Filed electronically with the Securities and Exchange
Commission on December 23, 1999.
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. 7
--- / X /
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 9
--- / X /
Scudder Pathway Series.
-----------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place
-----------------------
Boston, Massachusetts 02110-4103
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2567
--------------
John Millette
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 )
/ X / On January 1, 2000 pursuant to paragraph ( b )
/ / 60 days after filing pursuant to paragraph ( a ) ( 1 )
/ / On pursuant to paragraph ( a ) ( 1 )
/ / 75 days after filing pursuant to paragraph ( a ) ( 2 )
/ / On ___________ pursuant to paragraph ( a ) ( 2 ) 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>
[LOGO] SCUDDER
INVESTMENTS(SM)
- -----------------------------
ASSET ALLOCATION
- -----------------------------
Scudder
Pathway Series
Conservative Portfolio Fund #080
Balanced Portfolio Fund #081
Growth Portfolio Fund #082
Prospectus
January 1, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder Pathway Series
How the portfolios work
2 Conservative Portfolio
6 Balanced Portfolio
10 Growth Portfolio
14 Other Policies and Risks
15 Who Manages and Oversees the Portfolios
17 Financial Highlights
How to invest in the portfolios
21 How to Buy Shares
22 How to Exchange or Sell Shares
23 Policies You Should Know About
28 Understanding Distributions and Taxes
<PAGE>
How the portfolios work
These portfolios use an asset allocation strategy, dividing their assets among
different types of investments. All three portfolios invest in other Scudder
funds. Each portfolio is designed for investors with a particular time horizon
or risk profile, and invests in a distinct mix of funds. Because the underlying
funds hold a range of securities, an investment in a portfolio may offer
exposure to thousands of individual securities.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
You can access all Scudder fund prospectuses
online at www.scudder.com
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol | SCPCX fund number | 080
Conservative Portfolio
- --------------------------------------------------------------------------------
Investment Approach
The portfolio seeks current income and, as a secondary objective, long-term
growth of capital. It does this by investing mainly in other Scudder mutual
funds.
The portfolio has a target allocation (see sidebar), which the portfolio
managers use as a reference point in setting the portfolio's actual allocation.
While the actual allocation may vary, the managers expect that over the long
term it will average out to be similar to the target allocation.
The managers regularly review the actual allocation, and may adjust it in
seeking to take advantage of current or expected market conditions or to manage
risk. In making their allocation decisions, the managers take a top-down
approach, looking at the outlooks for various securities markets and segments of
those markets. Based on the desired exposure to particular investments, the
managers then decide which funds to use as underlying funds and how much to
invest in each fund.
The portfolio's underlying funds use a broad array of investment styles. These
funds can buy many types of securities, among them common stocks of companies of
any size, corporate bonds of varying credit quality, U.S. government and agency
bonds, mortgage- and asset-backed securities, money market instruments, and
others. These securities are mainly from U.S. issuers but may, to a more limited
extent, be from foreign issuers.
The managers of the underlying funds may adjust the duration (a measure of
sensitivity to interest rates) of a fund's bond allocation depending on their
outlook for interest rates, and the portfolio's allocation among the underlying
funds may similarly be adjusted.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
ASSET ALLOCATION
The portfolio's target allocation is as follows:
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE.
CHART DATA:
60% Bond funds
30% Equity funds
10% Money funds
The managers have the flexibility to adjust this allocation within the following
ranges:
Bond funds 40%-80%
Equity funds 20%-50%
Money funds 0%-15%
- --------------------------------------------------------------------------------
2 | Conservative Portfolio
<PAGE>
- --------------------------------------------------------------------------------
[ICON] This portfolio may make sense for investors who have a time horizon of
three to five years or who are seeking a relatively conservative asset
allocation investment.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the portfolio's performance,
cause you to lose money or make the portfolio perform less well than other
investments.
Bonds could be hurt by rises in market interest rates. (As a general rule, a 1%
rise in interest rates means a 1% fall in value for every year of duration.)
Some bonds could be paid off earlier than expected, which would hurt the
portfolio's performance; with mortgage- or asset-backed securities, any
unexpected behavior in interest rates could increase the volatility of the
portfolio's share price and yield. Corporate bonds could perform less well than
other bonds in a weak economy.
The portfolio is also affected by how stock markets perform -- something that
depends on many influences, including economic, political, and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Stock prices can be hurt by poor management, shrinking product demand,
and other business risks. These risks tend to be greater with smaller companies.
Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. There is also the risk that
changing currency rates could add to market losses or reduce market gains.
Other factors that could affect performance include:
o the managers of the portfolio or the underlying funds could be wrong in
their analysis of economic trends, countries, industries, companies, the
relative attractiveness of asset classes or other matters
o a bond could fall in credit quality or go into default; this risk is
greater with junk and foreign bonds
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
3 | Conservative Portfolio
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how portfolio returns have varied from year to year, which
may give some idea of risk. The table shows how returns over different periods
average out. For context, the table also includes three broad-based market
indexes (which do not have any fees or expenses). All figures on this page
assume reinvestment of distributions and dividends.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
14.36 5.36
'97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of September 30: -0.10%
Best Quarter: 7.47%, Q2 1997 Worst Quarter: -4.93%, Q3 1998
- --------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year Since Inception
- --------------------------------------------------------------------------------
Portfolio 5.63 9.94*
- --------------------------------------------------------------------------------
Index 1 8.69 8.31**
- --------------------------------------------------------------------------------
Index 2 5.01 5.33**
- --------------------------------------------------------------------------------
Index 3 28.58 28.36**
- --------------------------------------------------------------------------------
Index 1: Lehman Brothers Aggregate Bond Index, an unmanaged, market
value-weighted measure of U.S. Treasury and agency securities, corporate bond
issues and mortgage-backed securities.
Index 2: Treasury Bill 1-year.
Index 3: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
* Fund inception: 11/15/96
** Index comparisons begin 11/30/96
4 | Conservative Portfolio
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. 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.
- --------------------------------------------------------------------------------
Fee Table (%)
- --------------------------------------------------------------------------------
Range of Avg. 0.77% to 2.37%
Weighted Expense Ratio
The example below shows an approximate estimate of the expenses that might apply
to your investment of $10,000 in the portfolio over 1, 3, 5 and 10 years. Your
actual costs could be higher or lower than this example.
- --------------------------------------------------------------------------------
Expenses on a $10,000 Investment
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$160 $496 $855 $1,867
- --------------------------------------------------------------------------------
The example assumes 5% annual returns, expenses calculated at the midpoint of
the current expense range and reinvestment of all dividends and distributions
and that you sold your shares at the end of each period.
5 | Conservative Portfolio
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol | SPBAX fund number | 081
Balanced Portfolio
- --------------------------------------------------------------------------------
Investment Approach
The portfolio seeks a balance of current income and growth of capital. It does
this by investing mainly in other Scudder mutual funds.
The portfolio has a target allocation (see sidebar), which the portfolio
managers use as a reference point in setting the portfolio's actual allocation.
While the actual allocation may vary, the managers expect that over the long
term it will average out to be similar to the target allocation.
The managers regularly review the actual allocation, and may adjust it in
seeking to take advantage of current or expected market conditions or to manage
risk. In making their allocation decisions, the managers take a top-down
approach, looking at the outlooks for various securities markets and segments of
those markets. Based on the desired exposure to particular investments, the
managers then decide which funds to use as underlying funds and how much to
invest in each fund.
The portfolio's underlying funds use a broad array of investment styles. These
funds can buy many types of securities, among them common stocks of companies of
any size, corporate bonds of varying credit quality, U.S. government and agency
bonds, mortgage- and asset-backed securities, money market instruments, and
others. These securities are mainly from U.S. issuers but may, to a more limited
extent, be from foreign issuers.
The managers of the underlying funds may adjust the duration (a measure of
sensitivity to interest rates) of a fund's bond allocation depending on their
outlook for interest rates, and the portfolio's allocation among the underlying
funds may similarly be adjusted.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
ASSET ALLOCATION
The portfolio's target allocation is as follows:
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE.
CHART DATA:
60% Equity funds
35% Bond funds
5% Money funds
The managers have the flexibility to adjust this allocation within the following
ranges:
Equity funds 40%-70%
Bond funds 25%-60%
Money funds 0%-10%
- --------------------------------------------------------------------------------
6 | Balanced Portfolio
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Investors who have a time horizon of five to ten years and are seeking
a balanced asset allocation investment may be interested in this
portfolio.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the portfolio's performance,
cause you to lose money, or make the portfolio perform less well than other
investments.
One of the most important factors is how stock markets perform -- something that
depends on many influences, including economic, political, and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Stock prices can be hurt by poor management, shrinking product demand,
and other business risks. These risks tend to be greater with smaller companies.
Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. There is also the risk that
changing currency rates could add to market losses or reduce market gains.
The portfolio is also affected by the performance of bonds, which could be hurt
by rises in market interest rates. (As a general rule, a 1% rise in interest
rates means a 1% fall in value for every year of duration.) Some bonds could be
paid off earlier than expected, which would hurt the portfolio's performance;
with mortgage- or asset-backed securities, any unexpected behavior in interest
rates could increase the volatility of the portfolio's share price and yield.
Corporate bonds could perform less well than other bonds in a weak economy.
Other factors that could affect performance include:
o the managers of the portfolio or the underlying funds could be wrong in
their analysis of economic trends, countries, industries, companies, the
relative attractiveness of asset classes, or other matters
o a bond could fall in credit quality or go into default; this risk is
greater with junk and foreign bonds
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
7 | Balanced Portfolio
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how portfolio returns have varied from year to year, which
may give some idea of risk. The table shows how returns over different periods
average out. For context, the table also includes three broad-based market
indexes (which do not have any fees or expenses). All figures on this page
assume reinvestment of distributions and dividends.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
13.33 7.64
'97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of September 30: 3.67%
Best Quarter: 11.08%, Q4 1998 Worst Quarter: -10.26%, Q3 1998
- --------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year Since Inception
- --------------------------------------------------------------------------------
Portfolio 7.64 10.44*
- --------------------------------------------------------------------------------
Index 1 28.58 28.36**
- --------------------------------------------------------------------------------
Index 2 20.00 9.41**
- --------------------------------------------------------------------------------
Index 3 8.69 8.31**
- --------------------------------------------------------------------------------
Index 1: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: MSCI EAFE, an unmanaged capitalization-weighted measure of
international stock markets.
Index 3: Lehman Brothers Aggregate Bond Index, an unmanaged market
value-weighted measure of U.S. Treasury and agency securities, corporate bond
issues and mortgage-backed securities.
* Fund inception: 11/15/96
** Index comparisons begin 11/30/96
8 | Balanced Portfolio
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. 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.
- --------------------------------------------------------------------------------
Fee Table (%)
- --------------------------------------------------------------------------------
Range of Avg. 0.76% to 2.42%
Weighted Expense Ratio
The example below shows an approximate estimate of the expenses that might apply
to your investment of $10,000 in the portfolio over 1, 3, 5 and 10 years. Your
actual costs could be higher or lower than this example.
- --------------------------------------------------------------------------------
Expenses on a $10,000 Investment
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$162 $502 $866 $1,889
- --------------------------------------------------------------------------------
The example assumes 5% annual returns, expenses calculated at the midpoint of
the current expense range and reinvestment of all dividends and distributions
and that you sold your shares at the end of each period.
9 | Balanced Portfolio
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol | SPGRX fund number | 082
Growth Portfolio
- --------------------------------------------------------------------------------
Investment Approach
The portfolio seeks long-term growth of capital. It does this by investing
mainly in other Scudder mutual funds.
The portfolio has a target allocation (see sidebar), which the portfolio
managers use as a reference point in setting the portfolio's actual allocation.
While the actual allocation may vary, the managers expect that over the long
term it will average out to be similar to the target allocation.
The managers regularly review the actual allocation, and may adjust it in
seeking to take advantage of current or expected market conditions or to manage
risk. In making their allocation decisions, the managers take a top-down
approach, looking at the outlooks for various securities markets and segments of
those markets. Based on the desired exposure to particular investments, the
managers then decide which funds to use as underlying funds and how much to
invest in each fund.
The portfolio's underlying funds use a broad array of investment styles. These
funds can buy many types of securities, among them common stocks of companies of
any size, corporate bonds of varying credit quality, U.S. government and agency
bonds, mortgage- and asset-backed securities, money market instruments, and
others. These securities are mainly from U.S. issuers but may, to a more limited
extent, be from foreign issuers.
The managers of the underlying funds may adjust the duration (a measure of
sensitivity to interest rates) of a fund's bond allocation depending on their
outlook for interest rates, and the portfolio's allocation among the underlying
funds may similarly be adjusted.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
ASSET ALLOCATION
The portfolio's target allocation is as follows:
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE.
CHART DATA:
80% Equity funds
15% Bond funds
5% Money funds
The managers have the flexibility to adjust this allocation within the following
ranges:
Equity funds 60%-90%
Bond funds 10%-40%
Money funds 0%-5%
- --------------------------------------------------------------------------------
10 | Growth Portfolio
<PAGE>
- --------------------------------------------------------------------------------
[ICON] This portfolio is designed for investors with a long-term time horizon
-- ten years or more -- who are interested in taking an asset
allocation approach to growth investing.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the portfolio's performance,
cause you to lose money, or make the portfolio perform less well than other
investments.
One of the most important factors is how stock markets perform -- something that
depends on many influences, including economic, political, and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Because a stock represents ownership in its issuer, stock prices can be
hurt by poor management, shrinking product demand, and other business risks.
These risks tend to be greater with smaller companies.
Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. There is also the risk that
changing currency rates could add to market losses or reduce market gains. These
risks tend to be greater in emerging markets.
Because the portfolio invests some of its assets in bond funds, it may perform
less well in the long run than a fund investing entirely in stocks. At the same
time, the portfolio's bond component means that its performance could be hurt
somewhat by poor performance in the bond market.
Other factors that could affect performance include:
o the managers of the portfolio or the underlying funds could be wrong in
their analysis of economic trends, countries, industries, companies, the
relative attractiveness of asset classes, or other matters
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
11 | Growth Portfolio
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how portfolio returns have varied from year to year, which
may give some idea of risk. The table shows how returns over different periods
average out. For context, the table also includes three broad-based market
indexes (which do not have any fees or expenses). All figures on this page
assume reinvestment of distributions and dividends.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
14.93 9.60
'97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of September 30: 11.03%
Best Quarter: 16.37%, Q4 1998 Worst Quarter: -15.06%, Q3 1998
- --------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year Since Inception
- --------------------------------------------------------------------------------
Portfolio 9.60 12.38*
- --------------------------------------------------------------------------------
Index 1 27.02 27.60**
- --------------------------------------------------------------------------------
Index 2 20.00 9.41**
- --------------------------------------------------------------------------------
Index 3 -2.55 10.19**
- --------------------------------------------------------------------------------
Index 1: Russell 1000 Growth Index, an unmanaged measure of 1000 companies with
higher price-to-book and higher forecasted growth values.
Index 2: MSCI EAFE, an unmanaged capitalization-weighted measure of
international stock markets.
Index 3: Russell 2000 Index, an unmanaged measure of the 2000 companies that
typically have a market capitalization less than $2 billion.
* Fund inception: 11/15/96
** Index comparisons begin 11/30/96
12 | Growth Portfolio
<PAGE>
How Much Investors Pay
This fund has no sales charges or other shareholder fees. 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.
- --------------------------------------------------------------------------------
Fee Table (%)
- --------------------------------------------------------------------------------
Range of Avg. 0.74% to 2.40%
Weighted Expense Ratio
The example below shows an approximate estimate of the expenses that might apply
to your investment of $10,000 in the portfolio over 1, 3, 5 and 10 years. Your
actual costs could be higher or lower than this example.
- --------------------------------------------------------------------------------
Expenses on a $10,000 Investment
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$160 $496 $855 $1,867
- --------------------------------------------------------------------------------
The example assumes 5% annual returns, expenses calculated at the midpoint of
the current expense range and reinvestment of all dividends and distributions
and that you sold your shares at the end of each period.
13 | Growth Portfolio
<PAGE>
Other Policies and Risks
While the portfolio-by-portfolio sections on the previous pages describe the
main points of each portfolio's strategy and risks, there are a few other issues
to know about:
o Although major changes tend to be rare, a portfolio's Board could change
that portfolio's investment goals and other policies without seeking
shareholder approval.
o As a temporary defensive measure, any of these portfolios could shift up to
100% of assets into investments such as money market securities. This could
prevent losses, but would mean that the portfolio was not pursuing its
goal.
Year 2000 and euro readiness
Like all mutual funds, these portfolios could be affected by the inability of
some computer systems to recognize the year 2000. Also, to the extent they
invest in underlying funds which invest in foreign securities, the portfolios
could be affected by accounting differences, changes in tax treatment, or other
issues related to the conversion of certain European currencies into the euro,
which is already underway. The fund's investment adviser has readiness programs
designed to address these problems, and has researched the readiness of
suppliers and business partners as well as issuers of securities the underlying
funds own. Still, there's some risk that one or both of these problems could
materially affect a portfolio's operations (such as its ability to calculate net
asset value and to handle purchases and redemptions), the investments held by
underlying funds or securities markets in general.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
This prospectus doesn't tell you about every policy or risk of investing in the
portfolios.
If you want more information on a portfolio's allowable securities and
investment practices and the characteristics and risks of each one, you may want
to request a copy of the Statement of Additional Information (the back cover
tells you how to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
- --------------------------------------------------------------------------------
14 | Other Policies and Risks
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for managing
the portfolios, takes a team approach to asset management.
- --------------------------------------------------------------------------------
Who Manages and Oversees the Portfolios
The investment adviser
The investment adviser for these portfolios is Scudder Kemper Investments, Inc.,
345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more than 80 years
of experience managing mutual funds, and currently has more than $290 billion in
assets under management.
Each portfolio is managed by a team of investment professionals, who
individually represent different areas of expertise and who together develop
investment strategies and make buy and sell decisions. Supporting the portfolio
managers are Scudder Kemper's many economists, research analysts, traders, and
other investment specialists, located in offices across the United States and
around the world.
The portfolio managers
The following people handle the day-to-day management of each portfolio in this
prospectus.
Benjamin W. Thorndike Edward Baldini
Lead Portfolio Manager o Began investment career in 1989
o Began investment career o Joined the adviser in 1995
in 1981 o Joined the fund team in 1998
o Joined the adviser in 1983
o Joined the fund team
in 1996
Maureen F. Allyn
o Began investment career
in 1989
o Joined the adviser in 1996
o Joined the fund team
in 1996
15 | Who Manages and Oversees the Portfolios
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The individuals listed below serve concurrently on the boards of all
portfolios in this prospectus. The majority of the board is not affiliated with
Scudder Kemper. These independent members have primary responsibility for
assuring that each portfolio is managed in the best interests of its
shareholders.
Dr. Rosita Chang Dr. J.D. Hammond
o Trustee; Professor of o Trustee; Dean Emeritus,
Finance, University of Smeal College of Business
Rhode Island Administration, Pennsylvania
State University
Peter B. Freeman
Richard M. Hunt
o Trustee; Corporate
Director and Trustee o Trustee; University
Marshal and Senior Lecturer,
Edgar R. Fiedler Harvard University
o Trustee; Senior Fellow Kathryn L. Quirk
and Economic Counsellor,
The Conference Board, Inc. o Trustee; Managing Director
of Scudder Kemper Investments,
Inc.
16 | Who Manages and Oversees the Portfolios
<PAGE>
Financial Highlights
These tables are designed to help you understand each portfolio's financial
performance in recent years. The figures in the first part of each table are for
a single share. The total return figures represent the percentage that an
investor in a particular portfolio would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by PricewaterhouseCoopers LLP, whose report, along with each portfolio's
financial statements, is included in that portfolio's annual report (see
"Shareholder reports" on the back cover).
Conservative Portfolio
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Years Ended August 31, 1999(a) 1998(a)(b) 1997(c)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $12.28 $13.27 $12.00
-----------------------------
- -------------------------------------------------------------------------------------
Income from investment operations:
- -------------------------------------------------------------------------------------
Net investment income .57 .51 .39
- -------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investment
transactions .36 (.63) 1.36
-----------------------------
- -------------------------------------------------------------------------------------
Total from investment operations .93 (.12) 1.75
- -------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------
From net investment income (.55) (.57) (.33)
- -------------------------------------------------------------------------------------
From net realized gains on investments (.21) (.30) (.15)
-----------------------------
- -------------------------------------------------------------------------------------
Total distributions (.76) (.87) (.48)
- -------------------------------------------------------------------------------------
Net asset value, end of period $12.45 $12.28 $13.27
-----------------------------
- -------------------------------------------------------------------------------------
Total Return (%) (d) 7.62 (1.10)** 14.99**
- -------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 28 29 17
- -------------------------------------------------------------------------------------
Ratio of operating expenses to average daily net
assets (%) (e) -- -- --
- -------------------------------------------------------------------------------------
Ratio of net investment income to average daily net
assets (%) 4.45 4.21* 3.67*
- -------------------------------------------------------------------------------------
Portfolio turnover rate (%) 28.1 31.5* 42.0*
- -------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the eleven months ended August 31, 1998.
(c) For the period November 15, 1996 (commencement of operations) to September
30, 1997.
(d) Total return would have been lower if the Adviser had not maintained some
Underlying Funds' expenses.
(e) 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.
* Annualized
** Not annualized
17 | Financial Highlights
<PAGE>
Balanced Portfolio
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Years Ended August 31, 1999(a) 1998(a)(b) 1997(c)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $12.06 $13.56 $12.00
- -------------------------------------------------------------------------------------
Income from investment operations:
- -------------------------------------------------------------------------------------
Net investment income .38 .39 .37
- -------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investment
transactions 1.79 (1.26) 1.59
-----------------------------
- -------------------------------------------------------------------------------------
Total from investment operations 2.17 (.87) 1.96
- -------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------
From net investment income (.38) (.42) (.33)
- -------------------------------------------------------------------------------------
From net realized gains on investments (.43) (.21) (.07)
-----------------------------
- -------------------------------------------------------------------------------------
Total distributions (.81) (.63) (.40)
- -------------------------------------------------------------------------------------
Net asset value, end of period $13.42 $12.06 $13.56
-----------------------------
- -------------------------------------------------------------------------------------
Total Return (%) (d) 18.27 (6.78)** 16.67**
- -------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 247 222 192
- -------------------------------------------------------------------------------------
Ratio of operating expenses to average daily net
assets (%) (e) -- -- --
- -------------------------------------------------------------------------------------
Ratio of net investment income to average daily net
assets (%) 2.88 3.15* 2.96*
- -------------------------------------------------------------------------------------
Portfolio turnover rate (%) 24.3 28.2* 24.3*
- -------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the eleven months ended August 31, 1998.
(c) For the period November 15, 1996 (commencement of operations) to September
30, 1997.
(d) Total return would have been lower if the Adviser had not maintained some
Underlying Funds' expenses.
(e) 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.
* Annualized
** Not annualized
18| Financial Highlights
<PAGE>
Growth Portfolio
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Years Ended August 31, 1999(a) 1998(a)(b) 1997(c)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $12.17 $14.15 $12.00
-----------------------------
- -------------------------------------------------------------------------------------
Income from investment operations:
- -------------------------------------------------------------------------------------
Net investment income .18 .23 .29
- -------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investment
transactions 3.61 (1.74) 2.15
-----------------------------
-------------------------------------------------------------------------------------
Total from investment operations 3.79 (1.51) 2.44
- -------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------
From net investment income (.20) (.21) (.16)
- -------------------------------------------------------------------------------------
From net realized gains on investments (.43) (.26) (.13)
-----------------------------
- -------------------------------------------------------------------------------------
Total distributions (.63) (.47) (.29)
- -------------------------------------------------------------------------------------
Net asset value, end of period $15.33 $12.17 $14.15
-----------------------------
- -------------------------------------------------------------------------------------
Total Return (%) (d) 31.69 (10.94)** 20.79**
- -------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 94 64 50
- -------------------------------------------------------------------------------------
Ratio of operating expenses to average daily net -- -- --
assets (%) (e)
- -------------------------------------------------------------------------------------
Ratio of net investment income to average daily net
assets (%) 1.26 1.78* 2.09*
- -------------------------------------------------------------------------------------
Portfolio turnover rate (%) 28.0 23.8* 15.1*
- -------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the eleven months ended August 31, 1998.
(c) For the period November 15, 1996 (commencement of operations) to September
30, 1997.
(d) Total return would have been lower if the Adviser had not maintained some
Underlying Funds' expenses.
(e) 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.
* Annualized
** Not annualized
19| Financial Highlights
<PAGE>
How to invest in the portfolios
The following pages tell you how to invest in these portfolios and what to
expect as a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket, or financial adviser -- your provider
may have its own policies or instructions, and you should follow those.
<PAGE>
How to Buy Shares
Use these instructions to invest directly with Scudder. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
First Investment Additional Investments
- -----------------------------------------------------------------------------------------
<S> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
- -----------------------------------------------------------------------------------------
$50 or more with an Automatic
Investment Plan
By mail or o Fill out and sign an o Send a check and a Scudder
express application investment slip to us at the
(see below) appropriate address below
o Send it to us at the
appropriate address, along o If you don't have an
with an investment check investment slip, simply include
a letter with your name,
account number, the full
name of the portfolio, and
your investment instructions
- -----------------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
- -----------------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
- -----------------------------------------------------------------------------------------
With an automatic -- o To set up regular investments
investment plan from a bank checking account,
call 1-800-SCUDDER
- -----------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
- -----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered, or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
- --------------------------------------------------------------------------------
21 | How to Buy Shares
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in an account opened directly
with Scudder.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
- -----------------------------------------------------------------------------------------
<S> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 for IRAs) most for over $100,000, can
only be ordered in writing; if
$100 or more for exchanges you're in doubt, see page 25
between existing accounts
- -----------------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
- -----------------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
- -----------------------------------------------------------------------------------------
By mail, express, Write a letter that includes: Write a letter that includes:
or fax (see
previous page) o the portfolio and account o the portfolio and account
number you're exchanging out number from which you want to
of sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the name of the fund you want o your name(s), signature(s),
to exchange into and address, as they appear on
your account
o your name(s), signature(s), o a daytime telephone number
and address, as they appear on
your account
o a daytime telephone number
- -----------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
- -----------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
- -----------------------------------------------------------------------------------------
</TABLE>
22 | How to Exchange or Sell Shares
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8 a.m.
and 8 p.m. eastern time on any fund business day by calling
1-800-SCUDDER.
- --------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
Policies about transactions
The portfolios are open for business each day the New York Stock Exchange is
open. Each portfolio calculates its share price every business day, as of the
close of regular trading on the Exchange (typically 4 p.m. eastern time, but
sometimes earlier, as in the case of scheduled half-day trading or unscheduled
suspensions of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
23 | Policies You Should Know About
<PAGE>
- --------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. Go to www.scudder.com to get up-to-date information,
review balances or even place orders for exchanges.
- --------------------------------------------------------------------------------
SAIL(TM), the Scudder Automated Information Line, is available 24 hours a day by
calling 1-800-343-2890. You can use SAIL to get information on Scudder funds
generally and on accounts held directly at Scudder. You can also use it to make
exchanges and sell shares.
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-SCUDDER.
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The
portfolios can only accept wires of $100 or more.
24 | Policies You Should Know About
<PAGE>
Exchanges among Scudder funds are an option for shareholders who bought their
shares directly from Scudder and for many other investors as well. Exchanges are
a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers and
most banks, savings institutions, and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
25 | Policies You Should Know About
<PAGE>
- --------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
- --------------------------------------------------------------------------------
How the portfolios calculate share price
For each portfolio in this prospectus, the share price is the net asset value
per share, or NAV. To calculate NAV, the portfolios use the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
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.
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the portfolio's Board. In
such a case, the portfolio's value for a security is likely to be different from
quoted market prices.
Because certain underlying funds invest in securities that are traded primarily
in foreign markets, the value of their holdings could change at a time when you
aren't able to buy or sell portfolio shares. This is because some foreign
markets are open on days when the portfolios don't price their shares.
26 | Policies You Should Know About
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o charge you $10 a year if your account balance falls below $2,500, and close
your account and send you the proceeds if your balance falls below $1,000;
in either case, we will give you 60 days' notice so you can either increase
your balance or close your account (these policies don't apply to
retirement accounts, to investors with $100,000 or more in Scudder fund
shares or in any case where a fall in share price created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash; a portfolio generally won't make a
redemption in kind in marketable securities unless your requests over a
90-day period total more than $250,000 or 1% of a portfolio's net assets,
whichever is less
o change, add or withdraw various services, fees, and account policies (for
example, we may change or terminate the exchange privilege at any time)
27 | Policies You Should Know About
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
- --------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends, or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchases and sales of shares.) A
fund may not always pay a distribution for a given period.
The Conservative and Balanced Portfolios intend to pay dividends and
distributions to their shareholders quarterly, in March, June, September and
December. The Growth Portfolio intends to pay dividends and distributions in
December. If necessary, the portfolios may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in portfolio shares or all sent to you by
check. Tell us your preference on your application. If you don't indicate a
preference, your dividends and distributions will all be reinvested. For
retirement plans, reinvestment is the only option.
Buying and selling portfolio shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account, or in the case of money
market funds). Your sales of shares may result in a capital gain or loss for
you; whether long-term or short-term depends on how long you owned the shares.
For tax purposes, an exchange is the same as a sale.
28 | Understanding Distributions and Taxes
<PAGE>
The tax status of the portfolio earnings you receive, and your own portfolio
transactions, generally depends on their type:
Generally taxed at ordinary income rates
- --------------------------------------------------------------------------------
o short-term capital gains from selling portfolio shares
- --------------------------------------------------------------------------------
o taxable income dividends you receive from a portfolio
- --------------------------------------------------------------------------------
o short-term capital gains distributions you receive from a
portfolio
- --------------------------------------------------------------------------------
Generally taxed at capital gains rates
- --------------------------------------------------------------------------------
o long-term capital gains from selling portfolio shares
o long-term capital gains distributions you receive from a
portfolio
- --------------------------------------------------------------------------------
Each portfolio will send you detailed tax information every January. These
statements tell you the amount and the tax category of any dividends or
distributions you received. They also have certain details on your purchases and
sales of shares. The tax status of dividends and distributions is the same
whether you reinvest them or not. Dividends or distributions declared in the
last quarter of a given year are taxed in that year, even though you may not
receive the money until the following January.
If you invest right before the portfolio pays a dividend, you'll be getting some
of your investment back as a taxable dividend. You can avoid this, if you want,
by investing after the portfolio declares a dividend. In tax-advantaged
retirement accounts you don't need to worry about this.
29 | Understanding Distributions and Taxes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each portfolio's management
team about recent market conditions and the effects of a portfolio's strategies
on its performance. For each portfolio, they also have detailed performance
figures, a list of everything the portfolio owns, and the portfolio's financial
statements. Shareholders get these reports automatically. To reduce costs, we
may mail one copy per household. For more copies, call 1-800-SCUDDER.
Statement of Additional Information (SAI) -- This tells you more about each
portfolio's features and policies, including additional risk information. The
SAI is incorporated by reference into this document (meaning that it's legally
part of this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Scudder or the SEC (see below). Materials you
get from Scudder are free; those from the SEC involve a copying fee. If you
like, you can look over these materials in person at the SEC's Public Reference
Room in Washington, DC.
Scudder Funds SEC
PO Box 2291 450 Fifth Street, N.W.
Boston, MA 02107-2291 Washington, DC 20549-6009
1-800-SCUDDER 1-800-SEC-0330
www.scudder.com www.sec.gov
SEC File Number 811-8606
<PAGE>
SCUDDER PATHWAY SERIES
Two International Place
Boston, Massachusetts 02110
Scudder Pathway Series is a professionally managed, open-end
investment company which offers three investment portfolios.
CONSERVATIVE PORTFOLIO
BALANCED PORTFOLIO
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2000
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus.
The combined prospectus of Scudder Pathway Series Portfolios dated January 1,
2000, 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,
1999, is incorporated by reference and are hereby deemed to be part of this
Statement of Additional Information.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SCUDDER PATHWAY SERIES'INVESTMENT OBJECTIVES AND POLICIES.............................................................1
General Investment Objectives and Policies...................................................................1
Master/feeder 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............................................................................................19
Additional Information About Making Subsequent Investments..................................................19
Additional Information About Making Subsequent Investments by QuickBuy......................................20
Checks......................................................................................................20
Wire Transfer of Federal Funds..............................................................................20
Share Price.................................................................................................21
Share Certificates..........................................................................................21
Other Information...........................................................................................21
EXCHANGES AND REDEMPTIONS............................................................................................21
Exchanges...................................................................................................21
Redemption By Telephone.....................................................................................22
Redemption by QuickSell.....................................................................................23
Redemption by Mail or Fax...................................................................................23
Redemption-in-Kind..........................................................................................24
Other Information...........................................................................................24
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................25
The No-Load Concept.........................................................................................25
Internet access.............................................................................................25
Dividends and Capital Gains Distribution Options............................................................26
Reports to Shareholders.....................................................................................26
Transaction Summaries.......................................................................................26
THE SCUDDER FAMILY OF FUNDS..........................................................................................26
SPECIAL PLAN ACCOUNTS................................................................................................28
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations and Self-
Employed Individuals...................................................................................29
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........29
Scudder IRA: Individual Retirement Account.................................................................29
Scudder Roth IRA: Individual Retirement Account............................................................30
Scudder 403(b) Plan.........................................................................................30
Automatic Withdrawal Plan...................................................................................30
Group or Salary Deduction Plan..............................................................................31
Automatic Investment Plan...................................................................................31
Uniform Transfers/Gifts to Minors Act.......................................................................31
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................31
PERFORMANCE INFORMATION..............................................................................................32
Average Annual Total Return.................................................................................32
Cumulative Total Return.....................................................................................33
Total Return................................................................................................33
TRUST ORGANIZATION...................................................................................................35
Investment Adviser..........................................................................................35
AMA InvestmentLink(SM) Program..............................................................................36
Personal Investments by Employees of the Adviser............................................................37
Management Fees of Underlying Scudder Funds.................................................................37
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
SPECIAL SERVICING AGREEMENT..........................................................................................38
TRUSTEES AND OFFICERS................................................................................................40
REMUNERATION.........................................................................................................41
DISTRIBUTOR..........................................................................................................42
TAXES................................................................................................................42
Taxation of the Portfolios and Their Shareholders...........................................................42
Taxation of the Underlying Scudder Funds....................................................................44
PORTFOLIO TRANSACTIONS...............................................................................................45
Portfolio Turnover..........................................................................................45
NET ASSET VALUE......................................................................................................46
ADDITIONAL INFORMATION...............................................................................................46
Experts.....................................................................................................46
Shareholder Indemnification.................................................................................46
Other Information...........................................................................................46
FINANCIAL STATEMENTS.................................................................................................47
GLOSSARY.............................................................................................................48
</TABLE>
ii
<PAGE>
SCUDDER PATHWAY SERIES' INVESTMENT OBJECTIVES AND POLICIES
General Investment Objectives and Policies
Scudder Pathway Series (the "Trust") is an open-end management
investment company composed of three separate diversified portfolios (the
"Portfolios"), 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 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") or growth of
capital ("Pathway Series: Growth 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), 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.
Except as otherwise indicated, each Portfolio's investment objectives
and policies are not fundamental and may be changed without a vote of
shareholders. If there is a change in a Portfolio's investment objective,
shareholders should consider whether the Portfolio remains an appropriate
investment in light of their then current financial position and needs. There
can be no assurance that the Portfolio's objectives will be met.
The investment objectives of the Portfolios are as follows:
Conservative Portfolio
The Conservative Portfolio seeks current income and, as a secondary
objective, long-term growth of capital. 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. 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. This portfolio
may be suitable for investors with an investment time horizon of 10 years or
more.
1
<PAGE>
Master/feeder structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for each Portfolio while investing in a master fund in
a master/feeder structure fund as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
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.
2
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Conservative Portfolio Balanced Portfolio Growth Portfolio
Underlying Scudder Funds Underlying Scudder Funds Underlying Scudder Funds
------------------------ ------------------------ ------------------------
<S> <C> <C>
Bond Mutual Funds Equity Mutual Funds Equity Mutual Funds
Scudder Corporate Bond Fund Classic Growth Fund-Scudder Shares Classic Growth Fund-Scudder Shares
Scudder Emerging Markets Income Fund Global Discovery Fund-Scudder Shares Global Discovery Fund-Scudder Shares
Scudder Global Bond Fund Scudder Development Fund Scudder Development Fund
Scudder GNMA Fund Scudder Emerging Markets Growth Fund Scudder Emerging Markets Growth Fund
Scudder High Yield Bond Fund
Scudder Income Fund Scudder Global Fund Scudder Global Fund
Scudder International Bond Fund Scudder Gold Fund Scudder Gold Fund
Scudder Short Term Bond Fund Scudder Greater Europe Growth Fund Scudder Greater Europe Growth Fund
Equity Mutual Funds Scudder Growth and Income Fund Scudder Growth and Income Fund
Classic Growth Fund-Scudder Shares Scudder International Fund Scudder International Fund
Global Discovery Fund-Scudder Shares Scudder International Growth and Scudder International Growth and Income
Scudder Development Fund Income Fund Fund
Scudder Emerging Markets Growth Fund Scudder Large Company Growth Fund Scudder Large Company Growth Fund
Scudder Global Fund Scudder Large Company Value Fund Scudder Large Company Value Fund
Scudder Gold Fund Scudder Latin America Fund Scudder Latin America Fund
Scudder Greater Europe Growth Fund Scudder Micro Cap Fund Scudder Micro Cap Fund
Scudder Growth and Income Fund Scudder Pacific Opportunities Fund Scudder Pacific Opportunities Fund
Scudder International Fund Scudder Small Company Value Fund Scudder Small Company Value Fund
Scudder International Growth and The Japan Fund The Japan Fund
Income Fund Scudder 21st Century Growth Fund Scudder 21st Century Growth Fund
Scudder Large Company Growth Fund Value Fund-Scudder Shares Value Fund-Scudder Shares
Scudder Large Company Value Fund
Scudder Latin America Fund Bond Mutual Funds Bond Mutual Funds
Scudder Micro Cap Fund Scudder Corporate Bond Fund Scudder Corporate Bond Fund
Scudder Pacific Opportunities Fund Scudder Emerging Markets Income Fund Scudder Emerging Markets Income Fund
Scudder Small Company Value Fund Scudder Global Bond Fund Scudder Global Bond Fund
Scudder 21st Century Growth Fund Scudder GNMA Fund Scudder GNMA Fund
The Japan Fund Scudder High Yield Bond Fund Scudder High Yield Bond Fund
Value Fund-Scudder Shares Scudder Income Fund Scudder Income Fund
Scudder International Bond Fund Scudder International Bond Fund
Money Market Funds Scudder Short Term Bond Fund Scudder Short Term Bond Fund
Scudder Cash Investment Trust
Scudder Money Market Series -- Money Market Funds Money Market Funds
Scudder Premium Money Market Scudder Cash Investment Trust Scudder Cash Investment Trust
Shares Scudder Money Market Series -- Scudder Scudder Money Market Series -- Scudder
Premium Money Market Shares Premium Money Market Shares
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</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 Ratings Services, a division of
McGraw Hill Companies, Inc. ("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 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.
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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. SCIT may also hold cash.
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.
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).
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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, "A-1" or better by S&P or "F-1" by 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 mainly 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 or AAA, AA, A, or BBB by
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 by Moody's or BBB by S&P. 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, warrants, 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.
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.
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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 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 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 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
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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 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
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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
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 investment-grade U.S. debt securities. The Fund invests no more than
15% of its total assets in debt securities rated below investment-grade, but not
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 or,
if unrated, judged to be of comparable quality by the Adviser. 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 Fund seeks long-term growth of capital mainly
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
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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 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.
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.
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<PAGE>
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.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in U.S. companies with the potential for above-average growth. The
Fund generally invests in equity securities, including common stocks and
convertible securities, of companies that the Adviser believes have the
potential for above-average revenue, earnings, business value and/ or cash flow
growth. To help reduce risk, the Fund allocates its investments among many
companies. In selecting industries and companies for investment, the Adviser may
consider many factors, including 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
10
<PAGE>
portfolio diversification and liquidity. At least 65% of the Fund's total assets
will be invested in the equity securities of emerging market issuers. The Fund
considers "emerging markets" to include any country that is defined as an
emerging or developing economy by any one of the International Bank for
Reconstruction and Development (i.e., the World Bank), the International Finance
Corporation or the United Nations or its authorities. The Fund intends to
allocate its investments among at least three countries at all times, and does
not expect to concentrate in any particular industry. The Fund deems an issuer
to be located in an emerging market if:
o the issuer is organized under the laws of an emerging market
country;
o the issuer's principal securities trading market is in an
emerging market; 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 investing primarily in emerging
markets, 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.
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 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)
11
<PAGE>
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 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 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 Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of seasoned,
large-sized 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
12
<PAGE>
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 value-orientated investment approach. 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 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 20% 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.
13
<PAGE>
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, warrants and restricted and illiquid securities. Securities
may be listed on national exchanges or traded over-the-counter. The Fund may
invest up to 20% of its assets in U. S. Treasuries, agency and instrumentality
obligations, may enter into repurchase agreements and may engage in strategic
transactions to increase stock market participation, enhance liquidity and
manage transaction costs.
Scudder 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
14
<PAGE>
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 reverse 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.
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
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.
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 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
15
<PAGE>
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
common stock of larger, established domestic companies with market
capitalization of at least $1 billion that the Fund's portfolio management team
believes are undervalued in the marketplace. 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. 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.
If you require more detailed information about an Underlying Scudder
Fund call Scudder Investor Relations at 1-800-SCUDDER 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
ended December 31, 1998 or the life of fund if shorter.
<TABLE>
<CAPTION>
Assets
as of Average Annual Total Returns
Inception 11/1/99 One Five Ten Life of
Date (in millions) Year Years Years Fund
---- ------------- ---- ----- ----- ----
Money Market Fund
<S> <C> <C> <C> <C> <C> <C>
Scudder Cash Investment Trust 7/23/76 1,115.3 4.83 4.66 5.19 --
Scudder Money Market Series - Scudder 7/7/97 936 5.46 -- -- --
Premium Money Market Shares
Bond Mutual Funds
Scudder Corporate Bond Fund 8/31/98 39.3 -- -- -- --
Scudder Emerging Markets Income Fund 12/31/93 192.2 (30.30) 3.11 -- 3.11
Scudder Global Bond Fund 3/1/91 84.8 11.45 4.21 5.43
Scudder GNMA Fund 7/5/85 360.5 6.92 6.40 8.25 --
Scudder High Yield Bond Fund 6/28/96 172.9 4.52 -- -- 11.46
Scudder Income Fund 5/10/28 732.9 6.11 6.20 8.81 --
16
<PAGE>
Assets
as of Average Annual Total Returns
Inception 11/1/99 One Five Ten Life of
Date (in millions) Year Years Years Fund
---- ------------- ---- ----- ----- ----
Scudder International Bond Fund 7/1/88 114.8 12.63 2.09 8.18 --
Scudder Short Term Bond Fund 4/2/84 811.0 4.34 4.35 7.23 --
Equity Mutual Funds
Classic Growth Fund-Scudder Shares 9/9/96 142.1 34.86 -- -- 36.89
Scudder Development Fund 1/18/71 724.0 8.01 12.63 15.32 --
Scudder Emerging Markets Growth Fund 5/8/96 103.6 (24.42) -- -- (3.83)
Global Discovery Fund-Scudder Shares 9/10/91 403.6 16.43 11.08 -- (12.83)
Scudder Global Fund 7/23/86 1,504.5 12.59 11.61 13.59 --
Scudder Gold Fund 8/22/88 114.2 (16.71) (7.37) (1.62) --
Scudder Greater Europe Growth Fund 10/10/94 1,036.2 29.20 29.30 -- 24.06
Scudder Growth and Income Fund 3/15/29 6,877.0 6.07 17.85 16.37 --
Scudder International Fund 6/15/54 4,000.0 18.62 9.82 10.63 --
Scudder International Growth and Income 6/30/97 40.4 9.45 -- -- 4.57
Fund
Scudder Large Company Growth Fund 5/15/91 972.4 33.23 22.28 -- 18.76
Scudder Large Company Value Fund 6/6/56 2,390.1 9.50 15.54 15.44 --
Scudder Latin America Fund 12/08/92 453.4 (29.70) (0.65) -- 9.74
Scudder Micro Cap Fund 8/12/96 69.6 35.19 -- -- 31.72
Scudder Pacific Opportunities Fund 12/08/92 144.4 (12.63) (13.43) -- (4.09)
Scudder Small Company Value Fund 10/6/95 244.5 5.54 17.29
Scudder 21st Century Growth Fund 9/9/96 95.3 3.55 4.96
Value Fund-Scudder Shares 12/31/92 411.5 11.90 19.77 -- 18.36
The Japan Fund 4/19/62* 1,131.5 24.29 (1.05) (0.62) --
</TABLE>
* From April 19, 1962 until August 14, 1987, the Fund operated as a
closed-end diversified management investment company.
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.
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<PAGE>
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
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
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, 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
18
<PAGE>
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-SCUDDER
to get an account number. During the call, the investor will be asked to
indicate the 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 Gifts to Minors Act, and Uniform Transfers to Minors Act accounts),
which amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Portfolio reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per fund charge (with the fee to be paid
to the 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 at the
address of record.
Reductions in value that result solely from market activity will not
trigger an annual fee or involuntary redemption. Shareholders with a combined
household account balance in any of the Scudder Funds of $100,000 or more, as
well as group retirement and certain other accounts will not be subject to a fee
or automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Contact the Distributor at 1-800-SCUDDER for additional
information. A confirmation of the purchase will be mailed out promptly
following receipt of a request to buy. Federal regulations require that payment
be received within three business days. If payment is not received within that
time, the order is subject to cancellation. In the event of such cancellation or
cancellation at the purchaser's request, the purchaser will be responsible for
any loss incurred by the 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.
19
<PAGE>
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 days. If you purchase
shares and there are insufficient funds in your bank account the purchase will
be canceled and you may 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 a Portfolio does not follow such procedures, it may be liable for losses
due to unauthorized or fraudulent telephone instructions. The Portfolios will
not be liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
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 may be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the 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.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the 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.
20
<PAGE>
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after the receipt of a purchase request in good order. Net asset
value normally will be computed as of the close of regular trading on each day
during which the Exchange is open for trading. Orders received after the close
of regular trading on the Exchange will receive the next business day's net
asset value. If the order has been placed by a member of the NASD, other than
the Distributor, it is the responsibility of that member broker, rather than the
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
Each Portfolio has authorized certain members of the NASD other than
the Distributor to accept purchase and redemption orders for its shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on the Portfoios' behalf. Orders for purchase or redemption will be
deemed to have been received by a Portfolio when such brokers or their
authorized designees accept the orders. Subject to the terms of the contract
between a Portfolio and the broker, ordinarily orders will be priced at the
Portfolio's net asset value next computed after acceptance by such brokers or
their authorized designees. Further, if purchases or redemptions of a
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 Portfolio shares 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 Portfolio shares at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Portfolios reserve the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the Portfolios with a tax identification
number during the 30-day notice period.
The Trust may issue shares at net asset value in connection with any merger or
consolidation with, or acquisition of the assets of, any investment company or
personal holding company, subject to the requirements of the 1940 Act.
EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and
purchase into another Scudder fund. The purchase side of the exchange may be
either an additional investment into an existing account or may involve opening
a new account in another fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges into a new fund account must be for a minimum of $2,500. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
21
<PAGE>
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is to be different in any respect, the
exchange request must be in writing and must contain an original signature
guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above
(except for exchanges from funds which impose a redemption fee on shares held
less than a year). An exchange into another Scudder fund is a redemption of
shares, and therefore may result in tax consequences (gain or loss) to the
shareholder and the proceeds of such exchange may be subject to backup
withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. 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 the Portfolios do not follow such
procedures, they may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Portfolio will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. 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-SCUDDER.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption By Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may also request to have the proceeds
mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
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.
22
<PAGE>
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 the 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.
The Portfolio's procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Portfolios will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe 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
23
<PAGE>
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-SCUDDER.
Redemption-in-Kind
The Trust reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the 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 generally 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, 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.
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.
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<PAGE>
FEATURES AND SERVICES OFFERED BY THE FUND
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
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.
Investors are encouraged to review the fee tables 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.
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.
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<PAGE>
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-SCUDDER 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 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-SCUDDER. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. 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-SCUDDER.
THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds; a list of Scudder's
funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
Scudder Government Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series+
- -------------------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
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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*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder 500 Index Fund
Scudder Real Estate Investment Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Value Fund-Scudder Shares**
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
- ------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
** Only the Scudder Shares are part of the Scudder Family of Funds.
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Classic Growth Fund-Scudder Shares**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund***
Scudder International Growth Fund
Global Discovery Fund-Scudder Shares**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
Certain Scudder funds or classes thereof may not be available for
purchase or exchange. For more information, please call 1-800-SCUDDER.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-SCUDDER. 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.
- ---------------------
*** Only the International Shares are part of the Scudder Family of Funds.
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<PAGE>
Shares of the Portfolios 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 the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, such as a pension or profit sharing plan, a
governmental plan, a simplified employee pension plan, a simple retirement
account, or a tax-deferred annuity program (a "qualified plan"), and a married
individual who is not an active participant in a qualified plan and whose spouse
is also not an active participant in a qualified plan, are eligible to make tax
deductible contributions of up to $2,000 to an IRA prior to the year such
individual attains age 70 1/2. In addition, certain individuals who are active
participants in qualified plans (or who have spouses who are active
participants) are also eligible to make tax-deductible contributions to an IRA;
the annual amount, if any, of the contribution which such an individual will be
eligible to deduct will be determined by the amount of his, her, or their
adjusted gross income for the year. If an individual is an active participant,
the deductibility of his or her IRA contributions in 2000 is phased out if the
individual has gross income between $32,000 and $42,000 and is single, if the
individual has gross income between $52,000 and $62,000 and is married filing
jointly, or if the individual has gross income between $0 and $10,000 and is
married filing separately; the phase-out ranges for individuals who are single
or married filing jointly are subject to annual adjustment through 2005 and
2007, respectively. If an individual is married filing jointly and the
individual's spouse is an active participant but the individual is not, the
deductibility of his or her IRA contributions is phased out if their combined
gross income is between $150,000 and $160,000. Whenever the adjusted gross
income limitation prohibits an individual from contributing what would otherwise
be the maximum tax-deductible contribution he or she could make, the individual
will be eligible to contribute the difference to an IRA in the form of
nondeductible contributions. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
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<PAGE>
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Redeeming shares -- Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the Trust or its agent on written notice, and will be terminated
when all shares of the Fund under the Plan have been liquidated or upon receipt
by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-SCUDDER.
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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
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 and Growth 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
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, 1999
One Year Life of Portfolio^(1)
-------- ---------------------
Conservative Portfolio 7.62% 7.51%
Balanced Portfolio 18.27 9.44
Growth Portfolio 31.69 13.29
^(1) For the period November 15, 1996 (commencement of operations) to August
31, 1999.
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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, 1999
One Year Life of Portfolio^(1)
-------- ---------------------
Conservative Portfolio 7.62% 22.39%
Balanced Portfolio 18.27 28.63
Growth Portfolio 31.69 41.66
^(1) For the period November 15, 1996 (commencement of operations) to August
31, 1999.
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
33
<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.
34
<PAGE>
TRUST ORGANIZATION
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 three separate portfolios: Conservative Portfolio, Balanced
Portfolio, and Growth Portfolio , all of which were organized on July 1, 1994.
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 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
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 December 31, 1997, Zurich Insurance Company ("Zurich") acquired a
majority interest in the Adviser, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of the Adviser. The Adviser's name changed to Scudder
Kemper Investments, Inc. On September 7, 1998, the businesses of Zurich
(including Zurich's 70% interest in Scudder Kemper) and the financial services
businesses of B.A.T Industries p.l.c. ("B.A.T") were combined to form a new
global insurance and financial services company known as Zurich Financial
Services Group. By way of a dual holding company structure, former Zurich
shareholders initially owned approximately 57% of Zurich Financial Services
Group, with the balance initially owned by former B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over 280 open and
closed-end mutual funds.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and
35
<PAGE>
statistical compilations from issuers and other sources, as well as analyses
from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser's international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which the Portfolios may invest, the conclusions
and investment decisions of the Adviser with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for a portfolio and also for
other clients advised by the Adviser. Investment decisions for a fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a fund. Purchase and sale orders for a fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to that fund.
In certain cases, the investments for a portfolio are managed by the
same individuals who manage one or more other mutual funds advised by the
Adviser, that have similar names, objectives and investment styles. You should
be aware that the Portfolios are likely to differ from these other mutual funds
in size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Portfolios can be expected to vary from those of these other
mutual funds.
The present investment management agreements (the "Agreements") were
approved by the Trustees on August 10, 1998, became effective September 7, 1998,
and were approved at a shareholder meeting held on December 15, 1998. The
Agreements will continue in effect only if their continuance is approved
annually by the vote of a majority of those Trustees who are not parties to such
Agreements or interested persons of the Adviser or the Trust, cast in person at
a meeting called for the purpose of voting on such approval, and either by a
vote of the Trust's Trustees or of a majority of the outstanding voting
securities of the respective Portfolio. The Agreements may be terminated at any
time without payment of penalty by either party on sixty days' written notice
and automatically terminate in the event of their assignment.
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 Underlying Scudder Fund. 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 expense 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 interests in such Underlying
Scudder Funds.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
AMA InvestmentLink(SM) Program
- ------------------------------
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLinkSM 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 InvestmentLinkSM Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLinkSM
is a service mark of AMA Solutions, Inc.
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<PAGE>
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>
Fiscal Year Total Management Total Management
Name of Fund End Expenses Fee (%) Expenses (%) Fee (%)
- ------------ --- -------- ------- ------------ -------
after after waiver
----- ------------
reimbursement
-------------
and/or waiver
-------------
<S> <C> <C> <C> <C> <C> <C>
Scudder Cash Investment Trust 5/31/99 1.02 0.43 0.85 0.26
Scudder Money Market Series - Scudder Premium 5/31/99 0.34 0.25 0.29 0.20
Money Market Shares
Scudder Corporate Bond Fund 1/31/99 2.55 0.65 0.00 0.00
Scudder Emerging Markets Income Fund 10/31/99 1.56 1.00 -- --
Scudder Global Bond Fund 10/31/99 1.48 0.75 1.25 0.52
Scudder GNMA Fund 3/31/99 0.94 0.63 -- --
Scudder High Yield Bond Fund 1/31/99 1.21 0.70 0.75 0.24
Scudder Income Fund 1/31/99 1.33 0.60 0.95 0.22
Scudder International Bond Fund 6/30/99 1.58 0.73 1.50 0.65
Scudder Short Term Bond Fund 12/31/98 0.86 0.54 0.85 0.53
Scudder Classic Growth Fund 10/31/99 1.84 0.70 1.59 0.45
Scudder Development Fund 7/31/99 1.51 0.98 -- --
Scudder Emerging Markets Growth Fund 10/31/99 2.31 1.25 2.25 1.19
Scudder Global Fund 8/31/99 1.35 0.94 1.35 0.94
Scudder Global Discovery Fund 10/31/99 1.65 1.10 -- --
Scudder Gold Fund 6/30/99 2.13 1.00 -- --
Scudder Greater Europe Growth Fund 10/31/98 1.48 1.00 -- --
Scudder Growth and Income Fund 12/31/99 0.74 0.44 -- --
Scudder International Fund 8/31/99 1.17 0.81 -- --
Scudder International Growth and Income Fund 8/31/99 2.42 1.00 1.75 0.33
Scudder Large Company Growth Fund 7/31/99 1.19 0.70 -- --
Scudder Large Company Value Fund 7/31/99 0.88 0.63 -- --
37
<PAGE>
Fiscal Year Total Management Total Management
Name of Fund End Expenses Fee (%) Expenses (%) Fee (%)
- ------------ --- -------- ------- ------------ -------
after after waiver
----- ------------
reimbursement
-------------
and/or waiver
-------------
Scudder Latin America Fund 10/31/99 1.87 0.62 -- --
Scudder Micro Cap Fund 8/31/99 1.61 0.75 -- --
Scudder Pacific Opportunities Fund 10/31/99 2.46 1.10 -- --
Scudder Small Company Value Fund 7/31/99 1.39 0.75 1.25 0.61
Scudder 21st Century Growth Fund 8/31/99 2.17 1.00 1.75 0.58
Scudder Value Fund 9/30/99 1.23 0.70 1.23 0.70
The Japan Fund, Inc. 12/31/98 1.26 0.78 -- --
</TABLE>
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
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.
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<PAGE>
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.
39
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter, Scudder
Position Investor Services,
Name, Age and Address with Trust Principal Occupation** Inc.
- --------------------- ---------- ---------------------- ----
<S> <C> <C> <C>
Dr. Rosita P. Chang (45) Trustee Professor of Finance, University --
PACAP Research Center of Rhode Island
College of Business Administration
University of Rhode Island
7 Lippitt Rd.
Kingston, RI 02881-0802
Edgar R. Fiedler*@ (70) Trustee Senior Fellow and Economic --
50023 Brogden Counsellor, The Conference
Chapel Hill, NC 27514 Board, Inc.
Peter B. Freeman@ (67) Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906
Dr. J. D. Hammond@ (66) Trustee Dean Emeritus, Smeal College of --
801 Business Administration Building Business Administration,
Pennsylvania State University Pennsylvania State University
University Park, PA 16801
Richard M. Hunt (73) Trustee University Marshal and Senior --
University Marshal's Office Lecturer, Harvard University
Wadsworth House
1341 Massachusetts Avenue
Harvard University
Cambridge, MA 02138
Ann M. McCreary# (49) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
John Millette+ (37) Vice President & Vice President of Scudder Kemper
Secretary Investments, Inc.
Kathryn L. Quirk# (47) President Managing Director of Scudder Director, Senior
Kemper Investments, Inc. Vice President and
Assistant Clerk
Benjamin W. Thorndike+ (43) Vice President Managing Director of Scudder Vice President
Kemper Investments, Inc.
John R. Hebble+ (41) Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
40
<PAGE>
Position with
Underwriter, Scudder
Position Investor Services,
Name, Age and Address with Trust Principal Occupation** Inc.
- --------------------- ---------- ---------------------- ----
Caroline Pearson + (37) Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm) 1989 - 1997
</TABLE>
* 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.
+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
As of November 30, 1999, 369,357 shares in the aggregate, 5.77% of the
outstanding shares of Scudder Pathway Series, Growth Portfolio, were held in the
name of Scudder Trust Company, Trustee for Ziff-Davis Retirement & Savings Plan
Trust, 1 Park Avenue, New York, NY 10016, who may be deemed to be the beneficial
owner of certain of these shares, but disclaims any beneficial ownership
therein.
As of November 30, 1999, 1,563,830 shares in the aggregate, 8.64% of
the outstanding shares of Scudder Pathway Series, Balanced Portfolio, were held
in the name of Scudder, Stevens & Clark, Trustee for Scudder Defined Benefit
Plan, 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, 1999, 410,460 shares in the aggregate, 17.26% of the
outstanding shares of Scudder Pathway Series, Conservative Portfolio, were held
in the name of the Trustees of the ACR Defined Contribution Retirement Plan &
Trust, 747 Locust Street, Pasadena, CA, 91101, 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, 1999, 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, 1999, owned
beneficially (as that term is defined under Section 13(d) of the Securities
Exchange Act) 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.
41
<PAGE>
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.
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
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.
42
<PAGE>
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.
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
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<PAGE>
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 ($52,000 for married individuals filing a joint
return, with a phase-out of the deduction for adjusted gross income between
$52,000 and $62,000; $32,000 for a single individual, with a phase-out for
adjusted gross income between $32,000 and $42,000). However, an individual not
permitted to make a deductible contribution to an IRA for any such taxable year
may nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,000 per individual for married couples if only one spouse has earned income)
for that year. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by a 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.
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.
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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.
<TABLE>
<CAPTION>
Underlying Scudder Fund Portfolio Turnover Rate (%)(1)
- ----------------------- ------------------------------
<S> <C>
Scudder Cash Investment Trust(2) n/a
Scudder Money Market Series--Premium Money Market Shares (2) n/a
Scudder Corporate Bond Fund* 96.7
Scudder Emerging Markets Income Fund 239.7
Scudder Global Bond Fund 218.3
Scudder GNMA Fund* 280.8
Scudder High Yield Bond Fund 83
Scudder Income Fund 20.6
Scudder International Bond Fund 303.5
Scudder Short Term Bond Fund 95.4
Scudder Classic Growth Fund 68
Scudder Development Fund* 3.9
Scudder Emerging Markets Growth Fund 44.8
Scudder Global Fund 70.2
Scudder Global Discovery Fund 40.6
Scudder Gold Fund* 153.6
Scudder Greater Europe Growth Fund 92.7
Scudder Growth and Income Fund 40.8
Scudder International Fund 7.18
Scudder International Growth and Income Fund* 140.8
Scudder Large Company Growth Fund 54.1
Scudder Large Company Value Fund 39.5
Scudder Latin America Fund 43.6
Scudder Micro Cap Fund 4.43
Scudder Pacific Opportunities Fund 140.9
Scudder Small Company Value Fund 33.7
Scudder 21st Century Growth Fund 119.8
Scudder Value Fund 47
The Japan Fund 90.4
</TABLE>
- ------------------------------
(1) As of each Underlying Scudder Fund's most recent fiscal reporting period.
(2) Scudder Cash Investment Trust and Scudder Money Market Series - Scudder
Premium Shares are money market funds.
* Annualized
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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 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 Fund included in each Fund's prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been so included or incorporated by reference in reliance on
the report of PricewaterhouseCoopers LLP, 160 Federal Street, Boston,
Massachusetts 02110, independent accountants, and given on the authority of said
firm as experts in accounting and auditing. PricewaterhouseCoopers LLP is
responsible for performing annual audits of the financial statements and
financial highlights of each Fund 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
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<PAGE>
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.
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.
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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<PAGE>
GLOSSARY
Prospective investors should consider certain Underlying Scudder Funds
may engage in the following investment practices.
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 a greater potential for gain on investment,
compared to other classes of financial assets such as bonds or cash equivalents.
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 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.
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.
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.
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<PAGE>
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.
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.
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.
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.
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<PAGE>
The two principal classifications of municipal obligations are "notes" and
"bonds." The return on municipal obligations is ordinarily lower than that of
taxable obligations.
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 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.")
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,
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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.
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.
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
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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.
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
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savings and loan associations, mutual savings banks, commercial banks, credit
unions, and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA but are not
backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
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
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loans in the collateral pool in excess of the amount of FHLMC's minimum sinking
fund obligation for any payment date are paid to the holders of the CMOs as
additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. 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 15% of the value of the Underlying Scudder
Fund's total assets will be. 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
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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-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.
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 and there is a risk that an Underlying Fund may not be able to
dispose of them at an advantageous time or price. 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 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;
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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).
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 Underlying 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.
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.
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.
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
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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.
Strategic Transactions and Derivatives. Certain Underlying Scudder Funds may,
but are not required to, utilize various other investment strategies as
described below for a variety of purposes, such as hedging various market risks,
managing the effective maturity or duration of fixed-income securities in the
Fund's portfolio, or enhancing potential gain. These strategies may be executed
through the use of derivative contracts.
In the course of pursuing these investment strategies, the Underlyinhg
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
instruments, purchase and sell futures contracts and options thereon, enter into
various transactions such as swaps, caps, floors, collars, currency forward
contracts, currency futures contracts, currency swaps or options on currencies,
or currency futures and various other currency transactions (collectively, all
the above are called "Strategic Transactions"). In addition, strategic
transactions may also include new techniques, instruments or strategies that are
permitted as regulatory changes occur. Strategic Transactions may be used
without limit (subject to certain limitations imposed by the 1940 Act) to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the 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 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 in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the 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 will not be used to alter fundamental investment purposes
and characteristics of the Underlying Scudder Fund, and the Underlying Scudder
Fund will segregate assets (or as provided by applicable regulations, enter into
certain offsetting positions) to cover its obligations under options, futures
and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the 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 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.
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
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general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The 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. The
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. The Underlying
Scudder Fund expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Underlying Scudder Fund or fails to
make a cash settlement payment due in accordance with the terms of that option,
the 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. The 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 the Underlying Scudder Fund, and portfolio
securities "covering" the amount of the 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 the Underlying
Scudder Fund's limitation on investing no more than 15% of its net assets in
illiquid securities.
If the 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 the Underlying Scudder Fund's income. The sale of
put options can also provide income.
The Underlying Scudder Fund may purchase and sell call options on
securities including U.S. Treasury and agency securities, mortgage-backed
securities, foreign sovereign debt, corporate debt securities, equity securities
(including convertible securities) and Eurodollar instruments that are traded on
U.S. and foreign securities exchanges and in the over-the-counter markets, and
on securities indices, currencies and futures contracts. All calls sold by the
Underlying Scudder Fund must be "covered" (i.e., the 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 the Underlying Scudder Fund will receive the option
premium to help protect it against loss, a call sold by the Underlying Scudder
Fund exposes the 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 the Underlying Scudder Fund to
hold a security or instrument which it might otherwise have sold.
The 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. The Underlying Scudder Fund will not sell put
options if, as a result, more than 50% of the 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 the Underlying Scudder Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Underlying Scudder Fund may enter into
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate, currency or equity market changes, and
for duration management, risk management and return enhancement purposes.
Futures are generally bought and sold on the commodities exchanges where they
are listed with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by the 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.
The Underlying Scudder Fund's use of futures and options thereon will
in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading Commission
and will be entered into for bona fide hedging, risk management (including
duration management) or other portfolio and return enhancement management
purposes. Typically, maintaining a futures contract or selling an option thereon
requires the 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
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financial futures involves payment of a premium for the option without any
further obligation on the part of the Underlying Scudder Fund. If the 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. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The 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 the 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. The Underlying
Scudder Fund also may purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
Currency Transactions. The Underlying Scudder Fund may engage in currency
transactions with Counterparties primarily in order to hedge, or manage the risk
of the value of portfolio holdings denominated in particular currencies against
fluctuations in relative value. Currency transactions include forward currency
contracts, exchange listed currency futures, exchange listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and operates similarly to
an interest rate swap, which is described below. The Underlying Scudder Fund may
enter into currency transactions with Counterparties which have received (or the
guarantors of the obligations which have received) a credit rating of A-1 or P-1
by S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO
or (except for OTC currency options) are determined to be of equivalent credit
quality by the Adviser.
The Underlying Scudder Fund's dealings in forward currency contracts
and other currency transactions such as futures, options, options on futures and
swaps generally will be limited to hedging involving either specific
transactions or portfolio positions except as described below. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the 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.
The Underlying Scudder Fund generally will not enter into a transaction
to hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held in its portfolio that are denominated or generally quoted in or currently
convertible into such currency, other than with respect to proxy hedging or
cross hedging as described below.
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The 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 the Underlying Scudder
Fund has or in which the 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, the Underlying Scudder Fund may
also engage in proxy hedging. Proxy hedging is often used when the currency to
which the Underlying Scudder Fund's portfolio is exposed is difficult to hedge
or to hedge against the dollar. Proxy hedging entails entering into a commitment
or option to sell a currency whose changes in value are generally considered to
be correlated to a currency or currencies in which some or all of the Underlying
Scudder Fund's portfolio securities are or are expected to be denominated, in
exchange for U.S. dollars. The amount of the commitment or option would not
exceed the value of the Underlying Scudder Fund's securities denominated in
correlated currencies. For example, if the Adviser considers that the Austrian
schilling is correlated to the German deutschemark (the "D-mark"), the
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 commitment or option to sell D-marks and
buy dollars. Currency hedging involves some of the same risks and considerations
as other transactions with similar instruments. Currency transactions can result
in losses to the 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 correlation between various currencies may not be
present or may not be present during the particular time that the Underlying
Scudder Fund is engaging in proxy hedging. If the Underlying Scudder Fund enters
into a currency hedging transaction, the 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 the 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. The Underlying Scudder Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts) and multiple interest rate transactions and any combination of
futures, options, currency and interest rate transactions ("component"
transactions), instead of a single Strategic Transaction, as part of a single or
combined strategy when, in the opinion of the Adviser, it is in the best
interests of the 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 the
Underlying Scudder Fund may enter are interest rate, currency, index and other
swaps and the purchase or sale of related caps, floors and collars. The
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 the
Underlying Scudder Fund anticipates purchasing at a later date. The Underlying
Scudder Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Underlying
Scudder Fund may be obligated to pay. Interest rate swaps involve the exchange
by the 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
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predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The 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 the Underlying Scudder
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as the Underlying Scudder Fund will segregate assets (or
enter into offsetting positions) to cover its obligations under swaps, the
Adviser and the Underlying Scudder Fund believes such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. The Fund will not enter
into any swap, cap, floor or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from a NRSRO or is determined to be of equivalent
credit quality by the Adviser. If there is a default by the Counterparty, the
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. The Underlying Scudder Fund may make investments in
Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. The 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 the 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 the Underlying Scudder Fund
segregate cash or liquid assets with its custodian to the extent Underlying
Scudder Fund obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by the 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 assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by the Underlying Scudder Fund will require the Underlying
Scudder Fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate cash or liquid assets sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by the Underlying
Scudder Fund on an index will require the Underlying Scudder Fund to own
portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Underlying Scudder Fund requires
the Underlying Scudder Fund to segregate cash or liquid assets equal to the
exercise price.
Except when the 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 the
Underlying Scudder Fund to buy or sell currency will generally require the
Underlying Scudder Fund to hold an amount of that
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currency or liquid assets denominated in that currency equal to the Underlying
Scudder Fund's obligations or to segregate cash or liquid assets equal to the
amount of the Underlying Scudder Fund's obligation.
OTC options entered into by the 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 the Underlying Scudder Fund sells these instruments it will
only segregate an amount of cash or liquid assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed option
sold by the 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 the Underlying Scudder Fund sells a call option on an index at a time when
the in-the-money amount exceeds the exercise price, the 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 the Underlying Scudder Fund other than those above generally
settle with physical delivery, or with an election of either physical delivery
or cash settlement and the Underlying Scudder Fund will segregate an amount of
cash or liquid assets equal to the full value of the option. OTC options
settling with physical delivery, or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option thereon, the Underlying
Scudder Fund must deposit initial margin and possible daily variation margin in
addition to segregating cash or liquid assets sufficient to meet its obligation
to purchase or provide securities or currencies, or to pay the amount owed at
the expiration of an index-based futures contract. Such liquid assets may
consist of cash, cash equivalents, liquid debt or equity securities or other
acceptable assets.
With respect to swaps, the 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 assets having a value equal to the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the Underlying
Scudder Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The 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, the 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 the Underlying Scudder Fund. Moreover,
instead of segregating cash or liquid assets if the 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, cash or liquid assets equal to any remaining obligation would need
to be segregated.
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.
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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.
Foreign Securities. Certain Underlying Scudder Funds may invest in foreign
securities. The Adviser believes that diversification of assets on an
international basis may decrease 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.
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
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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 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
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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
(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
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.
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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.
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.
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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 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,
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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 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.
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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
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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 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.
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
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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 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.
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.
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.
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.
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.
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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
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.
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.
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.
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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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.
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
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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 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.
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SCUDDER PATHWAY SERIES:
CONSERVATIVE PORTFOLIO
BALANCED PORTFOLIO
GROWTH PORTFOLIO
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
- -------- --------
<S> <C> <C>
(a)(1) Declaration of Trust dated July 1, 1994, is incorporated by
reference to the original Registration Statement.
(a)(2) Certificate of Amendment to Declaration of Trust dated January
10, 1995, is incorporated by reference to Pre-Effective
Amendment No. 1 to the Registration Statement.
(a)(3) Certificate of Amendment to Declaration of Trust dated
September 16, 1996, is incorporated by reference to
Pre-Effective Amendment No. 1 to Registration Statement.
(b) By-Laws, dated July 1, 1994, is incorporated by reference to
the original Registration Statement.
(c) Inapplicable.
(d) Investment Management Agreement between the Registrant and
Scudder Kemper Investments, Inc., dated September 7, 1998, is
incorporated by reference to Post-Effective Amendment No. 5 to
the Registration Statement.
(e) Underwriting Agreement between the Registrant and Scudder
Investor Services, Inc., dated September 7, 1998, is
incorporated by reference to Post Effective Amendment No. 5 to
the Registration Statement.
(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. 3 to the Registration
Statement.
(g)(2) Amendment to Custodian Agreement between Registrant and State
Street Bank and Trust Company, is incorporated by reference to
Post-Effective Amendment No. 6 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 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 Post-Effective Amendment No. 1 to
the Registration Statement.
(h)(3) COMPASS Service Agreement between the Registrant and Scudder
Trust Company, dated November 15, 1996, is incorporated by
reference to Post-Effective Amendment No. 3 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 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 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 Post-Effective Amendment No. 1 to the Registration
Statement.
(i) Legal Opinion and Consent is filed herein.
(j) Consent of Independent Accountants is filed herein.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) Inapplicable.
(o) Inapplicable.
</TABLE>
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").
Part C - Page 2
<PAGE>
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, 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
Part C - Page 3
<PAGE>
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.
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
---- ------------------------------------
Part C - Page 4
<PAGE>
<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**
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 Financial Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Part C - Page 5
<PAGE>
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
</TABLE>
* 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
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>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
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
Part C - Page 6
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
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
John R. Hebble Assistant Treasurer Treasurer
Two International Place
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
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief President
345 Park Avenue Legal Officer and Assistant Clerk
New York, NY 10154
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 Vice President
Two International Place
Boston, MA 02110
Part C - Page 7
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
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
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
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(b) 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 23rd day of December 1999.
SCUDDER PATHWAY SERIES
By: /s/John Millette
----------------------------
John Millette
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/ Kathryn L. Quirk
- --------------------------------------
Kathryn L. Quirk President December 23, 1999
/s/ Dr. Rosita P. Chang
- --------------------------------------
Dr. Rosita P. Chang* Trustee December 23, 1999
/s/ Edgar R. Fiedler
- --------------------------------------
Edgar R. Fiedler* Trustee December 23, 1999
/s/ Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee December 23, 1999
/s/ Dr. J. D. Hammond
- --------------------------------------
Dr. J. D. Hammond* Trustee December 23, 1999
/s/ Richard M. Hunt
- --------------------------------------
Richard M. Hunt* Trustee December 23, 1999
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ John R. Hebble
- --------------------------------------
John R. Hebble Treasurer (Principal Financial Officer) December 23, 1999
</TABLE>
*By: /s/ Caroline Pearson
--------------------------------------
Caroline Pearson*
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, Post-Effective Amendment No. 2 to
the Registration Statement filed November
28, 1997 and Post-Effective No. 6 to the
Registration Statement filed October 19,
1999.
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. 7
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 9
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER PATHWAY SERIES
<PAGE>
SCUDDER PATHWAY SERIES
EXHIBIT INDEX
(i)
(j)
2
Exhibit I
[DECHERT PRICE & RHOADS LETTERHEAD]
December 22, 1999
Scudder Pathway Series
Two International Place
Boston, Massachusetts 02110
Re: Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A (SEC File No. 33-86070)
Ladies and Gentlemen:
Scudder Pathway Series, formerly Scudder Prime Fund (the "Trust"), is a
trust created under a written Declaration of Trust dated July 1, 1994. The
Declaration of Trust, as amended from time to time, is referred to as the
"Declaration of Trust." The beneficial interest under the Declaration of Trust
is represented by transferable shares, $.01 par value per share ("Shares"). The
Trustees have the powers set forth in the Declaration of Trust, subject to the
terms, provisions and conditions therein provided.
We are of the opinion that all legal requirements have been complied
with in the creation of the Trust and that said Declaration of Trust is legal
and valid.
Under Article V, Section 5.4 of the Declaration of Trust, the Trustees
are empowered, in their discretion, from time to time, to issue Shares for such
amount and type of consideration, at such time or times and on such terms as the
Trustees may deem best. Under Article V, Section 5.1, it is provided that the
number of Shares authorized to be issued under the Declaration of Trust is
unlimited. Under Article V, Section 5.11, the Trustees may authorize the
division of Shares into two or more series. By written instruments, the Trustees
have from time to time established various series of the Trust. The Shares are
currently divided into three active series (the "Funds").
By votes adopted on November 13, 1997 and November 13, 1998, the
Trustees of the Trust authorized the President, any Vice President, the
Secretary and the Treasurer, from
<PAGE>
Scuder Pathway Series
December 22, 1999
Page 2
time to time, to determine the appropriate number of Shares to be registered, to
register with the Securities and Exchange Commission, and to issue and sell to
the public, such Shares.
We understand that you are about to file with the Securities and
Exchange Commission, on Form N-1A, Post Effective Amendment No. 7 to the Trust's
Registration Statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), in connection with the continuous
offering of the Shares of three Funds: Conservative Portfolio, Balanced
Portfolio and Growth Portfolio. We understand that our opinion is required to be
filed as an exhibit to the Registration Statement.
We are of the opinion that all necessary Trust action
precedent to the issue of the Shares of the Funds named above has been duly
taken, and that all such Shares may be legally and validly issued for cash, and
when sold will be fully paid and non-assessable by the Trust upon receipt by the
Trust or its agent of consideration for such Shares in accordance with the terms
in the Registration Statement, subject to compliance with the Securities Act,
the Investment Company Act of 1940, as amended, and applicable state laws
regulating the sale of securities.
We consent to your filing this opinion with the Securities and
Exchange Commission as an Exhibit to Post-Effective Amendment No. 7 to the
Registration Statement.
Very truly yours,
/s/ Dechert Price & Rhoads
Exhibit (j)
PricewaterhouseCoopers [LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information constituting the Post-Effective Amendment
No. 7 to the Registration Statement on Form N-1A (the "Registration Statement")
of Scudder Pathway Series comprised of Conservative Portfolio, Balanced
Portfolio, and Growth Portfolio, of our report dated October 12, 1999, on the
financial statements and financial highlights appearing in the August 31, 1999
Annual Report to the Shareholders of Scudder Pathway Series, which is also
incorporated by reference into the Registration Statement. We further consent to
the references to our Firm under the heading "Financial Highlights," in the
Prospectus and "Experts" in the Statement of Additional Information.
/s/PricewaterhouseCoopers, LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 22, 1999
