trust's management to afford ease of redemption,
certificates will not be issued to indicate ownership in a Portfolio. Share
certificates now in a shareholder's possession may be sent to the Transfer Agent
for cancellation and credit to such shareholder's account. Shareholders who
prefer may hold the certificates in their possession until they wish to exchange
or redeem such shares.
Other Information
The Portfolios have authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Portfolios' shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Portfolios' behalf. Orders for purchase or redemption will be
deemed to have been received by the Portfolio when such brokers or their
authorized designees accept the orders. Subject to the terms of the contract
between the Portfolio and the broker, ordinarily orders will be priced at the
Portfolios' net asset value next computed after acceptance by such brokers or
their authorized designees. Further, if purchases or redemptions of the
Portfolios' shares are arranged and settlement is made at an investor's election
through any other authorized NASD member, that member may, at its discretion,
charge a fee for that service. The Board of Trustees and the Distributor, also
the Portfolios' principal underwriter, each has the right to limit the amount of
purchases by, and to refuse to sell to, any person. The Trustees and the
Distributor may suspend or terminate the offering of shares of the Portfolio at
any time for any reason.
The Board of Trustees and the Distributor each has the right to limit, for
any reason, the amount of purchases by, and to refuse to, sell to any person,
and each may suspend or terminate the offering of shares of each Portfolio at
any time for any reasons.
The Tax Identification Number section of the application must be completed
when opening an account. Applications and purchase orders without a correct
certified tax identification number and certain other certified information
(e.g. from exempt organizations, certification of exempt status) will be
returned to the investor. A Portfolio also reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the Portfolio with a tax identification
number during the 30-day notice period.
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The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and Redemptions" and "Transaction Information" in the
Portfolios' combined prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Portfolio and a purchase
into another Portfolio or Scudder fund. The purchase side of the exchange may be
either an additional investment into an existing account or may involve opening
a new account in another Portfolio or Scudder fund. When an exchange involves a
new account, the new account will be established with the same registration, tax
identification number, address, telephone redemption option, "Scudder Automated
Information Line" (SAIL(TM)) transaction authorization and dividend option as
the existing account. Other features will not carry over automatically to the
new account. Exchanges to a new Portfolio or fund account must be for a minimum
of $2,500. When an exchange represents an additional investment into an existing
account, the account receiving the exchange proceeds must have identical
registration, tax identification number, address, and account options/features
as the account of origin. Exchanges into an existing account must be for $100 or
more. If the account receiving the exchange proceeds is to be different in any
respect, the exchange request must be in writing and must contain an original
signature guarantee as described under "Transaction Information -- Signature
guarantees" in a Portfolios' combined prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day will ordinarily be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund or
portfolio to an existing account in another Scudder fund or portfolio through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
No commission is charged to the shareholder for any exchange described
above. An exchange into another Portfolio or Scudder fund is a redemption of
shares and therefore may result in tax consequences (gain or loss) to the
shareholder, and the proceeds of such an exchange may be subject to backup
withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange by
telephone, automatically without having to elect it. The Trust employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Trust does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trust will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trust, the Portfolios and the Transfer Agent each reserves the
right to suspend or terminate the privilege of exchanging by telephone or fax at
any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-225-5163.
Scudder retirement plans may have different exchange requirements. Please
refer to appropriate plan literature.
Redemption By Telephone
Shareholders currently receive the right, automatically without having to
elect it, to redeem by telephone up to $100,000 and have the proceeds mailed to
their address of record. Shareholders may also request to have the proceeds
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mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA, Scudder
Profit-Sharing or Money Purchase Pension Plans, Scudder 401(k) and
Scudder 403(b) planholders) who wish to establish telephone
redemption to a predesignated bank account or who want to change the
bank account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form (available
upon request) or send a letter identifying the account and
specifying the exact information to be changed. The letter must be
signed exactly as the shareholder's name(s) appears on the account.
An original signature and an original signature guarantee are
required for each person in whose name the account is registered.
Telephone redemption is not available with respect to shares held in IRA
accounts.
If a request for a redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must
be wired through a commercial bank which is a correspondent of the
savings bank. As this may delay receipt by the shareholder's
account, it is suggested that investors wishing to use a savings
bank discuss wire procedures with their bank and submit any special
wire transfer information with the telephone redemption
authorization. If appropriate wire information is not supplied,
redemption proceeds will be mailed to the designated bank.
The Trust employs procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the Trust
does not follow such procedures, it may be liable for losses due to unauthorized
or fraudulent telephone instructions. The Trust will not be liable for acting
upon instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption requests by telephone (technically a repurchase by agreement
between a Portfolio or fund and the shareholder) of shares purchased by check
will not be accepted until the purchase check has cleared.
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of a Portfolio by telephone.
Redemptions must be for at least $250. Proceeds in the amount of your redemption
will be transferred to your bank checking account two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4:00 p.m. eastern time, shares will be redeemed at the
net asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
Each Portfolio employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
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communicated by telephone are genuine, and to discourage fraud. To the extent
that a Portfolio does not follow such procedures, it may be liable for losses
due to unauthorized or fraudulent telephone instructions. A Portfolio will not
be liable for acting upon instructions communicated by telephone that it
reasonably believes to be genuine.
Redemption by Mail or Fax
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).
It is suggested that shareholders holding shares registered in other than
individual names contact the Transfer Agent prior to any redemptions to ensure
that all necessary documents accompany the request. When shares are held in the
name of a corporation, trust, fiduciary agent, attorney or partnership, the
Transfer Agent requires, in addition to the stock power, certified evidence of
authority to sign. These procedures are for the protection of shareholders and
should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) days after receipt by the Transfer Agent of a request
for redemption that complies with the above requirements. Delays of more than
seven (7) days of payment for shares tendered for repurchase or redemption may
result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for regular
accounts. For more information call 1-800-225-5163.
Redemption-in-Kind
The Trust reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order by making
payment in whole or in part in readily marketable securities chosen by the Trust
and valued as they are for purposes of computing a Portfolios' net asset value
(a redemption-in-kind). If payment is made in securities, a shareholder may
incur transaction expenses in converting these securities into cash. The Trust
has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which each Portfolio is obligated to redeem shares, with respect to
any one shareholder during any 90-day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the relevant Portfolio at the beginning
of the period.
Other Information
Clients, officers or employees of the Adviser or of an affiliated
organization, and members of such clients', officers' or employees' immediate
families, banks and members of the NASD may direct repurchase requests to a
Portfolio through Scudder Investor Services, Inc. at Two International Place,
Boston, Massachusetts 02110-4103 by letter, telegram, TWX, or telephone. A
two-part confirmation will be mailed out promptly after receipt of the
repurchase request. A written request in good order and any certificates with
proper original signature guarantee, as described in each Portfolios' combined
prospectus under "Transaction information - Signature guarantees", should be
sent with a copy of the invoice to Scudder Funds, c/o Scudder Confirmed
Processing, Two International Place, Boston, Massachusetts 02110-4103. Failure
to deliver shares or required documents (see above) by the settlement date may
result in cancellation of the trade and the shareholder will be responsible for
any loss incurred by a Portfolio or the principal underwriter by reason of such
cancellation. Net losses on such transactions which are not recovered from the
shareholder will be absorbed by the principal underwriter. Any net gains so
resulting will accrue to the Portfolio. For this group, repurchases will be
carried out at the net asset value next computed after such repurchase requests
have been received. The arrangements described in this paragraph for
repurchasing shares are discretionary and may be discontinued at any time.
If a shareholder redeems all shares in the account after the record date
of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. The Trust does not
impose a redemption or repurchase charge, although a wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including redemptions undertaken to effect an exchange for
shares of another Portfolio or Scudder fund, may result in tax consequences
(gain or loss) to the shareholder and the proceeds of such redemptions may be
subject to backup withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts should
contact the employer, trustee or custodian of the Plan for the requirements.
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The determination of net asset value and a shareholder's right to redeem
shares and to receive payment may be suspended at times (a) during which the
Exchange is closed, other than customary weekend and holiday closings, (b)
during which trading on the Exchange is restricted for any reason, (c) during
which an emergency exists as a result of which disposal by the Portfolio of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Portfolio fairly to determine the value of its net assets,
or (d) during which the SEC by order permits a suspension of the right of
redemption or a postponement of the date of payment or of redemption; provided
that applicable rules and regulations of the SEC (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
FEATURES AND SERVICES OFFERED BY THE TRUST
(See "Investment Products and Services" in the Portfolios' combined prospectus.)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of mutual
fund fee structures, and of how Scudder distinguishes its Scudder Family of
Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for the
sale and distribution of fund shares. There are three types of loads: front-end
loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of the
amount invested. A back-end load is a contingent deferred sales charge, which
can be as high as 8.50% of either the amount invested or redeemed. The maximum
front-end or back-end load varies, and depends upon whether or not a fund also
charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds in the Scudder Family of Funds do not pay any asset-based
sales charges or service fees, Scudder developed and trademarked the phrase pure
no-load(TM) to distinguish Scudder funds from other no-load mutual funds.
Scudder pioneered the no-load concept when it created the nation's first no-load
fund in 1928, and later developed the nation's first family of no-load mutual
funds.
The following chart shows the potential long-term advantage of investing
$10,000 in a Scudder Family of Funds pure no-load fund over investing the same
amount in a load fund that collects an 8.50% front-end load, a load fund that
collects only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only
a 0.25% 12b-1 and/or service fee. The hypothetical figures in the chart show the
value of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
================================================================================
Scudder No-Load Fund
Pure No-Load(TM) 8.50% Load Load Fund with with 0.25%
Years Fund Fund 0.75% 12b-1 Fee 12b-1 Fee
- --------------------------------------------------------------------------------
10 $25,937 $23,733 $24,222 $25,354
- --------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
================================================================================
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Investors are encouraged to review the fee tables on page 8 of the
Portfolios' combined prospectus for more specific information about the rates at
which management fees and other expenses are assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability. A
section entitled "Planning Resources" provides information on asset allocation,
tuition, and retirement planning to users who fill out interactive "worksheets."
Investors can easily establish a "Personal Page," that presents price
information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties on
Prodigy since 1988 and has participated since 1994 in GALT's Networth "financial
marketplace" site on the Internet. The firm made Scudder Funds information
available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions for
an account, with trade dates, type and amount of transaction, share price and
number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Portfolio. A change of instructions for the
method of payment must be received by the Transfer Agent at least five days
prior to a dividend record date. Shareholders also may change their dividend
option either by calling 1-800-225-5163 or by sending written instructions to
the Transfer Agent. Please include your account number with your written
request. See "Investment Products and Services" in the Portfolios' prospectuses
for the address.
Reinvestment is usually made at the closing net asset value determined on
the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment
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or cash distribution of any income dividends or capital gains distributions. If
no election is made, dividends and distributions will be invested in additional
shares of a Portfolio.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after a Portfolio pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal Plan
must reinvest any dividends or capital gains. For most retirement plan accounts,
the reinvestment of dividends and capital gains is also required.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Portfolios' combined prospectus. The Centers are
designed to provide individuals with services during any business day. Investors
may pick up literature or obtain assistance with opening an account, adding
monies or special options to existing accounts, making exchanges within the
Scudder Family of Funds, redeeming shares or opening retirement plans. Checks
should not be mailed to the Centers but should be mailed to "The Scudder Funds"
at the address listed under "Investment Products and Services" in the
prospectuses.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Portfolios.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available to
shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment Products and Services" in the Portfolios' combined prospectus.)
The Scudder Family of Funds is America's first family of mutual funds and
the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current income.
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible, and declares
dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability of
capital and, consistent therewith, to maintain the liquidity of capital
and to provide current income. SCIT seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not
be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices and
with preservation of capital and liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
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Scudder Government Money Market Series seeks to provide investors with as
high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of shares
of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt from
regular federal income tax and stability of principal through investments
primarily in municipal securities. STFMF seeks to maintain a constant net
asset value of $1.00 per share, although in extreme circumstances this may
not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal income
tax by reason of federal law as is consistent with its investment policies
and with preservation of capital and liquidity. The Fund seeks to maintain
a constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value will
be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There can
be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a high
degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of income
free from regular federal income taxes and to limit principal fluctuation.
The Fund will invest primarily in high-grade, intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of interest
income, exempt from regular federal income tax, from an actively managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and regular
federal income tax. The Fund is a professionally managed portfolio
consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income taxes
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of New York municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income tax.
The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from U.S.
Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder Corporate Bond Fund seeks a high level of current income through
investment primarily in investment-grade corporate debt securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis on
current income by investing primarily in high-grade bonds denominated in
foreign currencies and the U.S. dollar. As a secondary objective, the Fund
will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As a
secondary objective, the Fund seeks protection and possible enhancement of
principal value by actively managing currency, bond market and maturity
exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current income
and, secondarily, long-term capital appreciation through investments
primarily in high-yielding debt securities issued by governments and
corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will have
some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors with
a balance of growth and income by investing in a select mix of Scudder
money market, bond and equity mutual funds.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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Scudder Pathway Series: Growth Portfolio seeks to provide investors with
long-term growth of capital. In pursuing this objective, the Portfolio
will, under normal market conditions, invest predominantly in a select mix
of Scudder equity mutual funds designed to provide long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total return
for investors. Total return consists of any capital appreciation plus
dividend income and interest. To achieve this objective, the Portfolio
invests in a select mix of established international and global Scudder
funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund also
seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity securities.
Scudder Growth and Income Fund seeks long-term growth of capital, current
income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies in
the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through investment
in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of capital
by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of capital
with reduced share price volatility compared to other growth mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of seasoned,
financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in securities of small and medium-size growth companies.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies poised
to be leaders in the 21st century.
- ----------
** Only the Scudder Shares are part of the Scudder Family of Funds.
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GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign companies
with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of
small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity securities
and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital appreciation
through investment primarily in the securities of Latin American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts) of
Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related to
the treatment or prevention of diseases and other medical problems.
- ----------
*** Only the International Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
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Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the development,
production or distribution of technology-related products or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of capital
on an after-tax basis through investment primarily in undervalued stocks
of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Transaction Information", "Purchases", and "Exchanges and Redemptions"
in the Portfolios' combined prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of each Portfolio may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Portfolios'
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of each Portfolio may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
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Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of each Portfolio may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of each Portfolio may be purchased as the underlying investment for
an Individual Retirement Account which meets the requirements of Section 408(a)
of the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples if only one spouse has
earned income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- --------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of -------------------------------------------------------------
Contributions 5% 10% 15%
- --------------------------------------------------------------------------------
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
- --------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of -------------------------------------------------------------
Contributions 5% 10% 15%
- --------------------------------------------------------------------------------
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
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Scudder Roth IRA: Individual Retirement Account
Shares of each Portfolio may be purchased as the underlying investment for
a Roth Individual Retirement Account which meets the requirements of Section
408A of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000 per
year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, excess medical expenses, the
purchase of health insurance for an unemployed individual and education
expenses.
An individual with an income of less than $100,000 (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of each Portfolio may also be purchased as the underlying
investment for tax sheltered annuity plans under the provisions of Section
403(b)(7) of the Internal Revenue Code. In general, employees of tax-exempt
organizations described in Section 501(c)(3) of the Internal Revenue Code (such
as hospitals, churches, religious, scientific, or literary organizations and
educational institutions) or a public school system are eligible to participate
in a 403(b) plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction Information -- Signature guarantees" in the
Portfolios' combined prospectus. Any such requests must be received by the
applicable Portfolio's transfer agent ten days prior to the date of the first
automatic withdrawal. An Automatic Withdrawal Plan may be terminated at any time
by the shareholder, the Trust or its agent on written notice, and will be
terminated when all shares of the Portfolio under the Plan have been liquidated
or upon receipt by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
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Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where satisfactory
arrangements have been made with Scudder Investor Services, Inc. for forwarding
regular investments through a single source. The minimum annual investment is
$240 per investor which may be made in monthly, quarterly, semiannual or annual
payments. The minimum monthly deposit per investor is $20. Except for trustees
or custodian fees for certain retirement plans, at present there is no separate
charge for maintaining group or salary deduction plans; however, the Trust and
its agents reserve the right to establish a maintenance charge in the future
depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "DISTRIBUTIONS -- Dividends and capital gains distributions"
and "Taxes" in the Portfolios' combined prospectus.)
Each Portfolio intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. Each
Portfolio may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, a Portfolio may retain all or part of such gain for reinvestment after
paying the related federal income taxes for which the shareholders may then be
asked to claim a credit against their federal income tax liability. (See
"TAXES.")
If a Portfolio does not distribute the amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, a Portfolio may be subject to that excise tax. (See "TAXES.") In certain
circumstances, a Portfolio may determine that it is in the interest of
shareholders to distribute less than the required amount.
Earnings and profits distributed to shareholders on redemptions of
Portfolio shares may be utilized by a Portfolio, to the extent permissible, as
part of the Portfolios' dividends paid deduction on its federal tax return.
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The Conservative Portfolio and the Balanced Portfolio each intend to
distribute investment company taxable income, exclusive of net short-term
capital gains in excess of net long-term capital losses, on a quarterly basis,
and distributions of net capital gains realized during the fiscal year will be
made in November or December to avoid federal excise tax, although an additional
distribution may be made within three months of its fiscal year end, if
necessary. The Conservative, Growth and International Portfolios intend to
distribute their investment company taxable income and any net realized capital
gains in November or December to avoid federal excise tax, although an
additional distribution may be made within three months of the Portfolios'
fiscal year end, if necessary.
Both types of distributions will be made in Portfolio shares and
confirmations will be mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check will be sent. Distributions of
investment company taxable income and net realized capital gains are taxable
(See "TAXES"), whether made in shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year each Portfolio issues to each shareholder a statement of
the federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
(See "PORTFOLIO SUMMARIES -- Past Performance" in
the Portfolios' combined prospectus.)
From time to time, quotations of a Portfolios' performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures will be calculated in the following manner:
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of return
for the periods of one year, five years, ten years or for the life of the
Portfolio, all ended on the last day of a recent calendar quarter. Average
annual total return quotations reflect changes in the price of a Portfolio's
shares and assume that all dividends and capital gains distributions during the
respective periods were reinvested in Portfolio shares. Average annual total
return is calculated by finding the average annual compound rates of return of a
hypothetical investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial payment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
Average Annual Total Return for the periods ended August 31, 1998
One Year Life of Portfolio(1)
-------- --------------------
Conservative Portfolio 2.05% 7.44%
Balanced Portfolio -2.84% 4.80%
Growth Portfolio -6.23% 4.16%
International Portfolio -5.22% 2.52%
(1) For the period November 15, 1996 (commencement of operations) to August 31,
1998.
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<PAGE>
Cumulative Total Return
Cumulative Total Return is the compound rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative Total Return
quotations reflect changes in the price of a Portfolio's shares and assume that
all dividends and capital gains distributions during the period were reinvested
in Portfolio shares. Cumulative Total Return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (Cumulative Total Return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
Cumulative Total Return for the periods ended August 31, 1998
One Year Life of Portfolio(1)
-------- --------------------
Conservative Portfolio 2.05% 13.73%
Balanced Portfolio -2.84% 8.76%
Growth Portfolio -6.23% 7.57%
International Portfolio -5.22% 4.56%
(1) For the period November 15, 1996 (commencement of operations) to August 31,
1998.
Quotations of each Portfolio's performance are based on historical
earnings and are not intended to indicate future performance. An investor's
shares when redeemed may be worth more or less than their original cost.
Performance of a Fund will vary based on changes in market conditions and the
level of the Portfolio's expenses. There may be quarterly periods following the
periods reflected in the performance bar chart in the Portfolio's prospectus
which may be higher or lower than those included in the bar chart.
Total Return
Total Return is the rate of return on an investment for a specified period
of time calculated in the same manner as Cumulative Total Return.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Portfolio with performance quoted with respect to other
investment companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, a Portfolio also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Examples include, but are not limited to the Dow Jones Industrial Average, the
Consumer Price Index, Standard & Poor's 500 Composite Stock Price Index (S&P
500), the Nasdaq OTC Composite Index, the Nasdaq Industrials Index, the Russell
2000 Index, the Wilshire Real Estate Securities Index and statistics published
by the Small Business Administration.
From time to time, in advertising and marketing literature, a Portfolio's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Portfolio will be compared to the
appropriate fund category, that
36
<PAGE>
is, by fund objective and portfolio holdings, or to the appropriate volatility
grouping, where volatility is a measure of a fund's risk. For instance, a
Scudder growth fund will be compared to funds in the growth fund category; a
Scudder income fund will be compared to funds in the income fund category; and
so on. Scudder funds (except for money market funds) may also be compared to
funds with similar volatility, as measured statistically by independent
organizations.
From time to time, in marketing and other Portfolio literature, Trustees
and officers of the Trust, the Portfolios' portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Portfolios. In addition, the amount of assets that the Adviser has
under management in various geographical areas may be quoted in advertising and
marketing materials.
The Portfolios may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Portfolio literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Portfolios
to other Scudder funds or broad categories of funds, such as money market, bond
or equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond funds these factors include, but are
not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both domestic
and foreign securities or a combination of bond and equity securities.
Evaluation of Portfolio performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Portfolios, including reprints of, or selections from, editorials
or articles about these Funds. Sources for Fund performance information and
articles about the Portfolios include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
37
<PAGE>
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
38
<PAGE>
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
TRUST ORGANIZATION
(See "Investment Adviser" in the Portfolios' combined prospectus.)
The Portfolios are portfolios of Scudder Pathway Series (the "Trust"), a
Massachusetts business trust established under a Declaration of Trust dated July
1, 1994. The Trust's authorized capital consists of an unlimited number of
shares of beneficial interest of $0.01 par value, all of which are of one class
and have equal rights as to voting, dividends and liquidation. The Trust is
comprised of six separate portfolios: Conservative Portfolio, Pure Income
Portfolio, Balanced Portfolio, Growth Portfolio, Pure Growth Portfolio, and
International Portfolio, all of which were organized on July 1, 1994. The Trust
currently offers four portfolios: Conservative Portfolio, Balanced Portfolio,
Growth Portfolio and International Portfolio. Each portfolio consists of an
unlimited number of shares. The Trustees have the authority to issue additional
portfolios to the Trust.
The Trustees, in their discretion, may authorize the division of shares of
a Portfolio into different classes permitting shares of different classes to be
distributed by different methods. Although shareholders of different classes of
a Portfolio would have interest in the same portfolio of assets, shareholders of
different classes may bear different
39
<PAGE>
expenses in connection with different methods of distribution. The Trust will
vote its shares in each Underlying Scudder Fund in proportion to the vote of all
other shareholders of each respective Underlying Scudder Fund.
The Declaration of Trust (the "Declaration") provides that obligations of
the Trust are not binding upon the Trustees individually but only upon the
property of the Trust, that the Trustees and officers will not be liable for
errors of judgment or mistakes of fact or law, and that the Trust, will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner provided in the
Declaration that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in the
Declaration protects or indemnifies a Trustee or officer against any liability
to which he or she would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, of reckless disregard of duties involved in the
conduct of his or her office.
INVESTMENT ADVISER
(See "Investment Adviser" in the Portfolios' prospectuses.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Portfolios. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") entered into
an agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder
and Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Adviser's income is professional fees received
from providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today, it provides investment counsel
for many individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. In addition,
it manages Montgomery Street Income Securities, Inc., Scudder California Tax
Free Trust, Scudder Cash Investment Trust, Value Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Global/International Fund, Inc., Scudder Global High
Income Fund, Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder
Institutional Fund, Inc., Scudder International Fund, Inc., Investment Trust,
Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund,
Inc., Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder Securities
Trust, Scudder State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax
Free Trust, Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment
Fund, The Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc., The
Japan Fund, Inc. and Scudder Spain and Portugal Fund, Inc. Some of the foregoing
companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual funds
which comprise the AARP Investment Program from Scudder. The AARP Investment
Program from Scudder has assets over $13 billion and includes the AARP Growth
Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed Investment
Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM)
40
<PAGE>
Program will be a customer of the Adviser (or of a subsidiary thereof) and not
the AMA or AMA Solutions, Inc. AMA InvestmentLink(SM) is a service mark of AMA
Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which each Portfolio may invest, the conclusions and
investment decisions of the Adviser with respect to the Portfolios are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for the Underlying Scudder Funds
held by each Portfolio and also for other clients advised by the Adviser.
Investment decisions for the Underlying Scudder Funds and other clients are made
with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Underlying Scudder Fund. Purchase and sale orders for the
Underlying Scudder Fund may be combined with those of other clients of the
Adviser in the interest of achieving the most favorable net results to the
Underlying Scudder Fund.
The transaction between Scudder and Zurich resulted in the assignment of
the Portfolios' investment management agreements with Scudder, those agreements
were deemed to be automatically terminated at the consummation of the
transaction. In anticipation of the transaction, however, new investment
management agreements between each of the Portfolios' and the Adviser were
approved by the Trust's Trustees on October 17, 1997. At the special meeting of
the Portfolios' shareholders held on October 23, 1997, the shareholders also
approved the investment management agreements. The investment management
agreements became effective as of December 31, 1997.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Portfolios' existing investment
management agreements with Scudder Kemper were deemed to have been assigned and,
therefore, terminated. The Board approved new investment management agreements
(the "Agreements") with Scudder Kemper, which are substantially identical to the
current investment management agreements, except for the dates of execution and
termination. These agreements became effective upon the termination of the then
current investment management agreements and were approved at a shareholder
meeting held in December 1998.
The Agreements dated September 7, 1998, were approved by the Trustees of
each Portfolio on August 12, 1998. The Agreements will continue in effect until
September 30, 1999 and from year to year thereafter only if their continuance is
approved annually by the vote of a majority of those Trustees who are not
parties to such Agreements or interested persons of the Adviser or the Trust,
cast in person at a meeting called for the purpose of voting on such approval,
and either by a vote of the Trustees or of a majority of the outstanding voting
securities of the Trust. The Agreements may be terminated at any time without
payment of penalty by either party on sixty days' written notice and
automatically terminates in the event of its assignment.
The Adviser regularly provides the Trust with continuing investment
management for the Portfolios consistent with the Portfolios' investment
objectives, policies and restrictions and determines what Underlying Scudder
Funds shall be purchased, held or sold and what portion of each Portfolio's
assets shall be held uninvested, subject to the Declaration of Trust, the 1940
Act, the Code, the Order and to the Portfolios' investment objectives, policies
and restrictions, and subject, further, to such policies and instructions as the
Board of Trustees may from time to time establish.
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<PAGE>
The Adviser provides each Portfolio with discretionary investment
services. Specifically, the Adviser is responsible for supervising and directing
the investments of each Portfolio in accordance with each Portfolio's investment
objectives, program, and restrictions as provided in the prospectus and this
Statement of Additional Information. The Adviser is also responsible for
effecting all security transactions on behalf of each Portfolio, including the
negotiation of commissions and the allocation of principal business and
portfolio brokerage. However, it should be understood that each Portfolio will
invest their assets almost exclusively in the shares of the Underlying Scudder
Funds and such investments will be made without the payment of any commission or
other sales charges. In addition to these services, the Adviser provides the
Trust with certain corporate administrative services, including: maintaining the
corporate existence, corporate records, and registering and qualifying Portfolio
shares under federal and state laws; monitoring the financial accounting, and
administrative functions of each Portfolio; maintaining liaison with the agents
employed by the Trust such as the custodian and transfer agent; assisting the
Trust in the coordination of such agents' activities; and permitting the
Adviser's employees to serve as officers, trustees, and committee members of the
Trust without cost to the Trust.
The Adviser also renders significant administrative services (not
otherwise provided by third parties) necessary for the Trust's operations as an
open-end investment company including, but not limited to, preparing reports and
notices to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Trust (such as the Trust's transfer agent, pricing agents, custodian, fund
accounting agent and others); preparing and making filings with the SEC and
other regulatory agencies; assisting in the preparation and filing of the
Trust's federal, state and local tax returns; preparing and filing the Trust's
federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of each Portfolio under applicable
federal and state securities laws; maintaining the Trust's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Trust; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Trust's operating budget;
processing the payment of the Trust's bills; assisting each Portfolio in, and
otherwise arranging for, the payment of distributions and dividends and
otherwise assisting the Trust in the conduct of its business, subject to the
direction and control of the Trustees.
The Adviser pays the compensation and expenses (except those of attending
Board and committee meetings outside New York, New York or Boston,
Massachusetts) of all Trustees, officers and executive employees of the Trust
affiliated with the Adviser and makes available, without expense to the Trust,
the services of such Trustees, officers and employees of the Adviser as may duly
be elected officers of the Trust, subject to their individual consent to serve
and to any limitations imposed by law, and provides the Trust's office space and
facilities.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning such Agreement, the Trustees of the Fund who are not
"interested persons" of the Adviser are represented by independent counsel.
Dechert Price & Rhoads acts as general counsel for the Trust.
The Agreement provides that the Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with matters to which the Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
Each Portfolio expects to operate at a zero expense level. Under the
Agreement with the Trust, and the Special Servicing Agreement, the Adviser has
agreed to bear any expenses of the Trust which exceed the estimated savings to
each of the Underlying Scudder Funds. Of course, shareholders of the Trust will
still indirectly bear their fair and proportionate share of the cost of
operating the Underlying Scudder Funds in which the Trust invests because, the
Trust, as a shareholder of the Underlying Scudder Funds, will bear its
proportionate share of any fees and expenses paid by the Underlying Scudder
Funds. The Trust, as a shareholder of the selected Underlying Scudder Funds,
will benefit only from cost-sharing reductions in proportion to its interest in
such Underlying Scudder Funds.
The range of the average weighted pro rata share of expenses borne by each
Portfolio is expected to be as follows: Conservative Portfolio, 0.15% to 1.75%,
Balanced Portfolio, 0.30% to 1.85%, Growth Portfolio, 0.71% to 1.95% and
International Portfolio, 1.06% to 2.00%.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Portfolios, has the
non-exclusive right to use and sublicense the Scudder name and marks as part of
its name, and to use the Scudder Marks in the Trust's investment products and
services.
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<PAGE>
The Adviser charges nonadvisory fees under the Agreement.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Portfolios. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
Management Fees of Underlying Scudder Funds
The Adviser has agreed not to be paid a management fee for performing its
services. However, the Adviser will receive management fees from managing the
Underlying Scudder Funds in which each Portfolio invests.
Each Underlying Scudder Fund pays the Adviser a management fee as
determined by the Investment Management Agreement between each Underlying
Scudder Fund and the Adviser. As manager of the assets of each Underlying
Scudder Fund, the Adviser directs the investments of an Underlying Scudder Fund
in accordance with each Underlying Scudder Fund's investment objective, policies
and restrictions. The Adviser determines the securities, instruments and other
contracts relating to investments to be purchased, sold or entered into by an
Underlying Scudder Fund. If an Underlying Scudder Fund's expenses, exclusive of
taxes, interest and extraordinary expenses, exceed specified limits, such excess
up to the amount of the management fee, will be paid by the Adviser.
The management fees and total operating expenses of the Underlying Scudder
Funds are as follows:
<TABLE>
<CAPTION>
Total
Expenses (%)
after
reimbursement Management
Fiscal Year Total Management and/or Fee (%)
Name of Fund End Expenses Fee (%) waiver after waiver
- ------------ ----------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Scudder Cash Investment Trust 6/30/98 0.95 0.42 0.85 0.32
Scudder Corporate Bond Fund 1/31/99 0.0 0.65* 0.0* 0.0*
Scudder Emerging Markets Income Fund 10/31/97 1.49 1.00 -- --
Scudder Global Bond Fund 10/31/97 1.39 0.75 1.00 0.36
Scudder GNMA Fund 3/31/98 1.02 0.63 -- --
Scudder High Yield Bond Fund 2/28/98 1.23 0.70 0.03 0.0
Scudder Income Fund 12/31/97 1.18 0.61 0.95 0.38
Scudder International Bond Fund 6/30/98 1.62 0.85 1.56 0.79
Scudder Short Term Bond Fund 12/31/97 0.86 0.53 -- --
Scudder Classic Growth Fund 8/31/98 1.61 0.70 1.30 0.39
Scudder Development Fund 6/30/98 1.41 0.98 -- --
Scudder Emerging Markets Growth Fund 10/31/97 2.33 1.25 2.00 0.92
Scudder Global Fund 6/30/98 1.34 0.94 -- --
Scudder Global Discovery Fund 10/31/97 1.63 1.10 -- --
Scudder Gold Fund 6/30/98 1.82 1.00 -- --
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Total
Expenses (%)
after
reimbursement Management
Fiscal Year Total Management and/or Fee (%)
Name of Fund End Expenses Fee (%) waiver after waiver
- ------------ ----------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Scudder Greater Europe Growth Fund 10/31/97 1.72 1.00 1.66 0.94
Scudder Growth and Income Fund 12/31/97 0.76 0.46 -- --
Scudder International Fund 3/31/98 1.18 0.81 -- --
Scudder International Growth and Income Fund 2/28/98 2.65 1.00 1.75 0.10
Scudder Large Company Growth Fund 10/31/97 1.21 0.70 -- --
Scudder Large Company Value Fund 9/30/98 0.88 0.63 -- --
Scudder Latin America Fund 10/31/97 1.89 1.25 -- --
Scudder Micro Cap Fund 8/31/98 1.39 0.75
Scudder Pacific Opportunities Fund 10/31/97 1.94 1.10 -- --
Scudder Small Company Value Fund 8/31/98 1.39 0.75 -- --
Scudder 21st Century Growth Fund 8/31/98 2.17 1.00 1.75 0.58
Scudder Value Fund 9/30/98 1.23 0.70
The Japan Fund, Inc. 12/31/97 1.21 0.77 -- --
</TABLE>
*Estimates for the fiscal year ending January 31, 1999.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Portfolios' custodian bank. It is
the Adviser's opinion that the terms and conditions of those transactions which
have occurred were not influenced by existing or potential custodial or other
Trust relationships.
The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Portfolios that may have different
distribution arrangements or expenses, which may affect performance.
None of the officers or Trustees may have dealings with the Trust as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of the Trust.
SPECIAL SERVICING AGREEMENT
The Special Servicing Agreement (the "Service Agreement") was entered into
among the Adviser, the Underlying Scudder Funds, Scudder Service Corporation,
Scudder Fund Accounting Corporation, Scudder Investor Services, Inc., Scudder
Trust Company and the Trust. Under the Service Agreement, the Adviser arranges
for all services pertaining to the operation of the Trust including the services
of Scudder Service Corporation and Scudder Fund Accounting Corporation to act as
Shareholder Servicing Agent and Fund Accounting Agent, respectively, for each
Portfolio. In addition, the Service Agreement provides that, if the officers of
any Underlying Scudder Fund, at the direction of the Board of
Directors/Trustees, 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 that
Portfolio. No Underlying Scudder Fund will bear such expenses in excess of the
estimated savings to it. Such savings are expected to result primarily from the
elimination of numerous separate shareholder accounts which are or would have
been invested directly in the Underlying Scudder Funds and the resulting
reduction in shareholder servicing costs. In this regard, the shareholder
servicing costs to any Underlying Scudder Fund for servicing one account
registered to the Trust would be significantly less than the cost to that same
Underlying Scudder Fund of servicing the same pool of assets contributed in the
typical fashion by a large group of individual shareholders owning small
accounts in each Underlying Scudder Fund.
Based on actual expense data from the Underlying Scudder Funds and certain
very conservative assumptions with respect to the Trust, the Adviser, the
Underlying Scudder Funds, Scudder Service Corporation, Scudder Investor
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<PAGE>
Services, Inc., Scudder Fund Accounting Corporation, Scudder Trust Company and
the Series anticipate that the aggregate financial benefits to the Underlying
Scudder Funds from these arrangements will exceed the costs of operating the
Portfolios. If such turns out to be the case, there will be no charge to the
Trust for the services under the Service Agreement. Rather, in accordance with
the Service Agreement, such expenses will be passed through to the Underlying
Scudder Funds in proportion to the value of each Underlying Scudder Fund's
shares held by each 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, as set forth herein, determined
to be greater than the benefits. The determination of whether and the extent to
which the benefits to the Underlying Scudder Funds from the organization of the
Trust will exceed the costs to such funds will be made based upon the analysis
criteria set forth in the Order. This cost-benefit analysis was initially
reviewed by the Directors/Trustees of the Underlying Scudder Funds before
participating in the Service Agreement. For future years, there will be an
annual review of the Service Agreement to determine its continued
appropriateness for each Underlying Scudder Fund.
Certain non-recurring and extraordinary expenses will not be paid in
accordance with the Service Agreement including: the fees and costs of actions,
suits or proceedings and any penalties or damages in connection therewith, to
which the Trust and/or a Portfolio may incur directly, or may incur as a result
of its legal obligation to provide indemnification to its officers, director and
agents; the fees and costs of any governmental investigation and any fines or
penalties in connection therewith; and any federal, state or local tax, or
related interest penalties or additions to tax, incurred, for example, as a
result of the Trusts' failure to distribute all of its earnings, failure to
qualify under subchapter M of the Internal Revenue Code, or failure to timely
file any required tax returns or other filings; the 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 the fees for registering or
qualifying securities for sale; the fees and expenses of Trustees, officers and
employees of a Portfolio who are not affiliated with the Adviser; the cost of
printing and distributing reports and notices to shareholders; and fees of
disbursements of custodians. Under unusual circumstances, the parties to the
Service Agreement may agree to exclude certain other expenses.
Certain Underlying Scudder Funds impose a fee upon the redemption or
exchange of shares held for 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. Each
such 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, the Portfolios 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 the 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.
TRUSTEES AND OFFICERS
Position with
Underwriter,
Scudder
Investor
Position Services,
Name, Age and Address with Trust Principal Occupation** Inc.
- --------------------- ---------- ---------------------- -------------
Daniel Pierce+ (64) President Managing Director of --
Scudder Kemper
Investments, Inc.
Dr. Rosita P. Chang (44) Trustee Professor of Finance, --
PACAP Research Center University of Rhode
College of Business Island
Administration
University of Rhode Island
7 Lippitt Rd.
Kingston, RI 02881-0802
Edgar R. Fiedler*@ (69) Trustee Senior Fellow and --
50023 Brogden Economic Counselor,
Chapel Hill, NC 27514 The Conference Board,
Inc.
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<PAGE>
Position with
Underwriter,
Scudder
Investor
Position Services,
Name, Age and Address with Trust Principal Occupation** Inc.
- --------------------- ---------- ---------------------- -------------
Peter B. Freeman@ (66) Trustee Corporate Director --
100 Alumni Avenue and Trustee
Providence, RI 02906
Dr. J. D. Hammond@ (65) Trustee Dean, Smeal College --
801 Business of Business
Administration Building Administration,
Pennsylvania State Pennsylvania State
University University
University Park, PA 16801
Richard M. Hunt (72) Trustee University Marshal --
University Marshal's Office and Senior Lecturer,
Wadsworth House Harvard University
1341 Massachusetts Avenue
Harvard University
Cambridge, MA 02138
Thomas W. Joseph+ (59) Vice President Senior Vice President Vice
of Scudder Kemper President,
Investments, Inc. Treasurer,
Assistant
Clerk and
Director
Ann M. McCreary# (48) Vice President Managing Director of --
Scudder Kemper
Investments, Inc.
Thomas F. McDonough+ (51) Vice President Senior Vice President Clerk
and Secretary of Scudder Kemper
Investments, Inc.
Kathryn L. Quirk# (46) Vice President Managing Director of Director,
and Assistant Scudder Kemper Senior Vice
Secretary Investments, Inc. President and
Assistant
Clerk
John R. Hebble+ (40) Treasurer Senior Vice President --
of Scudder Kemper
Investments, Inc.
Caroline Pearson+ (36) Assistant Senior Vice President --
Secretary of Scudder Kemper
Investments, Inc.;
Associate, Dechert
Price & Rhoads (law
firm) 1989 - 1997
* Trustee considered by the Trust and its counsel to be an "interested
person" (as defined in the 1940 Act) of the Trust or of its investment
manager because of their employment by the Investment Manager and, in some
cases, holding offices with the Trust. Although Mr. Fiedler is currently
not an "interested person," he may be deemed to be so in the future by the
Commission because of his prior service as a director of Zurich American
Insurance Company, a subsidiary of Zurich. Mr. Fiedler resigned from that
position in July 1997 and has had no further affiliation with Zurich or
any of its subsidiaries since that date.
** Unless otherwise stated, all officers and Trustees have been associated
with their respective companies for more than five years, but not
necessarily in the same capacity.
@ Messrs. Fiedler, Freeman and Hammond are members of the Executive
Committee which may exercise substantially all of the powers of the Board
of Trustees when it is not in session.
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+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
As of November 30, 1998, 1,454,659 shares in the aggregate, 7.82% of the
outstanding shares of Scudder Pathway Balanced Portfolio were held in the name
of Scudder Kemper Investments, Inc Trustee, Scudder Defined Benefit Plan &
Trust, 345 Park Avenue, New York, NY 10154, who may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of November 30, 1998, 310,311 shares in the aggregate, 12.98% of the
outstanding shares of Scudder Pathway Conservative Portfolio, were held in the
name of Trustees of the ACR Defined Contribution Retirement Plan & Trust, 747
Locus Street, Pasadena, CA 91101, who may be deemed to be the beneficial owner
of certain of these shares, but disclaims any beneficial ownership therein.
As of November 30, 1998, 245,338 shares in the aggregate, 10.26% of the
outstanding shares of Scudder Pathway Conservative Portfolio, were held in the
name of Scudder Trust Company Trustee, Ithaca Industries Inc., Employee
Retirement Savings Plan Trust, Attn. Steve Propst, Hwy. 268 West, P.O. Box 620,
Wilkeboro, NC 28697 , who may be deemed to be the beneficial owner of certain of
these shares, but disclaims any beneficial ownership therein.
To the best of the Trust's knowledge, as of November 30, 1998, no person
owned beneficially more than 5% of any Portfolios' outstanding shares, except as
stated above.
All Trustees and officers as a group on November 30, 1998 owned
beneficially (as that term is defined under Section 13(d) of the Securities
Exchange Act) 56,954 shares or 1.03% of the shares of Growth Portfolio, 13,897
shares or 2.00% of the shares of International Portfolio, and less than 1% of
the shares of Balanced Portfolio and Conservative Portfolio outstanding on such
date.
REMUNERATION
The Trust pays no direct remuneration to any officer of the Trust.
However, several of the officers and Trustees of the Trust may be officers or
Directors of the Adviser, Scudder Service Corporation, Scudder Trust Company,
Scudder Investor Services, Inc. or of Scudder Fund Accounting Corporation and
participate in the fees paid by the Underlying Scudder Funds. Each Underlying
Scudder Fund pays their disinterested Trustees/Directors an annual
trustees'/directors' fee plus a proportionate share of travel and other expenses
incurred in attending Board meetings of the Underlying Scudder Fund on which he
or she serves.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc., Two International Place, Boston, MA 02110 (the "Distributor"), a
Massachusetts corporation, which is a subsidiary of the Adviser, a Delaware
corporation. The Trust's underwriting agreement dated September 7, 1998 will
remain in effect until September 30, 1999 and from year to year thereafter only
if its continuance is approved annually by a majority of the members of the
Board of Trustees who are not parties to such agreement or interested persons of
any such party and either by vote of a majority of the Board of Trustees or a
majority of the outstanding voting securities of the Trust. The underwriting
agreement was approved by the Trustees on August 12, 1998.
Under the underwriting agreement, the Distributor is not responsible for:
the payment of all fees and expenses in connection with the preparation and
filing with the SEC of its registration statement and prospectus and any
amendments and supplements thereto; the registration and qualification of shares
for sale in the various states, including registering the Trust as a broker or
dealer in various states as required; the fees and expenses of preparing,
printing and mailing prospectuses annually to existing shareholders (see below
for expenses relating to prospectuses paid by the Distributor); notices, proxy
statements, reports or other communications to shareholders of each Portfolio;
the cost of printing and mailing confirmations of purchases of shares and any
prospectuses accompanying such confirmations; any issuance taxes and/or any
initial transfer taxes; a portion of shareholder toll-free telephone charges and
expenses of shareholder service representatives; the cost of wiring funds for
share purchases and redemptions (unless paid by the shareholder who initiates
the transaction); the cost of printing and postage of business reply envelopes;
and a portion of the cost of computer terminals used by both the Trust and the
Distributor. Such fees will be borne by the Underlying Scudder Funds (or the
Adviser) under the Service Agreement.
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<PAGE>
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of Portfolio shares
to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of Portfolio shares to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by a Portfolio, unless a Rule 12b-1 Plan is in effect
which provides that a Portfolio shall bear some or all of such expenses.
Note: Although the Portfolios do not currently have a 12b-1 Plan, a
Portfolio would also pay those fees and expenses permitted to be
paid or assumed by the Portfolio pursuant to a 12b-1 Plan, if any,
were adopted by the Portfolio, notwithstanding any other provision
to the contrary in the underwriting agreement.
As agent, the Distributor currently offers shares of the Portfolios on a
continuous basis to investors in all states in which shares of the Portfolios
may from time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of a Portfolio.
TAXES
(See "DISTRIBUTIONS -- Dividends and Capital Gains Distributions"
and "Taxes" in the Portfolios' combined prospectuses.)
Taxation of the Portfolios and Their Shareholders
Each Portfolio intends to qualify annually and elects to be treated as a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, each Portfolio is required to distribute to its shareholders
at least 90 percent of its investment company taxable income (including net
short-term capital gain) and generally is not subject to federal income tax to
the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code.
If for any taxable year a Portfolio does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions, would be taxable to shareholders to the extent of
current accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations in the case of corporate
shareholders.
Each Portfolio is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of each Portfolio's ordinary income for the calendar
year, at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) realized during the one-year period
ending October 31 during such year, and all ordinary income and capital gains
for prior years that were not previously distributed.
Investment company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of a Portfolio. Presently,
each Portfolio has no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, the
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim a proportionate
share of federal income taxes paid by the Portfolio on such gains as a credit
against the shareholder's federal income tax liability, and will be entitled to
increase the adjusted tax basis of the shareholder's Portfolio shares by the
difference between the shareholder's pro rata share of such gains and the
shareholder's tax credit. If a Portfolio makes such an election, it may not be
treated as having met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
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<PAGE>
To the extent that an Underlying Scudder Fund derives dividends from
domestic corporations, a portion of the income distributions of a Portfolio
which invests in that Fund may be eligible for the 70% deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares held by Underlying Scudder Fund with respect to which the
dividends are received are treated as debt-financed under federal income tax law
and is eliminated if either those shares or the shares of the Underlying Scudder
Fund or the Portfolio are deemed to have been held by the Underlying Scudder
Fund, the Portfolio or the shareholders, as the case may be, for less than 46
days during the 90-day period beginning 45 days before the shares become
ex-dividend.
Income received by an Underlying Scudder Fund from sources within a
foreign country may be subject to withholding and other taxes imposed by that
country. If more than 50% of the value of an Underlying Scudder Fund's total
assets at the close of its taxable year consists of stock or securities of
foreign corporations, the Underlying Scudder Fund will be eligible and may elect
to "pass-through" to its shareholders, including a Portfolio, the amount of such
foreign income and similar taxes paid by the Underlying Scudder Fund. Pursuant
to this election, the Portfolio would be required to include in gross income (in
addition to taxable dividends actually received), its pro rata share of foreign
income and similar taxes and to deduct such amount in computing its taxable
income or to use it as a foreign tax credit against its U.S. federal income
taxes, subject to limitations. A Portfolio, would not, however, be eligible to
elect to "pass-through" to its shareholders the ability to claim a deduction or
credit with respect to foreign income and similar taxes paid by the Underlying
Scudder Fund.
Properly designated distributions of the excess of net long-term capital
gain over net short-term capital loss are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of a Portfolio have
been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares, including exchanges for shares of
another Scudder Fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution of up to
$2,000 or, if less, the amount of the individual's earned income for any taxable
year only if (i) neither the individual nor his or her spouse (unless filing
separate returns) is an active participant in an employer's retirement plan, or
(ii) the individual (and his or her spouse, if applicable) has an adjusted gross
income below a certain level ($40,050 for married individuals filing a joint
return, with a phase-out of the deduction for adjusted gross income between
$40,050 and $50,000; $25,050 for a single individual, with a phase-out for
adjusted gross income between $25,050 and $35,000). However, an individual not
permitted to make a deductible contribution to an IRA for any such taxable year
may nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,000 per individual for married couples if only one spouse has earned income)
for that year. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by a Portfolio result in a reduction in the net asset value
of the Portfolio's shares. Should a distribution reduce the net asset value
below a shareholder's cost basis, such distribution would nevertheless be
taxable to the shareholder as ordinary income or capital gain as described
above, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax implications
of buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
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<PAGE>
Each Portfolio will be required to report to the Internal Revenue Service
("IRS") all distributions of investment company taxable income and capital gains
as well as gross proceeds from the redemption or exchange of Portfolio shares,
except in the case of certain exempt shareholders. Under the backup withholding
provisions of Section 3406 of the Code, distributions of investment company
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Portfolio is
notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Shareholders of a Portfolio may be subject to state and local taxes on
distributions received from the Portfolio and on redemptions of the Portfolio's
shares.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. corporations, partnerships, trusts and estates. Each shareholder who is
not a U.S. person should consider the U.S. and foreign tax consequences of
ownership of shares of a Portfolio, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of 30% (or at a
lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Taxation of the Underlying Scudder Funds
Each Underlying Scudder Fund intends to qualify annually and elects to be
treated as a regulated investment company under Subchapter M of the Code. In any
year in which an Underlying Scudder Fund qualifies as a regulated investment
company and timely distributes all of its taxable income, the Fund generally
will not pay any federal income or excise tax.
Distributions of an Underlying Scudder Fund's investment company taxable
income are taxable as ordinary income to a Portfolio which invests in the Fund.
Distributions of the excess of an Underlying Scudder Fund's net long-term
capital gain over its net short-term capital loss, which are properly designated
as "capital gain dividends," are taxable as long-term capital gain to a
Portfolio which invests in the Fund, regardless of how long the Portfolio held
the Fund's shares, and are not eligible for the corporate dividends-received
deduction. Upon the sale or other disposition by a Portfolio of shares of an
Underlying Scudder Fund, the Portfolio generally will realize a capital gain or
loss which will be long-term or short-term, generally depending upon the
Portfolio's holding period for the shares.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of addition al information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
Each Portfolio's average annual portfolio turnover rate is the ratio of
the lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. Purchases and
sales are made for each Portfolio whenever necessary, in management's opinion,
to meet that Portfolio's objective.
Each Portfolio is expected to operate at a zero expense ratio. To
accomplish this, the payment of a Portfolio's expenses is subject to the Service
Agreement and certain provisions mentioned in the Agreement with the Adviser.
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Underlying Scudder Fund Portfolio Turnover Rate (%)(1)
- ----------------------- ------------------------------
Scudder Cash Investment Trust(2) n/a
Scudder Corporate Bond Fund(3) --
Scudder Emerging Markets Income Fund
Scudder Global Bond Fund
Scudder GNMA Fund 316.5*
Scudder High Yield Bond Fund 123.93*
Scudder Income Fund 138.2*
Scudder International Bond Fund 190.1
Scudder Short Term Bond Fund 152.2*
Scudder Classic Growth Fund 48.5
Scudder Development Fund 52.4
Scudder Emerging Markets Growth Fund
Scudder Global Fund 51.3
Scudder Global Discovery Fund
Scudder Gold Fund 68.3
Scudder Greater Europe Growth Fund
Scudder Growth and Income Fund 40.6*
Scudder International Fund 64.0*
Scudder International Growth and Income Fund 74.2*
Scudder Large Company Growth Fund
Scudder Large Company Value Fund 39.5
Scudder Latin America Fund
Scudder Micro Cap Fund 33.5
Scudder Pacific Opportunities Fund
Scudder Small Company Value Fund 22.6
Scudder 21st Century Growth Fund 119.8
Scudder Value Fund 47.0
The Japan Fund 89.2*
- ------------------------------
(1) As of each Underlying Scudder Fund's most recent fiscal reporting period.
(2) Scudder Cash Investment Trust is a money market fund.
(3) Financial information will be available after the fund's initial fiscal year
ending on January 31, 1999.
* Annualized
NET ASSET VALUE
The net asset value of Portfolio shares is computed as of the close of
regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value
per share is determined by dividing the value of the total assets of a
Portfolio, less all liabilities, by the total number of shares outstanding.
The net asset value of each Underlying Scudder Fund is determined based
upon the nature of the securities as set forth in the prospectus and statement
of additional information of such Underlying Scudder Fund. Shares of each
Underlying Scudder Fund in which a Portfolio may invest are valued at the net
asset value per share of each Underlying Scudder Fund as of the close of regular
trading on the Exchange on each day the Exchange is open for trading. The net
asset value per share of the Underlying Scudder Funds will be calculated and
reported to a Portfolio by each Underlying Scudder Fund's accounting agent.
Short-term securities with a remaining maturity of sixty days or less are valued
by the amortized cost method.
If, in the opinion of a Portfolio's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Portfolio is
determined in a manner
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<PAGE>
which, in the discretion of the Valuation Committee, most fairly reflects fair
market value of the property on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of each Portfolio included in the prospectus and
the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, One Post Office Square,
Boston, Massachusetts 02109, independent accountants, and given on the authority
of that firm as experts in accounting and auditing. PricewaterhouseCoopers, LLP
is responsible for performing annual audits of the financial statements and
financial highlights of each Portfolio in accordance with generally accepted
auditing standards, and the preparation of federal tax returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a Massachusetts
business trust. Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the Trust. The Declaration of Trust contains an express disclaimer of
shareholder liability in connection with each Portfolio's property or the acts,
obligations or affairs of the Trust. The Declaration of Trust also provides for
indemnification out of a Portfolio's property of any shareholder held personally
liable for the claims and liabilities which a shareholder may become subject by
reason of being or having been a shareholder. Thus, the risk of a shareholders
incurring financial loss on account of shareholder liability is limited to
circumstances in which a Portfolio itself would be unable to meet its
obligations.
Other Information
Many of the investment changes in a Portfolio will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Portfolio. These transactions will reflect
investment decisions made by the Adviser in light of the objective and policies
of the particular Portfolio, and other factors such as its other portfolio
holdings and tax considerations, and should not be construed as recommendations
for similar action by other investors.
The name "Scudder Pathway Series" is the designation of the Trustees for
the time being under a Declaration of Trust dated July 1, 1994, as amended from
time to time, and all persons dealing with a Portfolio must look solely to the
property of the Portfolio for the enforcement of any claims against the
Portfolio as neither the Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Portfolio. No
series of the Trust shall be liable for the obligations of any other series.
Upon the initial purchase of shares, the shareholder agrees to be bound by the
Trust's Declaration of Trust, as amended from time to time. The Declaration of
Trust is on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts.
The CUSIP number of the Conservative Portfolio is 811189-30-7.
The CUSIP number of the Balanced Portfolio is 811189-50-5.
The CUSIP number of the Growth Portfolio is 811189-20-8.
The CUSIP number of the International Portfolio is 811189-60-4.
Each Portfolio has a fiscal year end of August 31.
The prospectuses of each of the Portfolios are combined in this prospectus
and Statement of Additional Information. Each Portfolio offers only its own
shares, yet it is possible that a Portfolio might become liable for a
misstatement or omission regarding another Portfolio. The Trustees of the Trust
have considered this and approved the use of a combined prospectus and Statement
of Additional Information.
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<PAGE>
The Series employs State Street Bank and Trust Company as Custodian. State
Street Bank and Trust Company maintains shares of the Underlying Scudder Funds
in the book entry system of such funds' transfer agent, Scudder Service
Corporation.
The firm of Dechert Price & Rhoads is counsel to the Trust.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts, 02107-2291, a subsidiary of the Adviser, is the transfer
and dividend disbursing agent for the Trust. Service Corporation also serves as
shareholder service agent and provides subaccounting and recordkeeping services
for shareholder accounts in certain retirement and employee benefit plans.
The Portfolios, or the Adviser (including any affiliate of the Adviser),
or both, may pay unaffiliated third parties for providing recordkeeping and
other administrative services with respect to accounts of participants in
retirement plans or other beneficial owners of Portfolio shares whose interests
are held in an omnibus account.
The Portfolios' combined prospectus and this combined Statement of
Additional Information omit certain information contained in the Registration
Statement which the Trust has filed with the SEC under the Securities Act of
1933 and reference is hereby made to the Registration Statement for further
information with respect to the Portfolios and the securities offered hereby.
This Registration Statement and its amendments are available for inspection by
the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolios of Scudder
Pathway Series, together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements are incorporated herein by
reference and are hereby deemed to be part of this Statement of Additional
Information.
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GLOSSARY
Prospective investors should consider certain Underlying Scudder Funds may
engage in the following investment practices.
Strategic Transactions and Derivatives. Certain Underlying Scudder Funds may,
but are 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 an
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 part of modern portfolio management and are
regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the 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.") Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Underlying Scudder Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Underlying Scudder Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of fixed-income securities in the Underlying Scudder Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. Some Strategic
Transactions may also be used to enhance potential gain although no more than 5%
of the Underlying Scudder Fund's assets will be committed to Strategic
Transactions entered into for non-hedging purposes. Any or all of these
investment techniques may be used at any time and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Underlying Scudder Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Underlying
Scudder Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not to create leveraged exposure in the Fund.
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 the
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 amount
of appreciation the Underlying Scudder Fund can realize on its investments or
cause the 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 the Underlying Scudder Fund creates the possibility that
losses on the hedging instrument may be greater than gains in the value of the
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, the Underlying Scudder Fund might
not be able to close out a transaction without incurring substantial losses, if
at all. Although the use of futures and options transactions for hedging should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain which might
result from an increase in value of such position. Finally, the daily variation
margin requirements for futures contracts would create a greater ongoing
potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized.
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General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Underlying Scudder Fund assets in special
accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, an Underlying Scudder Fund's purchase of a put option on a
security might be designed to protect its holdings in the underlying instrument
(or, in some cases, a similar instrument) against a substantial decline in the
market value by giving an Underlying Scudder Fund the right to sell such
instrument at the option exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller the
obligation to sell, the underlying instrument at the exercise price. An
Underlying Scudder Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect an
Underlying Scudder Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. An Underlying Scudder Fund is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
An Underlying Scudder Fund's ability to close out its position as a
purchaser or seller of an OCC or exchange listed put or call option is
dependent, in part, upon the liquidity of the option market. Among the possible
reasons for the absence of a liquid option market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities including reaching daily price limits; (iv) interruption
of the normal operations of the OCC or an exchange; (v) inadequacy of the
facilities of an exchange or OCC to handle current trading volume; or (vi) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the relevant market for
that option on that exchange would cease to exist, although outstanding options
on that exchange would generally continue to be exercisable in accordance with
their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. An
Underlying Scudder Fund will only sell OTC options (other than OTC currency
options) that are subject to a buy-back provision permitting the Underlying
Scudder Fund to require the Counterparty to sell the option back to the
Underlying Scudder Fund at a formula price within seven days. An Underlying
Scudder Fund expects generally to enter into OTC options that have cash
settlement provisions, although not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with an Underlying Scudder Fund or fails to
make a cash settlement payment due in accordance with the terms of that option,
an Underlying Scudder Fund will lose any premium it paid for the option as well
as any
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anticipated benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. An Underlying Scudder Fund will
engage in OTC option transactions only with U.S. government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers" or
broker/dealers, domestic or foreign banks or other financial institutions which
have received (or the guarantors of the obligation of which have received) a
short-term credit rating of A-1 from S&P or P-1 from Moody's or an equivalent
rating from any nationally recognized statistical rating organization ("NRSRO")
or, in the case of OTC currency transactions, are determined to be of equivalent
credit quality by the Adviser. The staff of the SEC currently takes the position
that OTC options purchased by an Underlying Scudder Fund, and portfolio
securities "covering" the amount of an Underlying Scudder Fund's obligation
pursuant to an OTC option sold by it (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to an Underlying
Scudder Fund's limitation on investing no more than 15% of its assets in
illiquid securities.
If an Underlying Scudder Fund sells a call option, the premium that it
receives may serve as a partial hedge, to the extent of the option premium,
against a decrease in the value of the underlying securities or instruments in
its portfolio or will increase an Underlying Scudder Fund's income. The sale of
put options can also provide income.
An Underlying Scudder Fund may purchase and sell call options on
securities including U.S. Treasury and agency securities, mortgage-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by an Underlying
Scudder Fund must be "covered" (i.e., an Underlying Scudder Fund must own the
securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though an Underlying Scudder Fund will receive the option premium to help
protect it against loss, a call sold by an Underlying Scudder Fund exposes an
Underlying Scudder Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require an Underlying Scudder Fund to hold a
security or instrument which it might otherwise have sold.
An Underlying Scudder Fund may purchase and sell put options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
foreign sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. An Underlying Scudder Fund will not sell put options if, as a
result, more than 50% of an Underlying Scudder Fund's assets would be required
to be segregated to cover its potential obligations under such put options other
than those with respect to futures and options thereon. In selling put options,
there is a risk that an Underlying Scudder Fund may be required to buy the
underlying security at a disadvantageous price above the market price.
General Characteristics of Futures. Certain Underlying Scudder Funds may enter
into financial futures contracts or purchase or sell put and call options on
such futures as a hedge against anticipated interest rate, currency or equity
market changes, for duration management and for risk management purposes.
Futures are generally bought and sold on the commodities exchanges where they
are listed with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by an Underlying Scudder
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such position.
An Underlying Scudder Fund's use of financial futures and options thereon
will in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading Commission
and will be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires an
Underlying Scudder Fund to deposit with a financial intermediary as security for
its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited thereafter on a daily basis as the mark
to market value of the contract fluctuates. The purchase of an option on
financial futures involves payment of a premium for the option without any
further obligation on the part of an Underlying Scudder Fund. If an Underlying
Scudder Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position.
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Futures contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
An Underlying Scudder Fund will not enter into a futures contract or
related option (except for closing transactions) if, immediately thereafter, the
sum of the amount of its initial margin and premiums on open futures contracts
and options thereon would exceed 5% of an Underlying Scudder Fund's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The segregation requirements with respect to
futures contracts and options thereon are described below.
Options on Securities Indices and Other Financial Indices. Certain Underlying
Scudder Funds also may purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
Currency Transactions. Certain Underlying Scudder Funds may engage in currency
transactions with Counterparties in order to hedge the value of portfolio
holdings denominated in particular currencies against fluctuations in relative
value. Currency transactions include forward currency contracts, exchange listed
currency futures, exchange listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. An Underlying Scudder Fund may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations of which have received) a credit rating of A-1 or P-1 by S&P
or Moody's, respectively, or that have an equivalent rating from a NRSRO or are
determined to be of equivalent credit quality by the Adviser.
An Underlying Scudder Fund's dealings in forward currency contracts and
other currency transactions such as futures, options, options on futures and
swaps will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is entering into a currency transaction
with respect to specific assets or liabilities of an Underlying Scudder Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
An Underlying Scudder Fund will not enter into a transaction to hedge
currency exposure to an extent greater, after netting all transactions intended
wholly or partially to offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held in
its portfolio that are denominated or generally quoted in or currently
convertible into such currency, other than with respect to proxy hedging or
cross hedging as described below.
An Underlying Scudder Fund may also cross-hedge currencies by entering
into transactions to purchase or sell one or more currencies that are expected
to decline in value relative to other currencies to which an Underlying Scudder
Fund has or in which an Underlying Scudder Fund expects to have portfolio
exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, an Underlying Scudder Fund may
also engage in proxy hedging. Proxy hedging is often used when the currency to
which an Underlying Scudder Fund's portfolio is exposed is difficult to hedge or
to hedge against the dollar. Proxy hedging entails entering into a forward
contract to sell a currency whose changes in value are generally considered to
be linked to a currency or currencies in which some or all of an Underlying
Scudder Fund's portfolio securities are or are expected to be denominated, and
to buy U.S. dollars. The amount of the contract would not exceed the value of an
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Underlying Scudder Fund's securities denominated in linked currencies. For
example, if the Adviser considers that the Austrian schilling is linked to the
German deutschemark (the "D-mark"), an Underlying Scudder Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to an Underlying Scudder Fund if the currency
being hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that an Underlying Scudder Fund is engaging in proxy hedging. If
an Underlying Scudder Fund enters into a currency hedging transaction, an
Underlying Scudder Fund will comply with the asset segregation requirements
described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to an Underlying Scudder Fund if it is unable to deliver or receive
currency or funds in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Combined Transactions. Certain Underlying Scudder Funds may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts) and multiple interest rate transactions and any combination of
futures, options, currency and interest rate transactions ("component"
transactions), instead of a single Strategic Transaction, as part of a single or
combined strategy when, in the opinion of the Adviser, it is in the best
interests of an Underlying Scudder Fund to do so. A combined transaction will
usually contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into based on
the Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase such risks or hinder
achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
certain Underlying Scudder Funds may enter are interest rate, currency and index
swaps and the purchase or sale of related caps, floors and collars. An
Underlying Scudder Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities an
Underlying Scudder Fund anticipates purchasing at a later date. An Underlying
Scudder Fund intends to use these transactions as hedges and not as speculative
investments and will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream an Underlying
Scudder Fund may be obligated to pay. Interest rate swaps involve the exchange
by an Underlying Scudder Fund with another party of their respective commitments
to pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal. A currency
swap is an agreement to exchange cash flows on a notional amount of two or more
currencies based on the relative value differential among them and an index swap
is an agreement to swap cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
An Underlying Scudder Fund will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with an Underlying Scudder Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors and collars are entered into for
good faith hedging purposes, the Adviser and an Underlying Scudder Fund believe
such obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to its borrowing restrictions.
An Underlying Scudder Fund will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction, the unsecured
long-term debt of the Counterparty, combined with any credit enhancements, is
rated at least A by S&P or Moody's or has an equivalent rating from a
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NRSRO or is determined to be of equivalent credit quality by the Adviser. If
there is a default by the Counterparty, an Underlying Scudder Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. Certain Underlying Scudder Funds may make investments in
Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. An Underlying Scudder Fund might use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which many
interest rate swaps and fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in an Underlying Scudder Fund's ability to
act upon economic events occurring in foreign markets during non-business hours
in the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that an Underlying Scudder Fund
segregate liquid assets with its custodian to the extent an Underlying Scudder
Fund's obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by an Underlying Scudder Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid securities at least equal to the
current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by an Underlying Scudder Fund will require an
Underlying Scudder Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate liquid securities sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by an
Underlying Scudder Fund on an index will require an Underlying Scudder Fund to
own portfolio securities which correlate with the index or to segregate liquid
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by an Underlying Scudder Fund requires an
Underlying Scudder Fund to segregate liquid assets equal to the exercise price.
Except when an Underlying Scudder Fund enters into a forward contract for
the purchase or sale of a security denominated in a particular currency, which
requires no segregation, a currency contract which obligates an Underlying
Scudder Fund to buy or sell currency will generally require an Underlying
Scudder Fund to hold an amount of that currency or liquid securities denominated
in that currency equal to an Underlying Scudder Fund's obligations or to
segregate liquid assets equal to the amount of an Underlying Scudder Fund's
obligation.
OTC options entered into by an Underlying Scudder Fund, including those on
securities, currency, financial instruments or indices and OCC issued and
exchange listed index options, will generally provide for cash settlement. As a
result, when an Underlying Scudder Fund sells these instruments it will only
segregate an amount of assets equal to its accrued net obligations, as there is
no requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by an
Underlying Scudder Fund, or the in-the-money amount plus any sell-back formula
amount in the case of a cash-settled put or call. In addition, when an
Underlying Scudder Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, an Underlying Scudder Fund will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess. OCC issued and exchange listed options sold by an
Underlying Scudder Fund other than those above generally settle with physical
delivery, or with an election of either physical delivery or cash settlement and
an Underlying Scudder Fund will segregate an amount of assets equal to the full
value of the option. OTC options settling with physical delivery, or with an
election of either physical delivery or cash settlement will be treated the same
as other options settling with physical delivery.
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In the case of a futures contract or an option thereon, an Underlying
Scudder Fund must deposit initial margin and possible daily variation margin in
addition to segregating assets sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. Such assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, an Underlying Scudder Fund will accrue the net
amount of the excess, if any, of its obligations over its entitlements with
respect to each swap on a daily basis and will segregate an amount of cash or
liquid securities having a value equal to the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to an Underlying
Scudder Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. An Underlying Scudder Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, an Underlying Scudder Fund could purchase a
put option if the strike price of that option is the same or higher than the
strike price of a put option sold by an Underlying Scudder Fund. Moreover,
instead of segregating assets if an Underlying Scudder Fund held a futures or
forward contract, it could purchase a put option on the same futures or forward
contract with a strike price as high or higher than the price of the contract
held. Other Strategic Transactions may also be offset in combinations. If the
offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Common stocks. Under normal circumstances, certain Underlying Scudder Funds
invest primarily in common stocks. Common stock is issued by companies to raise
cash for business purposes and represents a proportionate interest in the
issuing companies. Therefore, an Underlying Scudder Fund may participate in the
success or failure of any company in which it holds stock. The market values of
common stock can fluctuate significantly, reflecting the business performance of
the issuing company, investor perception and general economic or financial
market movements. Smaller companies are especially sensitive to these factors
and may even become valueless. Despite the risk of price volatility, however,
common stocks also offer the greatest potential for gain on investment, compared
to other classes of financial assets such as bonds or cash equivalents.
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 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. 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 Ratings Appendix to this Statement of Additional
Information.
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.
Illiquid securities. Certain Underlying Scudder Funds may invest in securities
for which there is not an active trading market, or which have resale
restrictions. These types of securities generally offer a higher return than
more readily marketable securities, but carry the risk that the Fund may not be
able to dispose of them at an advantageous time or price.
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Foreign Securities. Certain Underlying Scudder Funds may invest in foreign
securities. The Adviser believes that diversification of assets on an
international basis decreases the degree to which events in any one country,
including the U.S., will affect an investor's entire investment holdings. In
certain periods since World War II, many leading foreign economies and foreign
stock market indices have grown more rapidly than the U.S. economy and leading
U.S. stock market indices, although there can be no assurance that this will be
true in the future. Investors should recognize that investing in foreign
securities involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. securities and
which may favorably or unfavorably affect an Underlying Scudder Fund's
performance. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may be
less publicly available information about a foreign company than about a
domestic company. Many foreign securities markets, while growing in volume of
trading activity, have substantially less volume than the U.S. market, and
securities of some foreign issuers are less liquid and more volatile than
securities of domestic issuers. Similarly, volume and liquidity in most foreign
bond markets is less than in the U.S. and, at times, volatility of price can be
greater than in the U.S. Fixed commissions on some foreign securities exchanges
and bid to asked spreads in foreign bond markets are generally higher than
commissions or bid to asked spreads on U.S. markets, although an Underlying
Scudder Fund will endeavor to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers and listed companies than in the
U.S. 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 U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Payment for securities without delivery may be required in certain
foreign markets. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The management of an
Underlying Scudder Fund seeks to mitigate the risks associated with the
foregoing considerations through continuous professional management.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because certain Underlying Scudder
Funds may hold foreign currencies and forward contracts, futures contracts and
options on foreign currencies and foreign currency futures contracts, the value
of the assets of such Underlying Scudder Fund as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the Underlying Scudder Fund may incur
costs in connection with conversions between various currencies. Although an
Underlying Scudder Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to an Underlying
Scudder Fund at one rate, while offering a lesser rate of exchange should the
Underlying Scudder Fund desire to resell that currency to the dealer. An
Underlying Scudder Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into options or forward or futures
contracts to purchase or sell foreign currencies.
Borrowing. As a matter of fundamental policy, the Portfolios will not borrow
money, except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Trustees do not currently intend to borrow for investment leverage purposes,
if such a strategy were implemented in the future it would increase a
Portfolio's volatility and the risk of loss in a declining market. Borrowing by
the Portfolios will involve special risk considerations. Although the principal
of a Portfolio's borrowing will be fixed, a Portfolio's assets may change in
value during the time a borrowing is outstanding, thus increasing exposure to
capital risk.
Certain Underlying Scudder Funds are authorized to borrow money for
purposes of liquidity and to provide for redemptions and distributions. An
Underlying Scudder Fund will borrow only when the Adviser believes that
borrowing will benefit the Underlying Scudder Fund after taking into account
considerations such as the costs of the borrowing. The Underlying Scudder Fund
does not expect to borrow for investment purposes, to increase return or
leverage the portfolio. Borrowing by the Underlying Scudder Fund will involve
special risk considerations. Although the principal of the Underlying Scudder
Fund's borrowings will be fixed, the Underlying Scudder Fund's assets may change
in value during the time a borrowing is outstanding, thus increasing exposure to
capital risk.
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Repurchase Agreements. Certain Underlying Scudder Funds may enter into
repurchase agreements with member banks of the Federal Reserve System, any
foreign bank, if the repurchase agreement is fully secured by government
securities of the particular foreign jurisdiction, or with any domestic or
foreign broker/dealer which is recognized as a reporting government securities
dealer if the creditworthiness of the bank or broker/dealer has been determined
by the Adviser to be at least as high as that of other obligations the relevant
Underlying Scudder Fund may purchase, or to be at least equal to that of issuers
of commercial paper rated within the two highest grades assigned by Moody's or
S&P.
A repurchase agreement provides a means for an Underlying Scudder Fund to
earn income on assets for periods as short as overnight. It is an arrangement
under which the purchaser (i.e., the Underlying Scudder Fund) acquires a
security ("Obligation") and the seller agrees, at the time of sale, to
repurchase the Obligation at a specified time and price. Securities subject to a
repurchase agreement are held in a segregated account and the value of such
securities kept at least equal to the repurchase price on a daily basis. The
repurchase price may be higher than the purchase price, the difference being
income to the Underlying Scudder Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Underlying Scudder Fund
together with the repurchase price upon repurchase. In either case, the income
to the Underlying Scudder Fund is unrelated to the interest rate on the
Obligation itself. Obligations will be held by the Custodian or in the Federal
Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from an Underlying Scudder Fund to the seller of the Obligation subject to
the repurchase agreement and is therefore subject to that Underlying Scudder
Fund's investment restriction applicable to loans. It is not clear whether a
court would consider the Obligation purchased by an Underlying Scudder Fund
subject to a repurchase agreement as being owned by the Underlying Scudder Fund
or as being collateral for a loan by the Underlying Scudder Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, an Underlying Scudder Fund may encounter delay and
incur costs before being able to sell the security. Delays may involve loss of
interest or decline in price of the Obligation. If the court characterizes the
transaction as a loan and the Underlying Scudder Fund has not perfected a
security interest in the Obligation, the Underlying Scudder Fund may be required
to return the Obligation to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Underlying Scudder Fund
would be at risk of losing some or all of the principal and income involved in
the transaction. As with any unsecured debt instrument purchased for the
Underlying Scudder Fund, the Adviser seeks to minimize the risk of loss through
repurchase agreements by analyzing the creditworthiness of the obligor, in this
case the seller of the Obligation. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may fail to
repurchase the Obligation, in which case an Underlying Scudder Fund may incur a
loss if the proceeds to the Underlying Scudder Fund of the sale to a third party
are less than the repurchase price. However, if the market value of the
Obligation subject to the repurchase agreement becomes less than the repurchase
price (including interest), the Underlying Scudder Fund will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that an Underlying Scudder Fund will be
unsuccessful in seeking to impose on the seller a contractual obligation to
deliver additional securities.
Convertible Securities. Certain Underlying Scudder Funds may invest in
convertible securities, that is, bonds, notes, debentures, preferred stocks and
other securities which are convertible into common stock. Investments in
convertible securities can provide an opportunity for capital appreciation
and/or income through interest and dividend payments by virtue of their
conversion or exchange features.
The convertible securities in which an Underlying Scudder Fund may invest
are either fixed income or zero coupon debt securities which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
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investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide
for a stream of income (or in the case of zero coupon securities, accretion of
income) with generally higher yields than common stocks. Of course, like all
debt securities, there can be no assurance of income or principal payments
because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
High Yield, High Risk Securities. Below investment grade securities (rated Ba
and lower by Moody's and BB and lower by S&P) or unrated securities of
equivalent quality, in which certain Underlying Scudder Funds may invest, carry
a high degree of risk (including the possibility of default or bankruptcy of the
issuers of such securities), generally involve greater volatility of price and
risk of principal and income, and may be less liquid, than securities in the
higher rating categories and are considered speculative. The lower the ratings
of such debt securities, the greater their risks render them like equity
securities. See the Appendix to this combined Statement of Additional
Information for a more complete description of the ratings assigned by ratings
organizations and their respective characteristics.
Economic downturns have in the past, and could in the future, disrupted
the high yield market and impaired the ability of issuers to repay principal and
interest. Also, an increase in interest rates would likely have a greater
adverse impact on the value of such obligations than on comparable higher
quality debt securities. During an economic downturn or period of rising
interest rates, highly leveraged issues may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations. Prices and yields of high yield securities will fluctuate
over time and, during periods of economic uncertainty, volatility of high yield
securities may adversely affect an Underlying Scudder Fund's net asset value. In
addition, investments in high yield zero coupon or pay-in-kind bonds, rather
than income-bearing high yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of an
Underlying Scudder Fund to accurately value high yield securities in the
Underlying Scudder Fund's portfolio and to dispose of those securities. Adverse
publicity and investor perceptions may decrease the values and liquidity of high
yield securities. These securities may also involve special registration
responsibilities, liabilities and costs. 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.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of an
Underlying Scudder Fund's investment objective by investment in such securities
may be more dependent on the Adviser's credit analysis than is the case for
higher quality bonds. Should the rating of a portfolio security be downgraded,
the Adviser will determine whether it is in the best interest of the Underlying
Scudder Fund to retain or dispose of such security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
Dollar Roll Transactions. Certain Underlying Scudder Funds may enter into
"dollar roll" transactions, which consist of the sale by an Underlying Scudder
Fund to a bank or broker/dealers (the "counterparty") of GNMA certificates or
other mortgage-backed securities together with a commitment to purchase from the
counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The
Underlying Scudder Fund receives a fee from the counterparty as consideration
for entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a different purchase and repurchase price fixed
and a cash settlement made at each renewal
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without physical delivery of securities. Moreover, the transaction may be
preceded by a firm commitment agreement pursuant to which the Underlying Scudder
Fund agrees to buy a security on a future date.
An Underlying Scudder Fund will not use such transactions for leveraging
purposes and, accordingly, will segregate cash, U.S. Government securities or
other high grade debt obligations in an amount sufficient to meet its purchase
obligations under the transactions. An Underlying Scudder Fund will also
maintain asset coverage of at least 300% for all outstanding firm commitments,
dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the 1940 Act as borrowings of an
Underlying Scudder Fund because they involve the sale of a security coupled with
an agreement to repurchase. Like all borrowings, a dollar roll involves costs to
the Underlying Scudder Fund. For example, while the Underlying Scudder Fund
receives a fee as consideration for agreeing to repurchase the security, the
Underlying Scudder Fund forgoes the right to receive all principal and interest
payments while the counterparty holds the security. These payments to the
counterparty may exceed the fee received by the Underlying Scudder Fund, thereby
effectively charging the Underlying Scudder Fund interest on its borrowing.
Further, although the Underlying Scudder Fund can estimate the amount of
expected principal prepayment over the term of the dollar roll, a variation in
the actual amount of prepayment could increase or decrease the cost of the
Underlying Scudder Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, an Underlying Scudder Fund's
right to purchase from the counterparty might be restricted. Additionally, the
value of such securities may change adversely before the Underlying Scudder Fund
is able to purchase them. Similarly, the Underlying Scudder Fund may be required
to purchase securities in connection with a dollar roll at a higher price than
may otherwise be available on the open market. Since, as noted above, the
counterparty is required to deliver a similar, but not identical security to the
Underlying Scudder Fund, the security that the Underlying Scudder Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that an Underlying Scudder Fund's
use of the cash that it receives from a dollar roll will provide a return that
exceeds borrowing costs.
The Directors/Trustees of the Underlying Scudder Funds have adopted
guidelines to ensure that those securities received are substantially identical
to those sold. To reduce the risk of default, an Underlying Scudder Fund will
engage in such transactions only with counterparties selected pursuant to such
guidelines.
Lending of Portfolio Securities. Certain Underlying Scudder Funds may seek to
increase their income by lending portfolio securities. Such loans may be made to
registered broker/dealers, and are required to be secured continuously by
collateral in cash, U.S. Government securities and high grade debt obligations,
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. An Underlying Scudder Fund has
the right to call a loan and obtain the securities loaned on no more than five
days' notice. During the existence of a loan, the Underlying Scudder Fund
continues to receive the equivalent of any distributions paid by the issuer on
the securities loaned and also receives compensation based on investment of the
collateral. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans may be made only to firms deemed
by the Adviser to be of good standing and will not be made unless, in the
judgment of the Adviser, the consideration to be earned from such loans would
justify the risk.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. The Fund will enter into reverse repurchase agreements only when the
Adviser believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
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Indexed Securities. Certain Underlying Scudder Funds may invest in indexed
securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.
Indexed securities differ from other types of debt securities in which an
Underlying Scudder Fund may invest in several respects. First, the interest rate
or, unlike other debt securities, the principal amount payable at maturity of an
indexed security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
Trust Preferred Securities. Certain Underlying Scudder Funds invest in Trust
Preferred Securities, which are hybrid instruments issued by a special purpose
trust (the "Special Trust"), the entire equity interest of which is owned by a
single issuer. The proceeds of the issuance to the Underlying Scudder Funds of
Trust Preferred Securities are typically used to purchase a junior subordinated
debenture, and distributions from the Special Trust are funded by the payments
of principal and interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by the
Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Underlying Scudder Funds, would be required to accrue daily for Federal income
tax purposes, their share of the stated interest and the de minimis OID on the
debentures (regardless of whether an Underlying Scudder Fund receives any cash
distributions from the Special Trust), and the value of Trust Preferred
Securities would likely be negatively affected. Interest payments on the
underlying junior subordinated debentures typically may only be deferred if
dividends are suspended on both common and preferred stock of the issuer. The
underlying junior subordinated debentures generally rank slightly higher in
terms of payment priority than both common and preferred securities of the
issuer, but rank below other subordinated debentures and debt securities. Trust
Preferred Securities may be subject to mandatory prepayment under certain
circumstances. The market values of Trust Preferred Securities may be more
volatile than those of conventional debt securities. Trust Preferred Securities
may be issued in reliance on Rule 144A under the Securities Act of 1933, as
amended, and, unless and until registered, are restricted securities; there can
be no assurance as to the liquidity of Trust Preferred Securities and the
ability of holders of Trust Preferred Securities, such as the Underlying Scudder
Funds, to sell their holdings.
Zero Coupon Securities. Certain Underlying Scudder Funds may invest in zero
coupon securities which pay no cash income and are sold at substantial discounts
from their value at maturity. When held to maturity, their entire income, which
consists of accretion of discount, comes from the difference between the issue
price and their value at maturity. Zero coupon securities are subject to greater
market value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually issued with shorter maturities (15 years or less) and with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different
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names, including "Treasury Income Growth Receipts" ("TIGRS") and Certificate of
Accrual on Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes
themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder thereof), in trust on behalf of the owners
thereof. Counsel to the underwriters of these certificates or other evidences of
ownership of the U.S. Treasury securities has stated that for federal tax and
securities purposes, in their opinion purchasers of such certificates, such as
an Underlying Scudder Fund, most likely will be deemed the beneficial holder of
the underlying U.S. government securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself. (See "TAXES.")
When-Issued Securities. Certain Underlying Scudder Funds may purchase securities
on a "when-issued" or "forward delivery" basis for payment and delivery at a
later date. The price of such securities, which is generally expressed in yield
terms, is generally fixed at the time the commitment to purchase is made, but
delivery and payment for the when-issued or forward delivery securities takes
place at a later date. During the period between purchase and settlement, no
payment is made by an Underlying Scudder Fund to the issuer and no interest on
the when-issued or forward delivery securities accrues to the Underlying Scudder
Fund. To the extent that assets of the Underlying Scudder Fund are held in cash
pending the settlement of a purchase of securities, the Underlying Scudder Fund
will earn no income; however, it is the Underlying Scudder Fund's intention to
be fully invested to the extent practicable and subject to the policies stated
above. While when-issued or forward delivery securities may be sold prior to the
settlement date, the Underlying Scudder Fund intends to purchase such securities
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Underlying Scudder Fund makes the commitment
to purchase a security on a when-issued or forward delivery basis, it will
record the transaction and reflect the value of the security in determining its
net asset value. At the time of settlement, the market value of the when-issued
or forward delivery securities may be more or less than the purchase price. The
Underlying Scudder Fund does not believe that its net asset value or income will
be adversely affected by its purchase of securities on a when-issued or forward
delivery basis.
Real Estate Investment Trusts. Certain Underlying Scudder Funds invest in REITs.
REITs are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs. REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments on real estate
mortgages in which they are invested. Hybrid REITs combine the characteristics
of both equity REITs and mortgage REITs. Investment in REITs may subject an
Underlying Scudder Fund to risks associated with the direct ownership of real
estate, such as decreases in real estate values, overbuilding, increased
competition and other risks related to local or general economic conditions,
increases in operating costs and property taxes, changes in zoning laws,
casualty or condemnation losses, possible environmental liabilities, regulatory
limitations on rent and fluctuations in rental income. Equity REITs generally
experience these risks directly through fee or leasehold interests, whereas
mortgage REITs generally experience these risks indirectly through mortgage
interests, unless the mortgage REIT forecloses on the underlying real estate.
Changes in interest rates may also affect the value of an Underlying Scudder
Fund's investment in REITs. For instance, during periods of declining interest
rates, certain mortgage REITs may hold mortgages that the mortgagors elect to
prepay, which prepayment may diminish the yield on securities issued by those
REITs.
Certain REITs have relatively small market capitalization, which may tend
to increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for
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tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended and to maintain exemption from the registration requirements of the 1940
Act. By investing in REITs indirectly through an Underlying Scudder Fund, a
shareholder will bear not only his or her proportionate share of the expenses of
an Underlying Scudder Fund's, but also, indirectly, similar expenses of the
REITs. In addition, REITs depend generally on their ability to generate cash
flow to make distributions to shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities. Certain
Underlying Scudder Funds may also invest in mortgage-backed securities, which
are interests in pools of mortgage loans, including mortgage loans made by
savings and loan institutions, mortgage bankers, commercial banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related, and private organizations as further
described below. An Underlying Scudder Fund may also invest in debt securities
which are secured with collateral consisting of mortgage-backed securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and expose an Underlying Scudder Fund to a lower rate of
return upon reinvestment. To the extent that such mortgage-backed securities are
held by the Underlying Scudder Fund, the prepayment right will tend to limit to
some degree the increase in net asset value of the Underlying Scudder Fund
because the value of the mortgage-backed securities held by the Underlying
Scudder Fund may not appreciate as rapidly as the price of non-callable debt
securities. When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of mortgage-related securities and increasing their
volatility, affecting the price volatility of the Fund's shares.
Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying property, refinancing, or foreclosure, net of fees or
costs which may be incurred. Because principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities. Some mortgage-related securities
such as securities issued by the Government National Mortgage Association
("GNMA") are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Underlying Scudder Fund shares. Also, GNMA securities often are
purchased at a premium over the maturity value of the underlying mortgages. This
premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
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Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets an Underlying Scudder
Fund's investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Underlying Scudder Fund may buy mortgage-related
securities without insurance or guarantees, if through an examination of the
loan experience and practices of the originators/servicers and poolers, the
Adviser determines that the securities meet the Underlying Scudder Fund's
quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series, (e.g.,
A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the event
of delinquencies and/or defaults.
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Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. An Underlying Scudder Fund will not purchase mortgage-backed
securities or any other assets which, in the opinion of the Adviser, are
illiquid if, as a result, more than 10% of the value of the Underlying Scudder
Fund's total assets will be illiquid. As new types of mortgage-related
securities are developed and offered to investors, the Adviser will, consistent
with the Underlying Scudder Fund's investment objective, policies, and quality
standards, consider making investments in such new types of mortgage-related
securities.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgaged-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with an Underlying Scudder Fund's investment objectives
and policies, the Underlying Scudder Fund may invest in these and other types of
asset-backed securities that may be developed in the future. In general, the
collateral supporting these securities is of shorter maturity than mortgage
loans and is less likely to experience substantial prepayments with interest
rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile Receivables(SM) ("CARS(SM)").
CARS(SM) represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS(SM) are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARS(SM) may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage to
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, the securities may
contain elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. An Underlying Scudder
Fund will not pay any additional or separate fees for credit support. The degree
of credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
An Underlying Scudder Fund may also invest in residual interests in
asset-backed securities. In the case of asset-backed securities issued in a
pass-through structure, the cash flow generated by the underlying assets is
applied to make required payments on the securities and to pay related
administrative expenses. The residual in an asset-backed security pass-through
structure represents the interest in any excess cash flow remaining after making
the foregoing payments. The amount of residual cash flow resulting from a
particular issue of asset-backed securities will depend on, among other things,
the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-
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backed security residuals not registered under the Securities Act of 1933 may be
subject to certain restrictions on transferability and would be subject to the
Underlying Scudder Fund's restriction on restricted or illiquid securities. In
addition, there may be no liquid market for such securities.
The availability of asset-backed securities may be affected by legislative
or regulatory developments. It is possible that such developments may require
the Underlying Scudder Fund to dispose of any then existing holdings of such
securities.
Repurchase Commitments. Certain Underlying Scudder Funds may enter into
repurchase commitments with any party deemed creditworthy by the Adviser,
including foreign banks and broker/dealers, if the transaction is entered into
for investment purposes and the counterparty's creditworthiness is at least
equal to that of issuers of securities which an Underlying Scudder Fund may
purchase. Such transactions may not provide the Underlying Scudder Fund with
collateral marked-to-market during the term of the commitment.
Investing in Emerging Markets. Most emerging securities markets in which certain
Underlying Scudder Funds may invest, may have substantially less volume and are
subject to less government supervision than U.S. securities markets. Securities
of many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. In addition, there is less regulation
of securities exchanges, securities dealers, and listed and unlisted companies
in emerging markets than in the United States.
Emerging markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions. Delays in settlement
could result in temporary periods when a portion of the assets of an Underlying
Scudder Fund is uninvested and no cash is earned thereon. The inability of the
Underlying Scudder Fund to make intended security purchases due to settlement
problems could cause the Underlying Scudder Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Underlying Scudder Fund due to
subsequent declines in value of the portfolio security or, if the Underlying
Scudder Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities are generally higher than costs associated with transactions
in U.S. securities. Such transactions also involve additional costs for the
purchase or sale of foreign currency.
Foreign investment in certain emerging market debt obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses of an Underlying Scudder Fund.
Certain emerging markets require prior governmental approval of investments by
foreign persons, limit the amount of investment by foreign persons in a
particular company, limit the investment by foreign persons only to a specific
class of securities of a company that may have less advantageous rights than the
classes available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging markets may also
restrict investment opportunities in issuers in industries deemed important to
national interest.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. 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 the Underlying Scudder Fund of any restrictions on
investments.
In the course of investment in emerging market debt obligations, an
Underlying Scudder Fund will be exposed to the direct or indirect consequences
of political, social and economic changes in one or more emerging markets.
Political changes in emerging market countries may affect the willingness of an
emerging market country governmental issuer to make or provide for timely
payments of its obligations. The country's economic status, as reflected, among
other things, in its inflation rate, the amount of its external debt and its
gross domestic product, also affects its ability to honor its obligations. While
the Underlying Scudder Fund will manage its assets in a manner that will seek to
minimize the exposure to such risks, and will further reduce risk by owning the
bonds of many issuers, there can be no assurance that adverse political, social
or economic changes will not cause the Underlying Scudder Fund to suffer a loss
of value in respect of the securities in the Underlying Scudder Fund's
portfolio.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for an Underlying Scudder Fund's securities
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in such markets may not be readily available. The Corporation may suspend
redemption of its shares for any period during which an emergency exists, as
determined by the Securities and Exchange Commission (the "Commission").
Accordingly if the Underlying Scudder Fund believes that appropriate
circumstances exist, it will promptly apply to the Commission for a
determination that an emergency is present. During the period commencing from
the Underlying Scudder Fund's identification of such condition until the date of
the Commission action, the Underlying Scudder Fund's securities in the affected
markets will be valued at fair value determined in good faith by or under the
direction of the Board of Directors.
Volume and liquidity in most foreign bond markets are less than in the
United States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although an Underlying Scudder Fund endeavors to achieve the
most favorable net results on its portfolio transactions. There is generally
less government supervision and regulation of business and industry practices,
securities exchanges, brokers, dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. In addition, with respect to certain emerging markets,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect the Underlying
Scudder Fund's investments in those countries. Moreover, individual emerging
market economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
chart below sets forth the risk ratings of selected emerging market countries'
sovereign debt securities.
Sovereign Risk Ratings for Selected Emerging Market Countries as of 1/15/98
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)
Country Moody's Standard & Poor's
------- ------- -----------------
Chile Baa1 A-
Turkey B1 B
Mexico Ba2 BB
Czech Republic Baa1 A
Hungary Baa3 BBB-
Colombia Baa3 BBB-
Venezuela Ba2 B+
Morocco NR NR
Argentina Ba3 BB
Brazil B1 BB-
Poland Baa3 BBB-
Ivory Coast NR NR
An Underlying Scudder Fund may have limited legal recourse in the event of
a default with respect to certain debt obligations it holds. If the issuer of a
fixed-income security owned by the Underlying Scudder Fund defaults, the
Underlying Scudder Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market country governments differ from debt
obligations of private entities; remedies from defaults on debt obligations
issued by emerging market governments, unlike those on private debt, must be
pursued in the courts of the defaulting party itself. The Underlying Scudder
Fund's ability to enforce its rights against private issuers may be limited. The
ability to attach assets to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and other similar laws
applicable to private issuers of debt obligations may be substantially different
from those of other countries. The political context, expressed as an emerging
market governmental issuer's willingness to meet the terms of the debt
obligation, for example, is of considerable importance. In addition, no
assurance can be given that the holders of commercial bank debt may not contest
payments to the holders of debt obligations in the event of default under
commercial bank loan agreements. With four exceptions, (Panama, Cuba, Costa Rica
and Yugoslavia), no sovereign emerging markets borrower has defaulted on an
external bond issue since World War II.
Income from securities held by an Underlying Scudder Fund could be reduced
by a withholding tax on the source or other taxes imposed by the emerging market
countries in which the Underlying Scudder Fund makes its
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investments. The Underlying Scudder Fund's net asset value may also be affected
by changes in the rates or methods of taxation applicable to the Underlying
Scudder Fund or to entities in which the Underlying Scudder Fund has invested.
The Adviser will consider the cost of any taxes in determining whether to
acquire any particular investments, but can provide no assurance that the taxes
will not be subject to change.
Many emerging markets have experienced substantial, and in some periods
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and continue
to exercise substantial influence over many aspects of the private sector
through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in the
Underlying Scudder Fund's portfolio. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments have occurred frequently over the history of certain emerging
markets and could adversely affect the Underlying Scudder Fund's assets should
these conditions recur.
The ability of emerging market country governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
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.
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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 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.
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 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.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors in such
markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
An Underlying Scudder Fund may invest a portion of its assets in
securities denominated in currencies of Latin American countries. Accordingly,
changes in the value of these currencies against the U.S. dollar may result in
corresponding changes in the U.S. dollar value of the Underlying Scudder Fund's
assets denominated in those currencies.
Some Latin American countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into other currencies. Further, certain Latin American currencies may
not be internationally traded. Certain of these currencies have experienced a
steep devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which the Underlying Scudder Fund's portfolio securities are
denominated may have a detrimental impact on the Underlying Scudder Fund's net
asset value.
The economies of individual Latin American countries may differ favorably
or unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Certain Latin American
countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to the
Underlying Scudder Fund at a higher rate than those imposed by other foreign
countries. This may reduce the Underlying Scudder Fund's investment income
available for distribution to shareholders.
Latin America is a region rich in natural resources such as oil, copper,
tin, silver, iron ore, forestry, fishing, livestock and agriculture. The region
has a large population (roughly 300 million) representing a large domestic
market. Economic growth was strong in the 1960's and 1970's, but slowed
dramatically (and in some instances was negative) in the 1980's as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
in Gross Domestic Product than they have in the past, other Latin American
countries continue to experience significant problems, including high inflation
rates and high interest rates. Capital flight has
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proven a persistent problem and external debt has been forcibly restructured.
Political turmoil, high inflation, capital repatriation restrictions, and
nationalization have further exacerbated conditions.
Governments of many Latin American countries have exercised and continue
to exercise substantial influence over many aspects of the private sector
through the ownership or control of many companies, including some of the
largest in those countries. As a result, government actions in the future could
have a significant effect on economic conditions which may adversely affect
prices of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect the Underlying Scudder Fund's investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth. External debt
is being restructured and flight capital (domestic capital that has left home
country) has begun to return. Inflation control efforts have also been
implemented. Free Trade Zones are being discussed in various areas around the
region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four countries in the southernmost point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the currencies to undergo wide fluctuations in value over
short periods of time due to changes in the market.
Special Considerations Affecting 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.
Economies of individual Pacific Basin countries in which certain
Underlying Scudder Funds may invest, may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, interest rate
levels, and balance of payments position. Of particular importance, most of the
economies in this region of the world are heavily dependent upon exports,
particularly to developed countries, and, accordingly, have been and may
continue to be adversely affected by trade barriers, managed adjustments in
relative currency values, and other protectionist measures imposed or negotiated
by the U.S. and other countries with which they trade. These economies also have
been and may continue to be negatively impacted by economic conditions in the
U.S. and other trading partners, which can lower the demand for goods produced
in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in which
an Underlying Scudder Fund may participate, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments that could
adversely impact a Pacific Basin country or the Underlying Scudder Fund's
investment in that country.
Trading volume on Pacific Basin stock exchanges outside of Japan, although
increasing, is substantially less than in the U.S. stock market. Further,
securities of some Pacific Basin companies are less liquid and more volatile
than securities of comparable U.S. companies. Fixed commissions on Pacific Basin
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Underlying Scudder Fund endeavors to achieve the most
favorable net results on its portfolio transactions and may be able to purchase
securities in which the Underlying Scudder Fund may invest on other stock
exchanges where commissions are negotiable.
Foreign companies, including Pacific Basin companies, are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and disclosure requirements comparable to those applicable to U.S.
companies. Consequently, there may be less publicly available information about
such companies than about U.S. companies. Moreover, there is generally less
government supervision and regulation of Pacific Basin stock exchanges, brokers,
and listed companies than in the U.S.
Investing in Africa. Many of the countries in which certain Underlying Scudder
Funds may invest are fraught with political instability. However, there has been
a trend over the past five years toward democratization. Many countries
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are moving from a military style, Marxist, or single party government to a
multi-party system. Still, there remain many countries that do not have a stable
political process. Other countries have been enmeshed in civil wars and border
clashes.
Africa is a continent of roughly 50 countries with a total population of
approximately 840 million people. Literacy rates (the percentage of people who
are over 15 years of age and who can read and write) are relatively low, ranging
from 20% to 60%. The primary industries include crude oil, natural gas,
manganese ore, phosphate, bauxite, copper, iron, diamond, cotton, coffee, cocoa,
timber, tobacco, sugar, tourism, and cattle.
Economically, the Northern Rim countries (including Morocco, Egypt, and
Algeria) and Nigeria, Zimbabwe and South Africa are the wealthier countries on
the continent. The market capitalization of these countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as Burkina,
Madagascar, and Malawi, that are considered to be among the poorest or least
developed in the world. These countries are generally landlocked or have poor
natural resources. The economies of many African countries are heavily dependent
on international oil prices. Of all the African industries, oil has been the
most lucrative, accounting for 40% to 60% of many countries' GDP. However,
general decline in oil prices has had an adverse impact on many economies.
Eastern Europe. Certain Underlying Scudder Funds may invest up to 5% of their
total assets in the securities of issuers domiciled in Eastern European
countries. Investments in companies domiciled in Eastern European countries may
be subject to potentially greater risks than those of other foreign issuers.
These risks include (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Underlying
Scudder Fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and (vii)
the possibility that recent favorable economic developments in Eastern Europe
may be slowed or reversed by unanticipated political or social events in such
countries, or in the countries of the former Soviet Union.
Investments in such countries involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that such expropriation will not occur in the future. In the event of such
expropriation, the Underlying Scudder Fund could lose a substantial portion of
any investments it has made in the affected countries. Further, no accounting
standards exist in East European countries. Finally, even though certain East
European currencies may be convertible into U.S. dollars, the conversion rates
may be artificial to the actual market values and may be adverse to the
Underlying Scudder Fund's shareholders.
Investing in Europe. An Underlying Scudder Fund's performance may be susceptible
to political, social and economic factors affecting issuers in European
countries. Such factors may include, but are not limited to: growth of GDP or
GNP, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position, as well as interest and monetary exchange rates
among European countries.
Eastern European countries and certain Southern European countries are
considered to be emerging markets. Securities traded in certain emerging
European markets may be subject to additional risks due to political and
economic reforms including efforts to decentralize the economic decision-making
process and move toward a market-oriented economy. Additionally, the
inexperience of financial intermediaries, lack of modern technology and the
possibility of permanent or temporary termination of trading of securities may
affect an Underlying Scudder Fund's performance. To the extent that an
Underlying Scudder Fund purchases equity securities of smaller companies, such
securities may experience greater volatility and have limited liquidity.
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 opportunity.
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Although the governments of certain Eastern European countries currently
are implementing or considering reforms directed at political and economic
liberalization, there can be no assurance that these reforms will continue or
achieve their goals.
Most Eastern European nations in which certain Underlying Scudder Funds
may invest, including Hungary, Poland, Czechoslovakia, and Romania have had
centrally planned, socialist economies since shortly after World War II. A
number of their governments, including those of Hungary, the Czech Republic, and
Poland are currently implementing or considering reforms directed at political
and economic liberalization, including efforts to foster multi-party political
systems, decentralize economic planning, and move toward free market economies.
At present, no Eastern European country has a developed stock market, but
Poland, Hungary, and the Czech Republic have small securities markets in
operation. Ethnic and civil conflict currently rage through the former
Yugoslavia. The outcome is uncertain.
Both the EC and Japan, among others, have made overtures to establish
trading arrangements and assist in the economic development of the Eastern
European nations. A great deal of interest also surrounds opportunities created
by the reunification of East and West Germany. Following reunification, the
Federal Republic of Germany has remained a firm and reliable member of the EC
and numerous other international alliances and organizations. To reduce
inflation caused by the unification of East and West Germany, Germany has
adopted a tight monetary policy which has led to weakened exports and a reduced
domestic demand for goods and services. However, in the long-term, reunification
could prove to be an engine for domestic and international growth.
The conditions that have given rise to these developments are changeable,
and there is no assurance that reforms will continue or that their goals will be
achieved.
Portugal is a genuinely emerging market which has experienced rapid growth
since the mid-1980s, except for a brief period of stagnation over 1990-91.
Portugal's government remains committed to privatization of the financial system
away from one dependent upon the banking system to a more balanced structure
appropriate for the requirements of a modern economy. Inflation continues to be
about three times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in the
1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (GDP) increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
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 of which have not been entirely settled. There can be no assurance that
the Underlying Scudder Fund's investments in Eastern Europe would not also be
expropriated, nationalized or otherwise confiscated. Finally, any change in
leadership or policies of Eastern European countries, or 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.
Depositary Receipts. Certain Underlying Scudder Funds may invest indirectly in
securities of emerging country issuers through sponsored or unsponsored American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), International
Depositary Receipts ("IDRs") and other types of Depositary Receipts (which,
together with ADRs, GDRs and IDRs are hereinafter referred to as "Depositary
Receipts"). Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted. In
addition, the issuers of the stock of unsponsored Depositary Receipts are not
obligated to disclose material information in the United States and, therefore,
there may not be a correlation between such information and the market value of
the Depositary Receipts. ADRs are
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Depositary Receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
GDRs, IDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be issued by United
States banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a United States corporation. Generally, Depositary
Receipts in registered form are designed for use in the United States securities
markets and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. For purposes of an Underlying
Scudder Fund's investment policies, the Underlying Scudder Fund's investments in
ADRs, GDRs and other types of Depositary Receipts will be deemed to be
investments in the underlying securities. Depositary Receipts other than those
denominated in U.S. dollars will be subject to foreign currency exchange rate
risk. Certain Depositary Receipts may not be listed on an exchange and therefore
may be illiquid securities.
Loan Participations and Assignments. Certain Underlying Scudder Funds may invest
in fixed and floating rate loans ("Loans") arranged through private negotiations
between an issuer of emerging market debt instruments and one or more financial
institutions ("Lenders"). An Underlying Scudder Fund's investments in Loans in
Latin America are expected in most instances to be in the form of participations
in Loans ("Participations") and assignments of portions of Loans ("Assignments")
from third parties. Participations typically will result in the Underlying
Scudder Fund having a contractual relationship only with the Lender and not with
the borrower. The Underlying Scudder Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
Underlying Scudder Fund generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement relating to the Loan, nor any
rights of set-off against the borrower, and the Underlying Scudder Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Underlying Scudder Fund will
assume the credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Underlying Scudder Fund may be treated as a general creditor
of the Lender and may not benefit from any set-off between the Lender and the
borrower. The Underlying Scudder Fund will acquire Participations only if the
Lender interpositioned between the Underlying Scudder Fund and the borrower is
determined by the Adviser to be creditworthy.
When an Underlying Scudder Fund purchases Assignments from Lenders, the
Underlying Scudder Fund will acquire direct rights against the borrower on the
Loan. Because Assignments are arranged through private negotiations between
potential assignees and potential assignors, however, the rights and obligations
acquired by the Underlying Scudder Fund as the purchaser of an Assignment may
differ from, and may be more limited than, those held by the assigning Lender.
An Underlying Scudder Fund may have difficulty disposing of Assignments
and Participations. Because no liquid market for these obligations typically
exists, the Underlying Scudder Fund anticipates that these obligations could be
sold only to a limited number of institutional investors. The lack of a liquid
secondary market will have an adverse effect on the Underlying Scudder Fund's
ability to dispose of particular Assignments or Participations when necessary to
meet the Underlying Scudder Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the borrower.
The lack of a liquid secondary market for Assignments and Participations may
also make it more difficult for the Underlying Scudder Fund to assign a value to
those securities for purposes of valuing the Underlying Scudder Fund's portfolio
and calculating its net asset value.
Illiquid Securities. Underlying Funds may purchase securities other than in the
open market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. The absence of a
trading market can make it difficult to ascertain a market value for these
investments. This investment practice, therefore, could have the effect of
increasing the level of illiquidity of a Fund. It is a Fund's policy that
illiquid securities (including repurchase agreements of more than seven days
duration, certain restricted securities, and other securities which are not
readily marketable) may not constitute, at the time of purchase, more than 15%
of the value of the Fund's net assets. Each Corporation/Trust's Board of
Directors/Trustees has approved guidelines for use by the Adviser in determining
whether a security is illiquid.
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; (iii) in limited quantities after they have been
held for a specified period of time and other conditions are met pursuant to an
exemption from registration; or (iv) in a public offering for which a
registration statement is in effect under the 1933 Act. Issuers of restricted
securities may not be
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subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between a Fund's decision to sell a
restricted or illiquid security and the point at which the Fund is permitted or
able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, a Fund may be required to
bear all or part of the registration expenses. A Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Adviser will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Adviser may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Brady Bonds. Certain Underlying Scudder Funds may invest in Brady Bonds, which
are securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Mexico, Uruguay,
Venezuela, Costa Rica, Argentina, Nigeria, and the Philippines.
Brady Bonds have been issued only recently, and for that reason do not
have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the dollar)
and are actively traded in over-the-counter secondary markets.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
bonds or floating rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on these Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults of countries issuing
Brady Bonds, with respect to commercial bank loans by public and private
entities, investments in Brady Bonds may be viewed as speculative. Over $82
billion in Brady Bonds have been issued by countries in Africa and Latin
America, with 90% of these Brady Bonds being denominated in U.S. dollars.
Sovereign Debt. Investment in sovereign debt can involve a high degree of risk.
The governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt 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.
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Municipal Obligations. Certain Underlying Scudder Funds may acquire municipal
obligations when, due to disparities in the debt securities markets, the
anticipated total return on such obligations is higher than that on taxable
obligations. The Underlying Scudder Fund has no current intention of purchasing
tax-exempt municipal obligations that would amount to greater than 5% of the
Underlying Scudder Fund's total assets.
Municipal obligations are issued by or on behalf of states, territories,
and possessions of the U.S., and their political subdivisions, agencies, and
instrumentalities, and the District of Columbia to obtain funds for various
public purposes. The interest on these obligations is generally exempt from
federal income tax in the hands of most investors. The two principal
classifications of municipal obligations are "notes" and "bonds." The return on
municipal obligations is ordinarily lower than that of taxable obligations.
Small Company Risk. The Adviser believes that small companies often have sales
and earnings growth rates which exceed those of larger companies, and that such
growth rates may in turn be reflected in more rapid share price appreciation
over time. However, investing in smaller company stocks involves greater risk
than is customarily associated with investing in larger, more established
companies. For example, smaller companies can have limited product lines,
markets, or financial and managerial resources. Smaller companies may also be
dependent on one or a few key persons, and may be more susceptible to losses and
risks of bankruptcy. Also, the securities of the smaller companies in which
certain Underlying Scudder Funds may invest, may be thinly traded (and therefore
have to be sold at a discount from current market prices or sold in small lots
over an extended period of time). Transaction costs in smaller company stocks
may be higher than those of larger companies.
Asset-Indexed Securities. Certain Underlying Scudder Funds may purchase
asset-indexed securities which are debt securities usually issued by companies
in precious metals related businesses such as mining, the principal amount,
redemption terms, or interest rates of which are related to the market price of
a specified precious metal. An Underlying Scudder Fund will only enter into
transactions in publicly traded asset-indexed securities. Market prices of
asset-indexed securities will relate primarily to changes in the market prices
of the precious metals to which the securities are indexed rather than to
changes in market rates of interest. However, there may not be a perfect
correlation between the price movements of the asset-indexed securities and the
underlying precious metals. Asset-indexed securities typically bear interest or
pay dividends at below market rates (and in certain cases at nominal rates). The
Underlying Scudder Fund will purchase asset-indexed securities to the extent
permitted by law.
Short Sales Against the Box. Certain Underlying Scudder Funds may make short
sales of common stocks if, at all times when a short position is open, an
Underlying Scudder Fund owns the stock or owns preferred stocks or debt
securities convertible or exchangeable, without payment of further
consideration, into the shares of common stock sold short. Short sales of this
kind are referred to as short sales "against the box." The broker/dealer that
executes a short sale generally invests cash proceeds of the sale until they are
paid to the Underlying Scudder Fund. Arrangements may be made with the
broker/dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Underlying Scudder Fund will segregate
the common stock or convertible or exchangeable preferred stock or debt
securities in a special account with the Custodian.
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.
Mining and exploration risks. The business of gold mining by its nature involves
significant risks and hazards, including environmental hazards, industrial
accidents, labor disputes, discharge of toxic chemicals, fire, drought, flooding
and natural acts. The occurrence of any of these hazards can delay production,
increase production costs and result in liability to the operator of the mines.
A mining operation may become subject to liability for pollution or other
79
<PAGE>
hazards against which it has not insured or cannot insure, including those in
respect of past mining activities for which it was not responsible.
Exploration for gold and other precious metals is speculative in nature,
involves many risks and frequently is unsuccessful. There can be no assurance
that any mineralisation discovered will result in an increase in the proven and
probable reserves of a mining operation. If reserves are developed, it can take
a number of years from the initial phases of drilling and identification of
mineralisation until production is possible, during which time the economic
feasibility of production may change. Substantial expenditures are required to
establish ore reserves properties and to construct mining and processing
facilities. As a result of these uncertainties, no assurance can be given that
the exploration programs undertaken by a particular mining operation will
actually result in any new commercial mining.
Investments Involving Above-Average Risk. Certain Underlying Scudder Funds may
purchase securities involving above-average risk. For example, an Underlying
Scudder Fund has invested from time to time in relatively new companies but is
limited by a non-fundamental policy that it may not invest more than 5% of its
total assets in companies that, with their predecessors, have been in continuous
operation for less than three years. The Underlying Scudder Fund's portfolio may
also include the securities of 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. Both factors are believed to offer significant opportunity for
capital appreciation. Investment risk is higher than that normally associated
with larger, older companies due to the higher business risks associated with
small size, frequently narrow product lines and relative immaturity. To help
reduce risk, the Underlying Scudder Fund allocates its investments among many
companies and different industries.
The securities of such companies are often traded only over-the-counter
and may not be traded in the volume typical of trading on a national securities
exchange. As a result, the disposition by the Underlying Scudder Fund of
holdings of such securities may require the Underlying Scudder Fund to offer a
discount from recent prices or to make many small sales over a lengthy period of
time. Such securities may be subject to more abrupt or erratic market movements
than those typically encountered on national securities exchanges.
Non-diversified investment company. Certain Underlying Scudder Funds are
classified as non-diversified investment companies under 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.
Investment company securities. Securities of other investment companies may be
acquired by certain Underlying Scudder Funds to the extent permitted under the
1940 Act. Investment companies incur certain expenses such as management,
custodian, and transfer agency fees, and, therefore, any investment by an
Underlying Scudder Fund in shares of other investment companies may be subject
to such duplicate expenses.
Special situation securities. From time to time, an Underlying Scudder Fund may
invest in equity or debt securities issued by companies that are determined by
the Adviser to possess "special situation" characteristics. In general, a
special situation company is a company whose securities are expected to increase
in value solely by reason of a development particularly or uniquely applicable
to the company. Developments that may create special situations include, among
others, a liquidation, reorganization, recapitalization or merger, material
litigation, technological breakthrough and new management or management
policies. The principal risk with investments in special situation companies is
that the anticipated development thought to create the special situation may not
occur and the investments therefore may not appreciate in value or may decline
in value.
Investing in emerging growth companies. The investment risk associated with
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.
80
<PAGE>
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 more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during other good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
which are rated B generally lack
81
<PAGE>
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.
82
<PAGE>
SCUDDER PATHWAY SERIES:
CONSERVATIVE PORTFOLIO
BALANCED PORTFOLIO
GROWTH PORTFOLIO
INTERNATIONAL PORTFOLIO
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
- -------- --------
<S> <C>
(a)(1) Declaration of Trust dated July 1, 1994.
(Incorporated by reference to Exhibit 1 to the Registration
Statement filed on November 7, 1994.)
(a)(2) Certificate of Amendment to Declaration of Trust dated January
10, 1995.
(Incorporated by reference to Exhibit 1(b) to Pre-Effective
Amendment No. 1 to the Registration Statement filed November
13, 1996.)
(a)(3) Certificate of Amendment to Declaration of Trust dated
September 16, 1996.
(Incorporated by reference to Exhibit 1(b)(1) to Pre-Effective
Amendment No. 1 to the Registration Statement filed November
13, 1996.)
(b)(1) By-Laws dated July 1, 1994.
(Incorporated by reference to Exhibit 2 to the Registration
Statement filed on November 7, 1994.)
(c) Inapplicable.
(d)(1) Investment Management Agreement between the Registrant and
Scudder Kemper Investments, Inc. dated September 7, 1998, is
filed herein.
(e)(1) Underwriting Agreement between the Registrant and Scudder
Investor Services, Inc., dated September 7, 1998, is filed
herein.
(f) Inapplicable.
(g)(1) Custodian Contract between the Registrant and State Street Bank
and Trust Company dated November 15, 1996, is incorporated by
reference to Post-Effective Amendment No. 2 Exhibit (8)(a) to
the Registration Statement.
(h)(1)(a) Special Servicing Agreement between the Registrant, the
Underlying Scudder Funds, Scudder Service Corporation, Scudder
Fund Accounting Corporation, Scudder Trust Company and Scudder,
Stevens & Clark, Inc. dated November 15, 1996, is incorporated
by reference to Exhibit 9(a) to Post-Effective Amendment No. 1
to the Registration Statement.
Part C - Page 1
<PAGE>
(h)(1)(b) Amendment to Special Servicing Agreement between Registrant and
the Underlying Scudder Funds, Scudder Servicing Corporation,
Scudder Fund Accounting Corporation, Scudder Trust Company and
Scudder Stevens & Clark dated May 15,1997, is incorporated by
reference to Post-Effective Amendment No. 4 to the Registration
Statement.
(h)(2) Transfer Agency and Service Agreement between the Registrant
and Scudder Service Corporation dated November 15, 1996, is
incorporated by reference to Exhibit 9(b) to Post-Effective
Amendment No. 1 to the Registration Statement.
(h)(3) COMPASS Service Agreement between the Registrant and Scudder
Trust Company is incorporated by reference to Exhibit 9(b)(1)
to Post-Effective Amendment No. 2 to the Registration Statement.
(h)(4)(a) Fund Accounting Services Agreement between Scudder Pathway
Series: Conservative Portfolio and Scudder Fund Accounting
Corporation dated November 15, 1996, is incorporated by
reference to Exhibit 9(c)(1) to Post-Effective Amendment No. 1
to the Registration Statement.
(h)(4)(b) Fund Accounting Services Agreement between Scudder Pathway
Series: Balanced Portfolio and Scudder Fund Accounting
Corporation dated November 14, 1996, is incorporated by
reference to Exhibit 9(c)(2) to Post-Effective Amendment No. 1
to the Registration Statement.
(h)(4)(c) Fund Accounting Services Agreement between Scudder Pathway
Series: Growth Portfolio and Scudder Fund Accounting
Corporation dated November 14, 1996, is incorporated by
reference to Exhibit 9(c)(3) to Post-Effective Amendment No. 1
to the Registration Statement.
(h)(4)(d) Fund Accounting Services Agreement between Scudder Pathway
Series: International Portfolio and Scudder Fund Accounting
Corporation dated November 14, 1996, incorporated by reference
to Exhibit 9(c)(4) to Post-Effective Amendment No. 1 to the
Registration Statement.
(i) Inapplicable.
(j) Consent of independent Accountants is filed herein.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) Financial Data Schedules are filed herein.
(o) Inapplicable
</TABLE>
Part C - Page 2
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant.
- -------- --------------------------------------------------------------
All of the outstanding shares of the Registrant, representing
all of the interests in the Scudder Pathway Series, on the
date Registrant's Registration Statement becomes effective
will be owned by Scudder Investor Services, Inc. ("The
Distributor").
Item 25. Indemnification
- -------- ---------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV, Sections 4.1 - 4.3 of the Registrant's Declaration
of Trust provide as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
Etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all such Persons shall look solely to the Trust Property
for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the
Trust to the fullest extent permitted by law against
all liability and against all expenses reasonably
incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or
other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include,
without limitation,
Part C - Page 3
<PAGE>
attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided
hereunder to a Trustee or officer:
(i) against any liability to the Trust, a Series thereof,
or the Shareholders by reason of a final adjudication
by a court or other body before which a proceeding
was brought that he engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have
been finally adjudicated not to have acted in good
faith in the reasonable belief that his action was in
the best interest of the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in
paragraph (b)(i) or (b)(ii) resulting in a payment by
a Trustee or officer, unless there has been a
determination that such Trustee or officer did not
engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of his office:
(A) by the court or other body
approving the settlement or other
disposition; or
(B) based upon a review of readily
available facts (as opposed to a
full trial-type inquiry) by (x)
vote of a majority of the
Disinterested Trustees acting on
the matter (provided that a
majority of the Disinterested
Trustees then in office act on the
matter) or (y) written opinion of
independent legal counsel.
(c) The rights of indemnification herein
provided may be insured against by policies
maintained by the Trust, shall be severable,
shall not affect any other rights to which
any Trustee or officer may now or hereafter
be entitled, shall continue as to a person
who has ceased to be such Trustee or officer
and shall insure to the benefit of the
heirs, executors, administrators and assigns
of such a person. Nothing contained herein
shall affect any rights to indemnification
to which personnel of the Trust other than
Trustees and officers may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation of
a defense to any claim, action, suit or
proceeding of the character described in
paragraph (a) of this Section 4.3 may be
advanced by the Trust prior to final
disposition thereof upon receipt of an
undertaking by or on behalf of the recipient
to repay such amount if it is ultimately
determined that he is not entitled to
indemnification under this Section 4.3,
provided that either:
(i) such undertaking is secured by a surety bond or some
other appropriate security provided by the recipient,
or the Trust shall be insured against losses arising
out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the
Disinterested Trustees act on the matter) or an
independent legal counsel in a written opinion shall
determine, based upon a review of readily available
facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is
not (i) an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or order of
the Commission), or (ii) involved in the claim, action, suit or proceeding.
Part C - Page 4
<PAGE>
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Part C - Page 5
<PAGE>
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
</TABLE>
Item 27. Principal Underwriters.
- -------- -----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
William S. Baughman Vice President None
Two International Place
Boston, MA 02110
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Part C - Page 6
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Treasurer Vice President
Two International Place and Assistant Clerk
Boston, MA 02110
Thomas F. McDonough Clerk Vice President and
Two International Place Secretary
Boston, MA 02110
James J. McGovern Chief Financial Officer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Daniel Pierce Director, Vice President President
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Vice President and
345 Park Avenue Legal Officer and Assistant Clerk Assistant Secretary
New York, NY 10154
Part C - Page 7
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
David B. Watts Assistant Treasurer None
Two International Place
Boston, MA 02110
(c)
</TABLE>
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage
Underwriter Commissions and Repurchases Commissions Other Compensation
----------- ----------- --------------- ----------- ------------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 28. Location of Accounts and Records.
- -------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments, Inc., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
custodian are maintained by State Street Bank & Trust Company,
225 Franklin Street, Boston, Massachusetts 02110. Records
relating to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts 02110-4103. Records relating to
the duties of the Registrant's pricing agent are maintained by
Scudder Fund Accounting Corporation, Two International Place,
Boston, Massachusetts 02110-4103. Records relating to the
duties of the Registrant's underwriter are maintained by
Scudder Investor Services, Inc., Two International Place,
Boston, Massachusetts 02110-4103.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings
- -------- ------------
Inapplicable.
Part C - Page 8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(a) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 29th day of December, 1998.
SCUDDER PATHWAY SERIES
By /s/ Thomas F. McDonough
-------------------------------
Thomas F. McDonough,
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Daniel Pierce
- --------------------------------------
Daniel Pierce* President (Principal Executive Officer) December 29, 1998
/s/ Dr. Rosita P. Chang
- --------------------------------------
Dr. Rosita P. Chang* Trustee December 29, 1998
/s/ Edgar R. Fiedler
- --------------------------------------
Edgar R. Fiedler* Trustee December 29, 1998
/s/ Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee December 29, 1998
/s/ Dr. J. D. Hammond
- --------------------------------------
Dr. J. D. Hammond* Trustee December 29, 1998
/s/ Richard M. Hunt
- --------------------------------------
Richard M. Hunt* Trustee December 29, 1998
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ John R. Hebble
- --------------------------------------
John R. Hebble Treasurer (Principal Financial Officer) December 29, 1998
</TABLE>
*By /s/ Thomas F. McDonough
-----------------------
Thomas F. McDonough*
Attorney-in-fact pursuant to powers of attorney contained in the
signature page of Post-Effective Amendment No. 1 to the
Registration Statement filed May 15, 1997 and Post-Effective
Amendment No. 2 to the Registration Statement filed November 28,
1997.
2
<PAGE>
File No. 33-86070
File No. 811-8606
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 5
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 7
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER PATHWAY SERIES
<PAGE>
SCUDDER PATHWAY SERIES
EXHIBIT INDEX
Exhibit (d)(1)
Exhibit (e)(1)
Exhibit (j)
Exhibit (n)
Exhibit (d)(1)
Scudder Pathway Series
Two International Place
Boston, Massachusetts 02110
September 7, 1998
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Scudder Pathway Series
Ladies and Gentlemen:
Scudder Pathway Series (the "Trust") has been established as a
Massachusetts business trust to engage in the business of an investment company.
Pursuant to the Trust's Declaration of Trust, as amended from time-to-time (the
"Declaration"), the Board of Trustees has divided the Trust's shares of
beneficial interest, par value $.01 per share, (the "Shares") into separate
series, or portfolios, including Conservative Portfolio, Balanced Portfolio,
Growth Portfolio and International Portfolio (the "Portfolios"). Series may be
abolished and dissolved, and additional series established, from time to time by
action of the Trustees.
The Trust, on behalf of the Portfolios, has selected you to act as the
sole investment manager of the Portfolios and to provide certain other services,
as more fully set forth below, and you have indicated that you are willing to
act as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Trust on behalf of the
Portfolios agrees with you as follows:
1. Delivery of Documents. The Trust engages in the business of
investing and reinvesting the assets of the Portfolios in the manner and in
accordance with the investment objectives, policies and restrictions specified
in the currently effective Prospectus (the "Prospectus") and Statement of
Additional Information (the "SAI") relating to the Portfolios included in the
Trust's Registration Statement on Form N-1A, as amended from time to time, (the
"Registration Statement") filed by the Trust under the Investment Company Act of
1940, as amended, (the "1940 Act") and the Securities Act of 1933, as amended.
Copies of the documents referred to in the preceding sentence have been
furnished to you by the Trust. The Trust has also furnished you with copies
properly certified or authenticated of each of the following additional
documents related to the Trust and the Portfolios:
(a) The Declaration dated July 1, 1994 as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders of each
Portfolio selecting you as investment manager and approving the form of
this Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated September 12, 1996 relating to each Portfolio.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of
the rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Trust and Portfolios a nonexclusive
right and sublicense to use (i) the "Scudder" name and mark as part of their
names (the "Trust Names"), and (ii) the Scudder Marks in connection with their
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Trust,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Trust and Portfolios agree that they shall
have no right to sublicense or assign rights to use the Scudder Marks, shall
acquire no interest in the Scudder Marks other than the rights granted herein,
that all of their uses of the Scudder Marks shall inure to the benefit of
Scudder Trust Company as owner and licensor of the Scudder Marks (the "Trademark
Owner"), and that the Trust and Portfolios shall not challenge the validity of
the Scudder Marks or the Trademark Owner's ownership thereof. The Trust and
Portfolios further agree that all services and products they offer in connection
with the Scudder Marks shall meet commercially reasonable standards of quality,
as may be determined by you or the Trademark Owner from time to time, provided
that you acknowledge that the services and products the Trust and Portfolios
rendered during the one-year period preceding the date of this Agreement are
acceptable. At your reasonable request, the Trust and Portfolios shall cooperate
with you and the Trademark Owner and shall execute and deliver any and all
documents necessary to maintain and protect (including but not limited to in
connection with any trademark infringement action) the Scudder Marks and/or
enter the Trust and Portfolios as registered users thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Trust and Portfolios, or you no
longer are a licensee of the Scudder Marks, the Trust and Portfolios shall (to
the extent that, and as soon as, it lawfully can) cease to use the Trust Names
or any other name indicating that it is advised by, managed by or otherwise
connected with you (or any organization which shall have succeeded to your
business as investment manager) or the Trademark Owner. In no event shall the
Trust use the Scudder Marks or any other name or mark confusingly similar
thereto (including, but not limited to, any name or mark that includes the name
"Scudder") if this Agreement or any other investment advisory agreement between
you (or your successor) and the Trust is terminated.
3. Portfolio Management Services. As manager of the assets of the
Portfolios, you shall provide continuing investment management of the assets of
the Portfolios in accordance with the investment objectives, policies and
restrictions set forth in the Prospectus and SAI; the applicable provisions of
the 1940 Act and the Internal Revenue Code of 1986, as amended, (the "Code")
relating to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and regulations of
which you have knowledge; subject always to policies and instructions adopted by
the Trust's Board of Trustees. In connection therewith, you shall use reasonable
efforts to manage each Portfolio so that it will qualify as a regulated
investment company under Subchapter M of the Code and regulations issued
thereunder. The Portfolios shall have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of
2
<PAGE>
long-range investment policy generally available to your investment advisory
clients. In managing the Portfolios in accordance with the requirements set
forth in this section 3, you shall be entitled to receive and act upon advice of
counsel to the Trust or counsel to you. You shall also make available to the
Trust promptly upon request all of the Portfolios' investment records and
ledgers as are necessary to assist the Trust in complying with the requirements
of he 1940 Act and other applicable laws. To the extent required by law, you
shall furnish to regulatory authorities having the requisite authority any
information or reports in connection with the services provided pursuant to this
Agreement which may be requested in order to ascertain whether the operations of
the Trust are being conducted in a manner consistent with applicable laws and
regulations.
You shall determine the securities, instruments, investments,
currencies, repurchase agreements, futures, options and other contracts relating
to investments to be purchased, sold or entered into by the Portfolios and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Portfolio policies as expressed in the Registration Statement. You shall
determine what portion of each Portfolio's investment portfolio shall be
invested in securities and other assets and what portion, if any, should be held
uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on
the investment performance of the Portfolios and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Trust's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Portfolios such office space and facilities in the United States as
the Portfolios may require for their reasonable needs, and you (or one or more
of your affiliates designated by you) shall render to the Trust administrative
services on behalf of the Portfolios necessary for operating as an open-end
investment company and not provided by persons not parties to this Agreement
including, but not limited to, preparing reports to and meeting materials for
the Trust's Board of Trustees and reports and notices to Portfolio shareholders;
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Portfolio operations; preparing
and making filings with the Securities and Exchange Commission (the "SEC") and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolios' transfer agent; assisting in the preparation and filing of each
Portfolio's federal, state and local tax returns; preparing and filing each
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of Shares of each Portfolio under applicable federal
and state securities laws; maintaining or causing to be maintained for each
Portfolio all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Portfolios' custodian or other agents of
the Portfolios; assisting in establishing the accounting policies of each
Portfolio; assisting in the resolution of accounting issues that may arise with
respect to each Portfolio's operations and consulting with the Portfolios'
independent accountants, legal counsel and the Portfolios' other agents as
necessary in connection therewith; establishing and monitoring each Portfolio's
operating expense budgets; reviewing each Portfolio's bills; processing the
payment of bills that have been approved by an authorized person; assisting each
Portfolio
3
<PAGE>
in determining the amount of dividends and distributions available to be paid by
each Portfolio to its shareholders, preparing and arranging for the printing of
dividend notices to shareholders, and providing the transfer and dividend paying
agent, the custodian, and the accounting agent with such information as is
required for such parties to effect the payment of dividends and distributions;
and otherwise assisting the Trust as it may reasonably request in the conduct of
each Portfolio's business, subject to the direction and control of the Trust's
Board of Trustees. Nothing in this Agreement shall be deemed to shift to you or
to diminish the obligations of any agent of a Portfolio or any other person not
a party to this Agreement which is obligated to provide services to the
Portfolios.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Trust (including each
Portfolio's share of payroll taxes) who are affiliated persons of you, and you
shall make available, without expense to the Portfolios, the services of such of
your directors, officers and employees as may duly be elected officers of the
Trust, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 3 hereof and the administrative services described
in section 4 hereof.
You shall not be required to pay any expenses of the Portfolios other
than those specifically allocated to you in this section 5 and under the terms
of the Special Servicing Agreement dated November 15, 1996 ("Special Servicing
Agreement") among you, the Trust, Scudder Fund Accounting Corporation, Scudder
Service Corporation, Scudder Trust Company, Scudder Investor Services, Inc. and
the various funds in which the Portfolios may invest (the "Underlying Funds").
In particular, but without limiting the generality of the foregoing, such
expenses include the following: organization expenses of each Portfolio
(including out-of-pocket expenses, but not including your overhead or employee
costs); fees payable to you and to any other Portfolio advisors or consultants;
legal expenses; auditing and accounting expenses; maintenance of books and
records which are required to be maintained by the Portfolios' custodian or
other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Portfolios in connection with membership in investment company
trade organizations; fees and expenses of the Portfolios' accounting agent,
custodians, subcustodians, transfer agents, dividend disbursing agents and
registrars; payment for portfolio pricing or valuation services to pricing
agents, accountants, bankers and other specialists, if any; expenses of
preparing share certificates and, except as provided below in this section 5,
other expenses in connection with the issuance, offering, distribution, sale,
redemption or repurchase of securities issued by the Portfolios; expenses
relating to investor and public relations; expenses and fees of registering or
qualifying Shares of the Portfolios for sale; interest charges, bond premiums
and other insurance expense; freight, insurance and other charges in connection
with the shipment of the Portfolios' investment portfolio securities; the
compensation and all expenses (specifically including travel expenses relating
to Trust business) of Trustees, officers and employees of the Trust who are not
affiliated persons of you; brokerage commissions or other costs of acquiring or
disposing of any portfolio securities of the Portfolios; expenses of printing
and distributing reports, notices and dividends to shareholders; expenses of
printing and mailing Prospectuses and SAIs of the Portfolios and supplements
thereto; costs of stationery; any litigation expenses; indemnification of
Trustees and officers of the Trust; costs of shareholders' and other meetings;
and travel expenses (or an appropriate portion thereof) of Trustees and officers
of the Trust who are directors, officers or employees of you to the extent that
such expenses relate to attendance at meetings of the Board of Trustees of the
Trust or any committees thereof or advisors thereto held outside of Boston,
Massachusetts or New York, New York.
4
<PAGE>
Except as provided in the Special Servicing Agreement, you shall not be
required to pay expenses of any activity which is primarily intended to result
in sales of Shares of the Portfolios if and to the extent that (i) such expenses
are required to be borne by a principal underwriter which acts as the
distributor of the Portfolios' Shares pursuant to an underwriting agreement
which provides that the underwriter shall assume some or all of such expenses,
or (ii) the Trust on behalf of the Portfolios shall have adopted a plan in
conformity with Rule 12b-1 under the 1940 Act providing that the Portfolios (or
some other party) shall assume some or all of such expenses. You shall be
required to pay such of the foregoing sales expenses as are not required to be
paid by the principal underwriter pursuant to the underwriting agreement or are
not permitted to be paid by the Portfolios (or some other party) pursuant to
such a plan.
6. Management Fee and Payment of Certain Expenses. As you expect to
receive additional compensation under investment management agreements currently
in effect between you and the Underlying Funds due to growth in the assets of
the Underlying Funds resulting from investments in the Underlying Funds by the
Portfolios, you will not be paid a fee for the services described in sections 3
and 4 hereof.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Portfolios, neither you nor any of your directors,
officers or employees shall act as a principal or agent or receive any
commission. You or your agent shall arrange for the placing of all orders for
the purchase and sale of portfolio securities and other investments for each
Portfolio's account with brokers or dealers selected by you in accordance with
Portfolios policies as expressed in the Registration Statement. If any occasion
should arise in which you give any advice to clients of yours concerning the
Shares of the Portfolios, you shall act solely as investment counsel for such
clients and not in any way on behalf of the Portfolios.
Your services to the Portfolios pursuant to this Agreement are not to
be deemed to be exclusive and it is understood that you may render investment
advice, management and services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Trust. Whenever the
Portfolios and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
equitable. The Portfolios recognize that in some cases this procedure may
adversely affect the size of the position that may be acquired or disposed of
for the Portfolios.
8. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Trust agrees that
you shall not be liable under this Agreement for any error of judgment or
mistake of law or for any loss suffered by the Portfolios in connection with the
matters to which this Agreement relates, provided that nothing in this Agreement
shall be deemed to protect or purport to protect you against any liability to
the Trust, the Portfolios or its shareholders to which you would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties hereunder. Any person, even though also employed by you,
who may be or become an employee of and paid by the Portfolios shall be deemed,
when acting within the scope of his or her employment by the Portfolios, to be
acting in such employment solely for the Portfolios and not as your employee or
agent.
5
<PAGE>
9. Duration and Termination of This Agreement. This Agreement shall
remain in force until September 30, 1999, and continue in force from year to
year thereafter, but only so long as such continuance is specifically approved
at least annually (a) by the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Trustees of the Trust, or, with respect to each Portfolio, by the
vote of a majority of the outstanding voting securities of such Portfolio. The
aforesaid requirement that continuance of this Agreement be "specifically
approved at least annually" shall be construed in a manner consistent with the
1940 Act and the rules and regulations thereunder and any applicable SEC
exemptive order therefrom.
This Agreement may be terminated with respect to a Portfolio at any
time, without the payment of any penalty, by the vote of a majority of the
outstanding voting securities of the Portfolio or by the Trust's Board of
Trustees on 60 days' written notice to you, or by you on 60 days' written notice
to the Trust. This Agreement shall terminate automatically in the event of its
assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of
which, together with all amendments thereto, is on file in the Office of the
Secretary of the Commonwealth of Massachusetts, provides that the name "Scudder
Pathway Series" refers to the Trustees under the Declaration collectively as
Trustees and not as individuals or personally, and that no shareholder of any
Portfolio, or Trustee, officer, employee or agent of the Trust, shall be subject
to claims against or obligations of the Trust or of any Portfolio to any extent
whatsoever, but that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability
as set forth in the Declaration and you agree that the obligations assumed by
the Trust on behalf of each Portfolio pursuant to this Agreement shall be
limited in all cases to the Portfolios and its assets, and you shall not seek
satisfaction of any such obligation from the shareholders or any shareholder of
the Portfolios or any other series of the Trust, or from any Trustee, officer,
employee or agent of the Trust. You understand that the rights and obligations
of each Portfolio, or series, under the Declaration are separate and distinct
from those of any and all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the SEC by any rule, regulation or
order.
6
<PAGE>
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause a
Portfolio to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or
management agreements entered into between you and the Trust on behalf of the
Portfolios.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
SCUDDER PATHWAY SERIES, on behalf of
Conservative Portfolio
Balanced Portfolio
Growth Portfolio
International Portfolio
By: /s/Thomas F. McDonough
----------------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/Daniel Pierce
-----------------------------------
Managing Director
7
Exhibit (e) (1)
SCUDDER PATHWAY SERIES
Two International Place
Boston, MA 02110
Date: September 7, 1998
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Underwriting Agreement
Dear Ladies and Gentlemen:
Scudder Pathway Series (hereinafter called the "Trust") is a business
trust organized under the laws of Massachusetts and is engaged in the business
of an investment company. The authorized capital of the Trust consists of shares
of beneficial interest, with par value of $0.01 per share ("Shares"), currently
divided into four portfolios ("Portfolio"). The Portfolios and, if applicable,
the classes thereof to which this Agreement applies are included under Schedule
A. Shares may be divided into additional Portfolios of the Trust and the
Portfolios may be terminated from time to time. The Trust has selected you to
act as principal underwriter (as such term is defined in Section 2(a)(29) of the
Investment Company Act of 1940, as amended (the "1940 Act")) of the Shares and
you are willing to act as such principal underwriter and to perform the duties
and functions of underwriter in the manner and on the terms and conditions
hereinafter set forth. Accordingly, the Trust hereby agrees with you as follows:
1. Delivery of Documents. The Trust has furnished you with copies properly
certified or authenticated of each of the following:
(a) Declaration of Trust of the Trust, dated July 1, 1994, as amended to
date.
(b) By-Laws of the Trust as in effect on the date hereof.
<PAGE>
(c) Resolutions of the Board of Trustees of the Trust selecting you as
principal underwriter and approving this form of Agreement.
(d) The Establishment and Designation of Series of Beneficial Interest,
$.01 Par Value.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
The Trust will furnish you promptly with properly certified or
authenticated copies of any registration statement filed by it with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
(the "1933 Act") or the 1940 Act, together with any financial statements and
exhibits included therein, and all amendments or supplements thereto hereafter
filed.
2. Registration and Sale of Additional Shares. The Trust will from time
to time use its best efforts to register under the 1933 Act such number of
Shares not already so registered as you may reasonably be expected to sell on
behalf of the Trust. You and the Trust will cooperate in taking such action as
may be necessary from time to time to qualify Shares so registered for sale by
you or the Trust in any states mutually agreeable to you and the Trust, and to
maintain such qualification. This Agreement relates to the issue and sale of
Shares that are duly authorized and registered and available for sale by the
Trust, including redeemed or repurchased Shares if and to the extent that they
may be legally sold and if, but only if, the Trust sees fit to sell them.
3. Sale of Shares. Subject to the provisions of paragraphs 5 and 7
hereof and to such minimum purchase requirements as may from time to time be
currently indicated in the Trust's prospectus or statement of additional
information, you are authorized to sell as agent on behalf of the Trust Shares
authorized for issue and registered under the 1933 Act. You may also purchase as
principal Shares for resale to the public. Such sales will be made by you on
behalf of the Trust by accepting unconditional orders to purchase Shares placed
with you by investors and such purchases will be made by you only after
acceptance by you of such orders. The sales price to the public of Shares shall
be the public offering price as defined in paragraph 6 hereof.
4. Solicitation of Orders. You will use your best efforts (but only in
states in which you may lawfully do so) to obtain from investors unconditional
orders for Shares authorized for issue by
2
<PAGE>
the Trust and registered under the 1933 Act, provided that you may in your
discretion refuse to accept orders for Shares from any particular applicant.
5. Sale of Shares by the Trust. Unless you are otherwise notified by
the Trust, any right granted to you to accept orders for Shares or to make sales
on behalf of the Trust or to purchase Shares for resale will not apply to (i)
Shares issued in connection with the merger or consolidation of any other
investment company with the Trust or its acquisition, by purchase or otherwise,
of all or substantially all of the assets of any investment company or
substantially all the outstanding shares of any such company, and (ii) to Shares
that may be offered by the Trust to shareholders of the Trust by virtue of their
being such shareholders.
6. Public Offering Price. All Shares sold to investors by you will be
sold at the public offering price. The public offering price for all accepted
subscriptions will be the net asset value per Share, determined, in the manner
provided in the Trust's registration statements as from time to time in effect
under the 1933 Act and the 1940 Act, next after the order is accepted by you.
7. Suspension of Sales. If and whenever the determination of net asset
value is suspended and until such suspension is terminated, no further orders
for Shares shall be accepted by you except unconditional orders placed with you
before you had knowledge of the suspension. In addition, the Trust reserves the
right to suspend sales and your authority to accept orders for Shares on behalf
of the Trust if, in the judgment of a majority of the Board of Trustees or a
majority of the Executive Committee of such Board, if such body exists, it is in
the best interests of the Trust to do so, such suspension to continue for such
period as may be determined by such majority; and in that event, no Shares will
be sold by you on behalf of the Trust while such suspension remains in effect
except for Shares necessary to cover unconditional orders accepted by you before
you had knowledge of the suspension.
8. Portfolio Securities. Portfolio securities of any Portfolio of the
Trust may be bought or sold by or through you and you may participate directly
or indirectly in brokerage commissions or "spread" in respect to transactions in
portfolio securities of any Portfolio of the Trust; provided, however, that all
sums of money received by you as a result of such purchases and sales or as a
result
3
<PAGE>
of such participation must, after reimbursement of your actual expenses in
connection with such activity, be paid over by you to or for the benefit of the
Trust.
9. Expenses. (a) The Trust will pay (or will enter into arrangements
providing that others than you will pay) all fees and expenses:
(1) in connection with the preparation, setting in type and filing
of any registration statement (including a prospectus and
statement of additional information) under the 1933 Act or the
1940 Act, or both, and any amendments or supplements thereto
that may be made from time to time;
(2) in connection with the registration and qualification of
Shares for sale in the various jurisdictions in which the
Trust shall determine it advisable to qualify such Shares for
sale (including registering the Trust as a broker or dealer or
any officer of the Trust or other person as agent or salesman
of the Trust in any such jurisdictions);
(3) of preparing, setting in type, printing and mailing any
notice, proxy statement, report, prospectus or other
communication to shareholders of the Trust in their capacity
as such;
(4) of preparing, setting in type, printing and mailing
prospectuses annually, and any supplements thereto, to
existing shareholders;
(5) in connection with the issue and transfer of Shares resulting
from the acceptance by you of orders to purchase Shares placed
with you by investors, including the expenses of printing and
mailing confirmations of such purchase orders and the expenses
of printing and mailing a prospectus included with the
confirmation of such orders;
(6) of any issue taxes or any initial transfer taxes;
(7) of WATS (or equivalent) telephone lines other than the portion
allocated to you in this paragraph 9;
(8) of wiring funds in payment of Share purchases or in
satisfaction of redemption or repurchase requests, unless such
expenses are paid for by the investor or shareholder who
initiates the transaction;
4
<PAGE>
(9) of the cost of printing and postage of business reply
envelopes sent to Trust shareholders;
(10) of one or more CRT terminals connected with the computer
facilities of the transfer agent other than the portion
allocated to you in this paragraph 9;
(11) permitted to be paid or assumed by the Trust pursuant to a
plan ("12b-1 Plan"), if any, adopted by the Trust in
conformity with the requirements of Rule 12b-1 under the 1940
Act ("Rule 12b-1") or any successor rule, notwithstanding any
other provision to the contrary herein;
(12) of the expense of setting in type, printing and postage of the
periodic newsletter to shareholders other than the portion
allocated to you in this paragraph 9; and
(13) of the salaries and overhead of persons employed by you as
shareholder representatives other than the portion allocated
to you in this paragraph 9.
b) You shall pay or arrange for the payment of all fees and
expenses:
(1) of printing and distributing any prospectuses or reports
prepared for your use in connection with the offering of
Shares to the public;
(2) of preparing, setting in type, printing and mailing any other
literature used by you in connection with the offering of
Shares to the public;
(3) of advertising in connection with the offering of Shares to
the public;
(4) incurred in connection with your registration as a broker or
dealer or the registration or qualification of your officers,
trustees, agents or representatives under Federal and state
laws;
(5) of that portion of WATS (or equivalent) telephone lines,
allocated to you on the basis of use by investors (but not
shareholders) who request information or prospectuses;
(6) of that portion of the expenses of setting in type, printing
and postage of the periodic newsletter to shareholders
attributable to promotional material included in such
newsletter at your request concerning investment companies
other than the Trust or concerning the Trust to the extent you
are required to assume the expense thereof
5
<PAGE>
pursuant to paragraph 9(b)(8), except such material which is
limited to information, such as listings of other investment
companies and their investment objectives, given in connection
with the exchange privilege as from time to time described in
the Trust's prospectus;
(7) of that portion of the salaries and overhead of persons
employed by you as shareholder representatives attributable to
the time spent by such persons in responding to requests from
prospective investors and shareholders for information about
the Trust;
(8) of any activity which is primarily intended to result in the
sale of Shares, unless a 12b-1 Plan shall be in effect which
provides that the Trust shall bear some or all of such
expenses, in which case the Trust shall bear such expenses in
accordance with such Plan; and
(9) of that portion of one or more CRT terminals connected with
the computer facilities of the transfer agent attributable to
your use of such terminal(s) to gain access to such of the
transfer agent's records as also serve as your records.
Expenses which are to be allocated between you and the Trust shall be
allocated pursuant to reasonable procedures or formulae mutually agreed upon
from time to time, which procedures or formulae shall to the extent practicable
reflect studies of relevant empirical data.
10. Conformity with Law. You agree that in selling Shares you will duly
conform in all respects with the laws of the United States and any state in
which Shares may be offered for sale by you pursuant to this Agreement and to
the rules and regulations of the National Association of Securities Dealers,
Inc., of which you are a member.
11. Independent Contractor. You shall be an independent contractor and
neither you nor any of your officers or employees is or shall be an employee of
the Trust in the performance of your duties hereunder. You shall be responsible
for your own conduct and the employment, control and conduct of your agents and
employees and for injury to such agents or employees or to others
6
<PAGE>
through your agents or employees. You assume full responsibility for your agents
and employees under applicable statutes and agree to pay all employee taxes
thereunder.
12. Indemnification. You agree to indemnify and hold harmless the Trust
and each of its trustees and officers and each person, if any, who controls the
Trust within the meaning of Section 15 of the 1933 Act, against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which the Trust or such trustees, officers, or controlling person
may become subject under such Act, under any other statute, at common law or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by you or any of your employees or
representatives, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement
(including a prospectus or statement of additional information) covering Shares
or any amendment thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading if such statement or
omission was made in reliance upon information furnished to the Trust by you, or
(iii) may be incurred or arise by reason of your acting as the Trust's agent
instead of purchasing and reselling Shares as principal in distributing the
Shares to the public, provided, however, that in no case (i) is your indemnity
in favor of a trustee or officer or any other person deemed to protect such
trustee or officer or other person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence in the performance of his duties or by reason of his
reckless disregard of obligations and duties under this Agreement or (ii) are
you to be liable under your indemnity agreement contained in this paragraph with
respect to any claim made against the Trust or any person indemnified unless the
Trust or such person, as the case may be, shall have notified you in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claims shall have been served upon the Trust or
upon such person (or after the Trust or such person shall have received notice
of such service on any designated agent), but failure to notify you of any such
claim shall not relieve you from any liability which you may have to the Trust
or any person against whom such action is brought otherwise than on account of
7
<PAGE>
your indemnity agreement contained in this paragraph. You shall be entitled to
participate, at your own expense, in the defense, or, if you so elect, to assume
the defense of any suit brought to enforce any such liability, but if you elect
to assume the defense, such defense shall be conducted by counsel chosen by you
and satisfactory to the Trust, to its officers and trustees, or to any
controlling person or persons, defendant or defendants in the suit. In the event
that you elect to assume the defense of any such suit and retain such counsel,
the Trust, such officers and trustees or controlling person or persons,
defendant or defendants in the suit shall bear the fees and expenses of any
additional counsel retained by them, but, in case you do not elect to assume the
defense of any such suit, you will reimburse the Trust, such officers and
trustees or controlling person or persons, defendant or defendants in such suit
for the reasonable fees and expenses of any counsel retained by them. You agree
promptly to notify the Trust of the commencement of any litigation or
proceedings against it in connection with the issue and sale of any Shares.
The Trust agrees to indemnify and hold harmless you and each of your
trustees and officers and each person, if any, who controls you within the
meaning of Section 15 of the 1933 Act, against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
you or such trustees, officers or controlling person may become subject under
such Act, under any other statute, at common law or otherwise, arising out of
the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Trust or any of its employees or representatives, or (ii)
may be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement (including a prospectus or statement
of additional information) covering Shares or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in reliance upon
information furnished to you by the Trust; provided, however, that in no case
(i) is the Trust's indemnity in favor of a trustee or officer or any other
person deemed to protect such trustee or officer or other person against any
liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of his
duties or by reason of
8
<PAGE>
his reckless disregard of obligations and duties under this Agreement or (ii) is
the Trust to be liable under its indemnity agreement contained in this paragraph
with respect to any claims made against you or any such trustee, officer or
controlling person unless you or such trustee, officer or controlling person, as
the case may be, shall have notified the Trust in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon you or upon such trustee,
officer or controlling person (or after you or such trustee, officer or
controlling person shall have received notice of such service on any designated
agent), but failure to notify the Trust of any such claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Trust will be entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Trust elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to you, your
trustees, officers, or controlling person or persons, defendant or defendants in
the suit. In the event that the Trust elects to assume the defense of any such
suit and retain such counsel, you, your trustees, officers or controlling person
or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the Trust does
not elect to assume the defense of any such suit, it will reimburse you or such
trustees, officers or controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses of any counsel retained by them.
The Trust agrees promptly to notify you of the commencement of any litigation or
proceedings against it or any of its officers or trustees in connection with the
issuance or sale of any Shares.
13. Authorized Representations. The Trust is not authorized to give any
information or to make any representations on behalf of you other than the
information and representations contained in a registration statement (including
a prospectus or statement of additional information) covering Shares, as such
registration statement and prospectus may be amended or supplemented from time
to time.
9
<PAGE>
You are not authorized to give any information or to make any
representations on behalf of the Trust or in connection with the sale of Shares
other than the information and representations contained in a registration
statement (including a prospectus or statement of additional information)
covering Shares, as such registration statement may be amended or supplemented
from time to time. No person other than you is authorized to act as principal
underwriter (as such term is defined in the 1940 Act) for the Trust.
14. Duration and Termination of this Agreement. This Agreement shall
become effective upon the date first written above and will remain in effect
until September 30, 1999 and from year to year thereafter, but only so long as
such continuance is specifically approved at least annually by the vote of a
majority of the trustees who are not interested persons of you or of the Trust,
cast in person at a meeting called for the purpose of voting on such approval,
and by vote of the Board of Trustees or of a majority of the outstanding voting
securities of the Trust. This Agreement may, on 60 days' written notice, be
terminated at any time without the payment of any penalty, by the Board of
Trustees of the Trust, by a vote of a majority of the outstanding voting
securities of the Trust, or by you. This Agreement will automatically terminate
in the event of its assignment. In interpreting the provisions of this paragraph
14, the definitions contained in Section 2(a) of the 1940 Act (particularly the
definitions of "interested person", "assignment" and "majority of the
outstanding voting securities"), as modified by any applicable order of the
Securities and Exchange Commission, shall be applied.
15. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. If the Trust should at any time deem it
necessary or advisable in the best interests of the Trust that any amendment of
this Agreement be made in order to comply with the recommendations or
requirements of the Securities and Exchange Commission or other governmental
authority or to obtain any advantage under state or federal tax laws and should
notify you of the form of such amendment, and the reasons therefor, and if you
should decline to assent to such amendment, the
10
<PAGE>
Trust may terminate this Agreement forthwith. If you should at any time request
that a change be made in the Trust's Declaration of Trust or By-laws or in its
methods of doing business, in order to comply with any requirements of federal
law or regulations of the Securities and Exchange Commission or of a national
securities association of which you are or may be a member relating to the sale
of shares of the Trust, and the Trust should not make such necessary change
within a reasonable time, you may terminate this Agreement forthwith.
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract.
Very truly yours,
SCUDDER PATHWAY SERIES
By: /s/Thomas F. McDonough
--------------------------------
Thomas F. McDonough,Vice President
The foregoing agreement is hereby accepted as of the foregoing date
thereof.
SCUDDER INVESTOR SERVICES, INC.
By: /s/Daniel Pierce
--------------------------------
Daniel Pierce, President
11
<PAGE>
Schedule A
Balanced Portfolio
Conservative portfolio
Growth Portfolio
International Portfolio
12
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A (the "Registration
Statement") of our report dated October 9, 1998, relating to the financial
statements and financial highlights appearing in the August 31, 1998 Annual
Reports to Shareholders of Scudder Pathway Series: International Portfolio,
Conservative Portfolio, Balanced Portfolio and Growth Portfolio, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights," in the Prospectus
and under the heading "Experts" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 30, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Pathway Series: Balanced Portfolio Annual Report for the fiscal year ended
8/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> Scudder Pathway Series: Balanced Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 239,188,808
<INVESTMENTS-AT-VALUE> 223,222,745
<RECEIVABLES> 20,672,121
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 243,894,866
<PAYABLE-FOR-SECURITIES> 20,379,423
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,044,202
<TOTAL-LIABILITIES> 21,423,625
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 230,238,079
<SHARES-COMMON-STOCK> 18,453,223
<SHARES-COMMON-PRIOR> 14,166,739
<ACCUMULATED-NII-CURRENT> 389,390
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,809,835
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (15,966,063)
<NET-ASSETS> 222,471,241
<DIVIDEND-INCOME> 6,646,858
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 6,646,858
<REALIZED-GAINS-CURRENT> 9,895,787
<APPREC-INCREASE-CURRENT> (33,472,924)
<NET-CHANGE-FROM-OPS> (16,930,279)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,892,334)
<DISTRIBUTIONS-OF-GAINS> (3,375,302)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,374,746
<NUMBER-OF-SHARES-REDEEMED> (3,863,351)
<SHARES-REINVESTED> 775,089
<NET-CHANGE-IN-ASSETS> 30,325,068
<ACCUMULATED-NII-PRIOR> 584,477
<ACCUMULATED-GAINS-PRIOR> 1,339,738
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 229,784,210
<PER-SHARE-NAV-BEGIN> 13.56
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> (1.26)
<PER-SHARE-DIVIDEND> (0.42)
<PER-SHARE-DISTRIBUTIONS> (0.21)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.06
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Pathway Series: Conservative Portfolio Annual Report for the fiscal year ended
8/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> Scudder Pathway Series: Conservative
Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 30,198,822
<INVESTMENTS-AT-VALUE> 28,921,289
<RECEIVABLES> 2,761,601
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 31,682,890
<PAYABLE-FOR-SECURITIES> 2,677,936
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 202,256
<TOTAL-LIABILITIES> 2,880,192
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 29,519,294
<SHARES-COMMON-STOCK> 2,346,300
<SHARES-COMMON-PRIOR> 1,279,306
<ACCUMULATED-NII-CURRENT> 55,480
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 505,457
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,277,533)
<NET-ASSETS> 28,802,698
<DIVIDEND-INCOME> 970,613
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 970,613
<REALIZED-GAINS-CURRENT> 684,820
<APPREC-INCREASE-CURRENT> (2,259,098)
<NET-CHANGE-FROM-OPS> (603,665)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,003,113)
<DISTRIBUTIONS-OF-GAINS> (419,415)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,561,078
<NUMBER-OF-SHARES-REDEEMED> (601,345)
<SHARES-REINVESTED> 107,261
<NET-CHANGE-IN-ASSETS> 11,831,017
<ACCUMULATED-NII-PRIOR> 78,162
<ACCUMULATED-GAINS-PRIOR> 249,870
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 25,137,600
<PER-SHARE-NAV-BEGIN> 13.27
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> (0.63)
<PER-SHARE-DIVIDEND> (0.57)
<PER-SHARE-DISTRIBUTIONS> (0.30)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.28
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Pathway Series: Growth Portfolio Annual Report for the fiscal year ended 8/31/98
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> Scudder Pathway Series: Growth
Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 70,590,670
<INVESTMENTS-AT-VALUE> 63,876,039
<RECEIVABLES> 2,139,818
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 66,015,857
<PAYABLE-FOR-SECURITIES> 2,034,458
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 214,300
<TOTAL-LIABILITIES> 2,248,758
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 67,725,014
<SHARES-COMMON-STOCK> 5,240,260
<SHARES-COMMON-PRIOR> 3,503,263
<ACCUMULATED-NII-CURRENT> 685,606
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,071,110
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (6,714,631)
<NET-ASSETS> 63,767,099
<DIVIDEND-INCOME> 1,013,142
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 1,013,142
<REALIZED-GAINS-CURRENT> 2,860,017
<APPREC-INCREASE-CURRENT> (12,210,035)
<NET-CHANGE-FROM-OPS> (8,336,876)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (792,755)
<DISTRIBUTIONS-OF-GAINS> (981,692)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,799,247
<NUMBER-OF-SHARES-REDEEMED> (1,195,935)
<SHARES-REINVESTED> 133,685
<NET-CHANGE-IN-ASSETS> 14,192,843
<ACCUMULATED-NII-PRIOR> 443,915
<ACCUMULATED-GAINS-PRIOR> 206,721
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 62,147,242
<PER-SHARE-NAV-BEGIN> 14.15
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> (1.74)
<PER-SHARE-DIVIDEND> (0.21)
<PER-SHARE-DISTRIBUTIONS> (0.26)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.17
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Pathway Series: International Portfolio Annual Report for the fiscal year ended
8/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> Scudder Pathway Series:
International Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 10,444,338
<INVESTMENTS-AT-VALUE> 8,841,769
<RECEIVABLES> 5,813
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,847,582
<PAYABLE-FOR-SECURITIES> 2,318
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<EQUALIZATION> 0
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<DISTRIBUTIONS-OF-GAINS> (277,380)
<DISTRIBUTIONS-OTHER> 0
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<NUMBER-OF-SHARES-REDEEMED> (517,849)
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<NET-CHANGE-IN-ASSETS> (2,904,001)
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<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> (1.55)
<PER-SHARE-DIVIDEND> (0.16)
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
