Filed electronically with the Securities and Exchange Commission
on October 30, 2000.
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. 10
--- / X /
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 12
--- / 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) 295-2572
--------------
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 )
/ / On ___________ pursuant to paragraph ( b )
/ / 60 days after filing pursuant to paragraph ( a ) ( 1 )
/ X / On December 29, 2000 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>
SCUDDER
INVESTMENTS(SM)
[LOGO]
December 29, 2000
Prospectus
Scudder Pathway Series
Conservative Portfolio
Balanced Portfolio
Growth Portfolio
Advisor Classes A, B, and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder Pathway Series
How the portfolios work
4 Conservative Portfolio
10 Balanced Portfolio
16 Growth Portfolio
22 Other Policies and Risks
23 Who Manages and Oversees the Portfolios
How to invest in the portfolios
26 Choosing a Share Class
31 How to Buy Shares
32 How to Exchange or Sell Shares
33 Policies You Should Know About
39 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.
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class A: 00000
| Class B: 00000
| Class C: 00000
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:
THE ORIGINAL DOCUMENT CONTAINS A PIE CHART HERE
PIE 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%
4
<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
5
<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 Portfolio's Track Record
Performance figures for Class A, B and C shares are derived from
the historical performance of Class S shares, adjusted to reflect
the operating expenses applicable to Class A, B and C shares, which
may be higher or lower than those of Class S shares. Class S shares
are offered in a separate prospectus and are invested in the same
portfolio as Class A, B and C shares.
The bar chart shows how these performance figures for the
portfolio's Class A shares have varied from year to year, which may
give some idea of risk. The table shows how these performance
figures for the portfolio's Class A, B and C shares compare with
three broad based market indexes (which, unlike the portfolio, have
no fees or expenses). The performance of both the portfolio and the
indexes vary over time. All figures on this page assume
reinvestment of dividends and distributions.
-------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
-------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
2000 Total Return as of September 30: ___%
Best Quarter: Worst Quarter:
6
<PAGE>
-------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
-------------------------------------------------------------------
1 Year 5 Years 10 Years
-------------------------------------------------------------------
Class A
-------------------------------------------------------------------
Class B
-------------------------------------------------------------------
Class C
-------------------------------------------------------------------
Index 1
-------------------------------------------------------------------
Index 2
-------------------------------------------------------------------
Index 3
-------------------------------------------------------------------
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.
The performance figures shown in the table are also adjusted to
reflect the maximum sales charge of [__]% for Class A shares and
the maximum contingent deferred sales charge of [__]% for Class B
shares and [__]% for Class C shares.
7
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you
buy and hold shares of the portfolio. The portfolio expects to
operate at a zero expense level. However, the portfolio's
shareholders will indirectly bear the portfolio's pro rata share of
fees and expenses incurred by the underlying Scudder funds in which
the portfolio is invested.
-------------------------------------------------------------------
Fee Table Class A Class B Class C
-------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
-------------------------------------------------------------------
Maximum Sales Charge (Load) [__%] None None
Imposed on Purchases (as % of
offering price)
-------------------------------------------------------------------
Maximum Deferred Sales Charge None* [__%] [__%]
(Load) (as a % of redemption
proceeds)
-------------------------------------------------------------------
Annual Operating Expenses (deducted from portfolio assets)
-------------------------------------------------------------------
Management Fee % % %
-------------------------------------------------------------------
Distribution (12b-1) Fee % % %
-------------------------------------------------------------------
Other Expenses** % % %
-------------------------------------------------------------------
Total Annual Operating Expenses % % %
-------------------------------------------------------------------
Range of Average Weighted Expense Ratio [ ]% to [ ]%
-------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the
Large Order NAV Purchase Privilege (see "Policies You Should
Know About -- Policies about transactions") may be subject to a
contingent deferred sales charge of 1.00% if redeemed within one
year of purchase and 0.50% if redeemed during the second year
following purchase.
** Includes a fixed rate administrative fee of ---%.
8
<PAGE>
-------------------------------------------------------------------
Expense Example
-------------------------------------------------------------------
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. Actual costs could be higher or lower
than this example.
-------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
-------------------------------------------------------------------
Class A shares $ $ $ $
-------------------------------------------------------------------
Class B shares
-------------------------------------------------------------------
Class C shares
-------------------------------------------------------------------
Expenses, assuming you kept your shares
-------------------------------------------------------------------
Class A shares $ $ $ $
-------------------------------------------------------------------
Class B shares
-------------------------------------------------------------------
Class C shares
-------------------------------------------------------------------
The example assumes 5% annual returns, expenses calculated at the
midpoint of the current expense range and reinvestment of all
dividends and distributions.
9
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class A: 00000
| Class B: 00000
| Class C: 00000
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:
THE ORIGINAL DOCUMENT CONTAINS A PIE CHART HERE
PIE 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%
10
<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
11
<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 Portfolio's Track Record
Performance figures for Class A, B and C shares are derived from
the historical performance of Class S shares, adjusted to reflect
the operating expenses applicable to Class A, B and C shares, which
may be higher or lower than those of Class S shares. Class S shares
are offered in a separate prospectus and are invested in the same
portfolio as Class A, B and C shares.
The bar chart shows how these performance figures for the
portfolio's Class A shares have varied from year to year, which may
give some idea of risk. The table shows how these performance
figures for the portfolio's Class A, B and C shares compare with
three broad based market indexes (which, unlike the portfolio, have
no fees or expenses). The performance of both the portfolio and the
indexes vary over time. All figures on this page assume
reinvestment of dividends and distributions.
-------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
-------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
2000 Total Return as of September 30: ___%
Best Quarter: Worst Quarter:
12
<PAGE>
-------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
-------------------------------------------------------------------
1 Year 5 Years 10 Years
-------------------------------------------------------------------
Class A
-------------------------------------------------------------------
Class B
-------------------------------------------------------------------
Class C
-------------------------------------------------------------------
Index 1
-------------------------------------------------------------------
Index 2
-------------------------------------------------------------------
Index 3
-------------------------------------------------------------------
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. The
performance figures shown in the table are also adjusted to reflect
the maximum sales charge of [__]% for Class A shares and the
maximum contingent deferred sales charge of [__]% for Class B
shares and [__]% for Class C shares.
13
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you
buy and hold shares of the portfolio. The portfolio expects to
operate at a zero expense level. However, the portfolio's
shareholders will indirectly bear the portfolio's pro rata share of
fees and expenses incurred by the underlying Scudder funds in which
the portfolio is invested.
-------------------------------------------------------------------
Fee Table Class A Class B Class C
-------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
-------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) [__%] None None
-------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as a % of redemption
proceeds) None* [__%] [__%]
-------------------------------------------------------------------
Annual Operating Expenses (deducted from portfolio assets)
-------------------------------------------------------------------
Management Fee % % %
-------------------------------------------------------------------
Distribution (12b-1) Fee % % %
-------------------------------------------------------------------
Other Expenses** % % %
-------------------------------------------------------------------
Total Annual Operating Expenses % % %
-------------------------------------------------------------------
Range of Average Weighted Expense Ratio [ ]% to [ ]%
-------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the
Large Order NAV Purchase Privilege (see "Policies You Should
Know About -- Policies about transactions") may be subject to a
contingent deferred sales charge of 1.00% if redeemed within one
year of purchase and 0.50% if redeemed during the second year
following purchase.
** Includes a fixed rate administrative fee of ---%.
14
<PAGE>
-------------------------------------------------------------------
Expense Example
-------------------------------------------------------------------
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. Actual costs could be higher or lower
than this example.
-------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
-------------------------------------------------------------------
Class A shares $ $ $ $
-------------------------------------------------------------------
Class B shares
-------------------------------------------------------------------
Class C shares
-------------------------------------------------------------------
Expenses, assuming you kept your shares
-------------------------------------------------------------------
Class A shares $ $ $ $
-------------------------------------------------------------------
Class B shares
-------------------------------------------------------------------
Class C shares
-------------------------------------------------------------------
The example assumes 5% annual returns, expenses calculated at the
midpoint of the current expense range and reinvestment of all
dividends and distributions.
15
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | Class A: 00000
| Class B: 00000
| Class C: 00000
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:
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR 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%
16
<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
17
<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 Portfolio's Track Record
Performance figures for Class A, B and C shares are derived from
the historical performance of Class S shares, adjusted to reflect
the operating expenses applicable to Class A, B and C shares, which
may be higher or lower than those of Class S shares. Class S shares
are offered in a separate prospectus and are invested in the same
portfolio as Class A, B and C shares.
The bar chart shows how these performance figures for the
portfolio's Class A shares have varied from year to year, which may
give some idea of risk. The table shows how these performance
figures for the portfolio's Class A, B and C shares compare with
three broad based market indexes (which, unlike the portfolio, have
no fees or expenses). The performance of both the portfolio and the
indexes vary over time. All figures on this page assume
reinvestment of dividends and distributions.
-------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A
-------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
2000 Total Return as of September 30: ___%
Best Quarter: Worst Quarter:
18
<PAGE>
-------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
-------------------------------------------------------------------
1 Year 5 Years 10 Years
-------------------------------------------------------------------
Class A
-------------------------------------------------------------------
Class B
-------------------------------------------------------------------
Class C
-------------------------------------------------------------------
Index 1
-------------------------------------------------------------------
Index 2
-------------------------------------------------------------------
Index 3
-------------------------------------------------------------------
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. The performance figures shown in the table are also
adjusted to reflect the maximum sales charge of [__]% for Class A
shares and the maximum contingent deferred sales charge of [__]%
for Class B shares and [__]% for Class C shares.
19
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you
buy and hold shares of the portfolio. The portfolio expects to
operate at a zero expense level. However, the portfolio's
shareholders will indirectly bear the portfolio's pro rata share of
fees and expenses incurred by the underlying Scudder funds in which
the portfolio is invested.
-------------------------------------------------------------------
Fee Table Class A Class B Class C
-------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
-------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) [ %] None None
-------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as a % of redemption
proceeds) None* [ %] [ %]
-------------------------------------------------------------------
Annual Operating Expenses (deducted from portfolio assets)
-------------------------------------------------------------------
Management Fee % % %
-------------------------------------------------------------------
Distribution (12b-1) Fee % % %
-------------------------------------------------------------------
Other Expenses** % % %
-------------------------------------------------------------------
Total Annual Operating Expenses % % %
-------------------------------------------------------------------
Range of Average Weighted Expense Ratio [ ]% to [ ]%
-------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the
Large Order NAV Purchase Privilege (see "Policies You Should
Know About -- Policies about transactions") may be subject to a
contingent deferred sales charge of 1.00% if redeemed within one
year of purchase and 0.50% if redeemed during the second year
following purchase.
** Includes a fixed rate administrative fee of ---%.
20
<PAGE>
-------------------------------------------------------------------
Expense Example
-------------------------------------------------------------------
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. Actual costs could be higher or lower
than this example.
-------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
-------------------------------------------------------------------
Class A shares $ $ $ $
-------------------------------------------------------------------
Class B shares
-------------------------------------------------------------------
Class C shares
-------------------------------------------------------------------
Expenses, assuming you kept your shares
-------------------------------------------------------------------
Class A shares $ $ $ $
-------------------------------------------------------------------
Class B shares
-------------------------------------------------------------------
Class C shares
-------------------------------------------------------------------
The example assumes 5% annual returns, expenses calculated at the
midpoint of the current expense range and reinvestment of all
dividends and distributions.
21
<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 infrequent, a portfolio's
Board could change that portfolio's investment goal without
seeking shareholder approval.
o As a temporary measure, any of these portfolios could shift up
to 100% of their assets into investments such as money market
securities. This could prevent losses, but would mean that the
portfolio was not pursuing its goal.
o While certain underlying funds are permitted to use various
types of derivatives (contracts whose value is based on, for
example, indices, currencies or securities), the managers of
those funds don't intend to use them as principal investments,
and might not use them at all.
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, as well as the list of underlying funds, 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.
22
<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 portfolios' investment adviser is Scudder Kemper Investments,
Inc., 345 Park Avenue, New York, NY. Scudder Kemper has more than
80 years of experience managing mutual funds, and currently has
more than $290 billion in assets under management.
Scudder Kemper's asset management teams include investment
professionals, economists, research analysts, traders and other
investment specialists, located in offices across the United States
and around the world.
23
<PAGE>
The portfolio managers
The following people handle the day-to-day management of each portfolio.
<TABLE>
<S> <C>
Donald E. Hall Shahram Tajbakhsh
Lead Portfolio Manager o Began investment career in 1991
o Began investment career in 1982 o Joined the adviser in 1996
o Joined the adviser in 1982 o Joined the fund team in 1999
o Joined the fund team in 2000
Maureen F. Allyn
o Began investment career in 1989
o Joined the adviser in 1989
o Joined the fund team in 1996
The Board
A mutual fund's Board is responsible for the general oversight of the
portfolio's business. 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.
The following people comprise each portfolio's Board.
Linda C. Coughlin Keith R. Fox
o Managing Director, o General Partner, The Exeter Group
Scudder Kemper Investments, Inc. of Funds
o President of each portfolio
Joan E. Spero
Henry P. Becton, Jr. o President, Doris Duke Charitable
o President, WGBH Educational Foundation Foundation
Dawn-Marie Driscoll Jean Gleason Stromberg
o Executive Fellow, Center for Business o Consultant
Ethics, Bentley College
o President, Driscoll Associates Jean C. Tempel
(consulting firm) o Managing Director, First Light
Capital, LLC (venture capital firm)
Edgar Fiedler
o Senior Fellow and Economic Counsellor, Steven Zaleznick
The Conference Board, Inc. o President and Chief Executive
(not-for-profit business research Officer, AARP Services, Inc.
organization)
</TABLE>
24
<PAGE>
How to invest in the portfolios
The following pages tell you about many of the services, choices
and benefits of being a shareholder. You'll also find information
on how to check the status of your account using the method that's
most convenient for you.
You can find out more about the topics covered here by speaking
with your financial representative or a representative of your
workplace retirement plan or other investment provider.
25
<PAGE>
Choosing a Share Class
Offered in this prospectus are three share classes for each portfolio. The
portfolios offer other classes of shares separately. Each class has its own fees
and expenses, offering you a choice of cost structures. Class A, Class B and
Class C shares are intended for investors seeking the advice and assistance of a
financial representative, who may receive compensation for those services
through sales commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Classes and features Points to help you compare
-------------------------------------------------------------------------------------
Class A
<S> <C>
o Sales charges with a range of up to o Some investors may be able to reduce
[__%], charged when you buy shares or eliminate their sales charges;
see next page
o In most cases, no charges when you sell
shares o Total annual operating expenses are
lower than those for Class B or Class C
-------------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate
falls to zero after six years
o Deferred sales charge declining from
[__%], charged when you sell shares you o Shares automatically convert to
bought within the last six years Class A after six years, which means
lower annual expenses going forward
o [__%] distribution fee
-------------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never convert
o Deferred sales charge of [__%], charged to Class A, so annual expenses
when you sell shares you bought within remain higher
the last year
o [__%] distribution fee
-------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class A shares may make sense for long-term investors, especially those
who are eligible for reduced or eliminated sales charges.
--------------------------------------------------------------------------------
Class A shares
Class A shares do have a 12b-1 plan, under which a distribution fee
of [__%] is deducted from portfolio assets each year. Class A
shares have a sales charge that varies with the amount you invest:
Sales charge as a % of Sales charge as % of
Your investment offering price your net investment
-------------------------------------------------------------------
Up to $50,000 [__%] [__%]
-------------------------------------------------------------------
$50,000-$99,999 [__] [__]
-------------------------------------------------------------------
$100,000-$249,999 [__] [__]
-------------------------------------------------------------------
$250,000-$499,999 [__] [__]
-------------------------------------------------------------------
$500,000-$999,999 [__] [__]
-------------------------------------------------------------------
$1 million or more See below and next page
-------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months
("letter of intent")
o the amount of shares you already own (including shares in
certain other funds) plus the amount you're investing now is at
least $50,000 ("cumulative discount")
o you are investing a total of $50,000 or more in several funds at
once ("combined purchases")
The point of these three features is to let you count investments
made at other times for purposes of calculating your present sales
charge. Any time you can use the privileges to "move" your
investment into a lower sales charge category in the table above,
it's generally beneficial for you to do so. You can take advantage
of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
27
<PAGE>
You may be able to buy Class A shares without sales charges when
you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you
pay a fee to an investment adviser or other firm for portfolio
management services
There are a number of additional provisions that apply in order to
be eligible for a sales charge waiver. The portfolios may waive the
sales charges for investors in other situations as well. Your
financial representative or Shareholder Services can answer your
questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or
through one of the sales charge reduction features described on the
previous page, you may be eligible to buy Class A shares without
sales charges. However, you may be charged a contingent deferred
sales charge (CDSC) of 1.00% on any shares you sell within the
first year of owning them, and a similar charge of 0.50% on shares
you sell within the second year of owning them. This CDSC is waived
under certain circumstances (see "Policies You Should Know About").
Your financial representative or Shareholder Services can answer
your questions and help you determine if you're eligible.
28
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class B shares can be a logical choice for long-term investors who
would prefer to see all of their investment go to work right away, and
can accept somewhat higher annual expenses in exchange.
--------------------------------------------------------------------------------
Class B shares
With Class B shares, you pay no up-front sales charges to the
portfolio. Class B shares do have a 12b-1 plan, under which a
distribution fee of [__%] is deducted from portfolio assets each
year. This means the annual expenses for Class B shares are
somewhat higher (and their performance correspondingly lower)
compared to Class A shares. After six years, Class B shares
automatically convert to Class A, which has the net effect of
lowering the annual expenses from the seventh year on.
Class B shares have a CDSC. This charge declines over the years you
own shares, and disappears completely after six years of ownership.
But for any shares you sell within those six years, you may be
charged as follows:
Year after you bought shares CDSC on shares you sell
-------------------------------------------------------------------
First year [__%]
-------------------------------------------------------------------
Second or third year [__]
-------------------------------------------------------------------
Fourth or fifth year [__]
-------------------------------------------------------------------
Sixth year [__]
-------------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
-------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You
Should Know About"). Your financial representative or Shareholder
Services can answer your questions and help you determine if you're
eligible.
While Class B shares don't have any front-end sales charges, their
higher annual expenses mean that over the years you could end up
paying more than the equivalent of the maximum allowable front-end
sales charge.
29
<PAGE>
--------------------------------------------------------------------------------
[ICON] Class C shares may appeal to investors who plan to sell some or all
shares within six years of buying them, or who aren't certain of their
investment time horizon.
--------------------------------------------------------------------------------
Class C shares
Like Class B shares, Class C shares have no up-front sales charges.
However, Class C shares do have a 12b-1 plan under which a
distribution fee of [__%] is deducted from portfolio assets each
year. Because of this fee, the annual expenses for Class C shares
are similar to those of Class B shares, but higher than those for
Class A shares (and the performance of Class C shares is
correspondingly lower than that of Class A).
Unlike Class B shares, Class C shares do NOT automatically convert
to Class A after six years, so they continue to have higher annual
expenses.
Class C shares have a CDSC, but only on shares you sell within one
year of buying them:
-------------------------------------------------------------------
Year after you bought shares CDSC on shares you sell
-------------------------------------------------------------------
First year __%
-------------------------------------------------------------------
Second year and later None
-------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You
Should Know About"). Your financial representative or Shareholder
Services can answer your questions and help you determine if you're
eligible.
While Class C shares don't have any front-end sales charges, their
higher annual expenses mean that over the years you could end up
paying more than the equivalent of the maximum allowable front-end
sales charge.
30
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
First investment Additional investments
-------------------------------------------------------------------------------------
<S> <C>
$[__] or more for regular accounts $100 or more for regular accounts
$[__] or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
-------------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using the o Contact your representative using
method that's most convenient for you the method that's most convenient
for you
-------------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check made out to "Kemper
Funds" and an investment slip to us
o Send it to us at the appropriate address, at the appropriate address below
along with an investment check
o If you don't have an investment
slip, simply include a letter
with your name, account number,
the full name of the fund and the
share class and your investment
instructions
-------------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
-------------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for instructions
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
With an automatic investment plan
-- o To set up regular investments, call
(800) 621-1048
-------------------------------------------------------------------------------------
On the Internet
-- o Go to www.kemper.com and register
o Follow the instructions for buying
shares with money from your bank
account
-------------------------------------------------------------------------------------
</TABLE>
[ICON] Regular mail:
Kemper Funds, PO Box 219415, Kansas City, MO 64121-9415
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
--------------------------------------------------------------------------------
31
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
-------------------------------------------------------------------------------------
<S> <C>
$[__] or more to open a new account ([$__] Some transactions, including most for
for IRAs) over $50,000, can only be ordered in
writing with a signature guarantee; if
$100 or more for exchanges you're in doubt, see page 34
between existing accounts
-------------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the method o Contact your representative by the
that's most convenient for you method that's most convenient for you
-------------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
-------------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the portfolio, class and account number o the portfolio, class and account
you're exchanging out of number from which you want to sell shares
o the dollar amount or number of shares you o the dollar amount or number of
want to exchange shares you want to sell
o the name and class of the portfolio/fund o your name(s), signature(s) and
you want to exchange into address, as they appear on your
account
o your name(s), signature(s) and address,
as they appear on your account o a daytime telephone number
o a daytime telephone number
-------------------------------------------------------------------------------------
With a systematic exchange plan
o To set up regular exchanges from a fund --
account, call (800) 621-1048
-------------------------------------------------------------------------------------
With a systematic withdrawal plan
-- o To set up regular cash payments from
a fund account, call (800) 621-1048
-------------------------------------------------------------------------------------
On the Internet
o Go to www.kemper.com and register --
o Follow the instructions for making
on-line exchanges
-------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies
below may affect you as a shareholder. Some of this information,
such as the section on dividends and taxes, applies to all
investors, including those investing through investment providers.
If you are investing through an investment provider, check the
materials you got from them. As a general rule, you should follow
the information in those materials wherever it contradicts the
information given here. Please note that an investment provider may
charge its own fees.
In either case, keep in mind that the information in this
prospectus applies only to each portfolio's Class A, Class B and
Class C shares. Each portfolio does have other share classes, which
are described in a separate prospectus and which have different
fees, requirements and services.
In order to reduce the amount of mail you receive and to help
reduce portfolio expenses, we generally send a single copy of any
shareholder report and prospectus to each household. If you do not
want the mailing of these documents to be combined with those for
other members of your household, please call (800) 621-1048.
Policies about transactions
The 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 Kemper Service Company, and they have
determined that it is a "good order," it will be processed at the
next share price calculated.
Because orders placed through investment providers must be
forwarded to Kemper Service Company before they can be processed,
you'll need to allow extra time. A representative of your
investment provider should be able to tell you when your order will
be processed.
33
<PAGE>
KemperACCESS, the Kemper Automated Information Line, is available
24 hours a day by calling (800) 972-3060. You can use Kemper ACCESS
to get information on Scudder or Kemper funds generally and on
accounts held directly at Kemper. You can also use it to make
exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Scudder or Kemper
account and a bank account. Once this link is in place, you can
move money between the two with a phone call. You'll need to make
sure your bank has Automated Clearing House (ACH) services.
Transactions take two to three days to be completed, and there is a
$100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800)
621-1048.
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 send or receive wires, it's possible that
your bank may do so. Wire transactions are completed within 24
hours. The portfolios can only send or accept wires of $1,000 or
more.
Exchanges are a shareholder privilege, not a right: we may reject
any exchange order, particularly when there appears to be a pattern
of "market timing" or other frequent purchases and sales. We may
also reject or limit purchase orders, for these or other reasons.
When you want to sell more than $50,000 worth of shares, you'll
usually need to place your order in writing and include a signature
guarantee. The only exception is if you want money wired to a bank
account that is already on file with us; in that case, you don't
need a signature guarantee. Also, you don't need a signature
guarantee for an exchange, although we may require one in certain
other circumstances.
A signature guarantee is simply a certification of your signature
-- a valuable safeguard against fraud. You can get a signature
guarantee from most brokers, banks, savings institutions and credit
unions. Note that you can't get a signature guarantee from a notary
public.
34
<PAGE>
When you sell shares that have a CDSC, we calculate the CDSC as a
percentage of what you paid for the shares or what you are selling
them for -- whichever results in the lowest charge to you. In
processing orders to sell shares, we turn to the shares with the
lowest CDSC first. Exchanges from one fund into another don't
affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that
particular investment.
There are certain cases in which you may be exempt from a CDSC.
These include:
o the death or disability of an account owner (including a
joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or
returns of excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV
Purchase Privilege, redemption of shares whose dealer of record
at the time of the investment notifies Kemper Distributors that
the dealer waives the applicable commission
In each of these cases, there are a number of additional provisions
that apply in order to be eligible for a CDSC waiver. Your
financial representative or Shareholder Services can answer your
questions and help you determine if you are eligible.
If you sell shares in a Scudder fund offering multiple classes or a
Kemper fund and then decide to invest with Scudder or Kemper again
within six months, you can take advantage of the "reinstatement
feature." With this feature, you can put your money back into the
same class of a Scudder or Kemper fund at its current NAV and for
purposes of sales charges it will be treated as if it had never
left Scudder or Kemper. You'll be reimbursed (in the form of fund
shares) for any CDSC you paid when you sold. Future CDSC
calculations will be based on your original investment date, rather
than your reinstatement date. There is also an option that lets
investors who sold Class B shares buy Class A shares with no sales
charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group
of shares. To take advantage of this feature, contact Shareholder
Services or your financial representative.
35
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
Money from shares you sell is normally sent out within one business
day of when your order is processed (not when it is received),
although it could be delayed for up to seven days. There are also
two circumstances when it could be longer: when you are selling
shares you bought recently by check and that check hasn't cleared
yet (maximum delay: 10 days) or when unusual circumstances prompt
the SEC to allow further delays. Certain expedited redemption
processes may also be delayed when you are selling recently
purchased shares.
How the portfolios calculate share prices The price at which you
buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to
allow for any applicable sales charges (see "Choosing a Share
Class")
Class B and Class C shares-- net asset value per
share, or NAV
To calculate NAV, each share class of each portfolio uses the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each share class, the price at which you sell shares is also
the NAV, although for Class B and Class C investors a contingent
deferred sales charge may be taken out of the proceeds (see
"Choosing a Share Class").
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.
The assets of each share class of each portfolio consist primarily
of the underlying Scudder funds, which are valued at their
respective net asset values at the time of computation.
36
<PAGE>
We typically use market prices to value securities. However, when a
market price isn't available, or when we have reason to believe it
doesn't represent market realities, we may use fair value methods
approved by a portfolio's Board. In such a case, the portfolio's
value for a security is likely to be different from quoted market
prices.
37
<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 reject a new account application if you don't provide a correct
Social Security or other tax ID number; if the account has
already been opened, we may give you 30 days' notice to provide
the correct number
o charge you $9 each calendar quarter if your account balance is
below $1,000 for the entire quarter; this policy doesn't apply
to most retirement accounts or if you have an automatic
investment plan
o pay you for shares you sell by "redeeming in kind," that is, by
giving you marketable securities (which typically will involve
brokerage costs for you to liquidate) rather than cash; a
portfolio generally won't make a redemption in kind unless your
requests over a 90-day period total more than $250,000 or 1% of
the value of 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)
38
<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 portfolio 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 portfolio's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A
portfolio 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 annually 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). 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.
39
<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 a 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.
40
<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. They
also have detailed performance figures, a list of everything the
portfolio owns, and the portfolio's financial statements.
Shareholders get the reports automatically. For more copies, call
(800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more
about 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,
please contact Scudder or the SEC (see below). If you're a
shareholder and have questions, please contact Scudder. Materials
you get from Scudder are free; those from the SEC involve a
copying fee. If you like, you can look over these materials at
the SEC's Public Reference Room in Washington, DC or request them
electronically at [email protected].
SEC Scudder Funds c/o
450 Fifth Street, N.W. Kemper Distributors, Inc.
Washington, DC 20549-0102 222 South Riverside Plaza
www.sec.gov Chicago, IL 60606-5808
Tel (202) 942-8090 www.scudder.com
Tel (800) 621-1048
SEC File Number
Scudder Pathway Series 811-8606
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
Scudder Pathway Series (Class A, B and C Shares)
Conservative Portfolio, Balanced Portfolio and Growth Portfolio
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, Class B and Class C Shares (the
"Shares") of Scudder Pathway Series Portfolios (the "Portfolios"), a diversified
series of Scudder Pathway Series (the "Trust"), an open-end management
investment company. It should be read in conjunction with the prospectus of the
Shares dated December 29, 2000. The prospectus may be obtained without charge
from the Portfolio at the address or telephone number on this cover or the firm
from which this Statement of Additional Information was received.
Scudder Pathway Series offers the following classes of shares: Class AARP,
Class S, Class A, Class B and Class C shares (the "Shares"). Only Class A, Class
B and Class C shares of Scudder Pathway Series Portfolios are offered herein.
TABLE OF CONTENTS
Investment Restrictions........................................................2
Investment Policies and Techniques.............................................4
Dividends, Distributions and Taxes............................................25
Performance...................................................................28
Investment Manager and Underwriter............................................31
Portfolio Transactions........................................................38
Net Asset Value...............................................................39
Purchase, Repurchase and Redemption of Shares.................................40
Purchase of Shares............................................................40
Redemption or Repurchase of Shares............................................44
Special Features..............................................................48
Officers and Trustees.........................................................51
Shareholder Rights............................................................54
Scudder Kemper Investments, Inc. (the "Advisor") serves as the Portfolios'
investment manager.
The financial statements appearing in the Portfolios' August 31, 2000 Annual
Report to Shareholders are incorporated herein by reference. The Annual Report
for the Portfolios accompanies this document.
<PAGE>
INVESTMENT RESTRICTIONS
The policies set forth below are fundamental policies of each Portfolio
and may not be changed with respect to each of the Portfolios without the
approval of a majority of such Portfolio's outstanding shares. As used in this
combined Statement of Additional Information, a "majority of the outstanding
voting securities of a Portfolio" means the lesser of (1) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities of such Portfolio are present or represented
by proxy; or (2) more than 50% of the outstanding voting securities of such
Portfolio.
Each Portfolio has elected to be classified as a diversified series of an
open-end investment company. In addition, as a matter of fundamental policy,
each Portfolio will not:
(1) borrow money, except as permitted under the Investment Company Act
of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(3) engage in the business of underwriting securities issued by others,
except to the extent that a Portfolio may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
(4) concentrate its investments in investment companies, as the term
"concentrate" is used in the Investment Company Act of 1940, as
amended and interpreted by regulatory authority having jurisdiction
from time to time; except that each Portfolio may concentrate in an
underlying Fund. However, each Underlying Scudder Fund in which each
Portfolio will invest may concentrate its investments in a
particular industry;
(5) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the
Portfolio reserves freedom of action to hold and to sell real estate
acquired as a result of the Portfolio's ownership of securities;
(6) purchase physical commodities or contracts relating to physical
commodities; or
(7) make loans except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
Nonfundamental policies may be changed by the Trustees of the Trust
without shareholder approval. As a matter of nonfundamental policy, each
Portfolio does not currently intend to:
(a) invest in companies for the purpose of exercising management or
control.
(b) (i) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes and (ii) by engaging in
reverse repurchase agreements, entering into dollar rolls, or making
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.
Master/feeder Fund 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.
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<PAGE>
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Interfund Borrowing and Lending Program. The Trust's Board of Trustees has
approved the filing of an application for exemptive relief with the SEC which
would permit the Portfolios to participate in an interfund lending program among
certain investment companies advised by the Advisor. If the Portfolios receive
the requested relief, the interfund lending program would allow the
participating funds to borrow money from and loan money to each other for
temporary or emergency purposes. The program would be subject to a number of
conditions designed to ensure fair and equitable treatment of all participating
funds, including the following: (1) no fund may borrow money through the program
unless it receives a more favorable interest rate than a rate approximating the
lowest interest rate at which bank loans would be available to any of the
participating funds under a loan agreement; and (2) no fund may lend money
through the program unless it receives a more favorable return than that
available from an investment in repurchase agreements and, to the extent
applicable, money market cash sweep arrangements. In addition, a fund would
participate in the program only if and to the extent that such participation is
consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings would extend overnight,
but could have a maximum duration of seven days. Loans could be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Portfolios are actually engaged in
borrowing through the interfund lending program, the Portfolios, as a matter of
non-fundamental policy, may not borrow for other than temporary or emergency
purposes (and not for leveraging).
Investment of Uninvested Cash Balances. The Portfolios may have cash balances
that have not been invested in portfolio securities ("Uninvested Cash").
Uninvested Cash may result from a variety of sources, including dividends or
interest received from portfolio securities, unsettled securities transactions,
reserves held for investment strategy purposes, scheduled maturity of
investments, liquidation of investment securities to meet anticipated
redemptions and dividend payments, and new cash received from investors.
Uninvested Cash may be invested directly in money market instruments or other
short-term debt obligations. Pursuant to an Exemptive Order issued by the SEC,
the Portfolios may use Uninvested Cash to purchase shares of affiliated funds
including money market funds, short-term bond funds and Scudder Cash Management
Investment Trust, or one or more future entities for which Scudder Kemper
Investments acts as trustee or investment advisor that operate as cash
management investment vehicles and that are excluded from the definition of
investment company pursuant to section 3(c)(1) or 3(c)(7) of the Investment
Company Act of 1940 (collectively, the "Central Funds") in excess of the
limitations of Section 12(d)(1) of the Investment Company Act. Investment by the
Portfolios in shares of the Central Funds will be in accordance with the
Portfolios' investment policies and restrictions as set forth in its
registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
The Portfolios will invest Uninvested Cash in Central Funds only to the extent
that each Portfolio's aggregate investment in the Central Funds does not exceed
25% of its total assets in shares of the Central Funds. Purchase and sales of
shares of Central Funds are made at net asset value.
3
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
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 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
"Advisor") 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.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Underlying Scudder Funds may
engage (such as short selling, hedging, etc.) or a financial instrument which
the Underlying Scudder Funds may purchase (such as options, etc.) are meant to
describe the spectrum of investments that Scudder Kemper Investments, Inc. (the
"Advisor"), in its discretion, might, but is not required to, use in managing a
Fund's assets. The Advisor may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds, but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of a Fund, but, to the extent employed, could from time to time have
a material impact on a Fund's performance.
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
4
<PAGE>
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.
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
Advisor'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.
<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 Global Discovery Fund-Scudder Shares Global Discovery Fund-Scudder Shares
Fund Scudder Balanced Fund Scudder Balanced Fund
Scudder Global Bond Fund Scudder Development Fund Scudder Development Fund
Scudder GNMA Fund Scudder Dividend & Growth Fund Scudder Dividend & Growth Fund
Scudder High Yield Bond Fund Scudder Emerging Markets Growth Fund Scudder Emerging Markets Growth Fund
Scudder Income Fund
Scudder Short Term Bond Fund Scudder Global Fund Scudder Global Fund
Equity Mutual Funds Scudder Gold Fund Scudder Gold Fund
Classic Growth Fund-Scudder Shares Scudder Greater Europe Growth Fund Scudder Greater Europe Growth Fund
Global Discovery Fund-Scudder Shares Scudder Growth and Income Fund Scudder Growth and Income Fund
Scudder Balanced Fund Scudder Health Care Fund Scudder Health Care Fund
Scudder Development Fund Scudder International Fund Scudder International Fund
Scudder Dividend & Growth Fund Scudder Large Company Growth Fund Scudder Large Company Growth Fund
Scudder Emerging Markets Growth Scudder Large Company Value Fund Scudder Large Company Value Fund
Fund Scudder Latin America Fund Scudder Latin America Fund
Scudder Global Fund Scudder Pacific Opportunities Fund Scudder Pacific Opportunities Fund
Scudder Gold Fund Scudder Select 500 Fund Scudder Select 500 Fund
Scudder Greater Europe Growth Fund Scudder Select 1000 Growth Fund Scudder Select 1000 Growth Fund
Scudder Growth and Income Fund Scudder S&P 500 Index Fund Scudder S&P 500 Index Fund
Scudder Health Care Fund Scudder Small Company Value Fund Scudder Small Company Value Fund
Scudder International Fund Scudder Technology Fund Scudder Technology Fund
Scudder Large Company Growth Fund Scudder 21st Century Growth Fund Scudder 21st Century Growth Fund
Scudder Large Company Value Fund The Japan Fund The Japan Fund
Scudder Latin America Fund Value Fund-Scudder Shares Value Fund-Scudder Shares
Scudder Pacific Opportunities Fund
Scudder Select 500 Fund Bond Mutual Funds Bond Mutual Funds
Scudder Select 1000 Growth Fund Scudder Corporate Bond Fund Scudder Corporate Bond Fund
Scudder S&P 500 Index 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 Technology Fund Scudder GNMA Fund Scudder GNMA Fund
Scudder 21st Century Growth Fund Scudder High Yield Bond Fund Scudder High Yield Bond Fund
The Japan Fund Scudder Income Fund Scudder Income Fund
Value Fund-Scudder Shares Scudder Short Term Bond Fund Scudder Short Term Bond Fund
Money Market Funds Money Market Funds Money Market Funds
Scudder Cash Investment Trust Scudder Cash Investment Trust Scudder Cash Investment Trust
Scudder Money Market Series -- Scudder Money Market Series -- Scudder Scudder Money Market Series -- Scudder
Scudder Premium Money Market Premium Money Market Shares Premium Money Market Shares
Shares
----------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
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.
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 Advisor, are of an investment quality
comparable to obligations of U.S. banks in which the Fund may invest. Such
investments may
6
<PAGE>
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 Advisor
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).
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
Advisor 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 Advisor 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 Advisor 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 Advisor, Scudder Kemper Investments, Inc. (the "Advisor"). 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
7
<PAGE>
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 Advisor deems such a position advisable in light of
economic or market conditions. It is impossible to predict accurately how long
such a defensive strategy may be utilized.
Scudder Emerging Markets Income Fund is a non-diversified investment
company which seeks to provide high current income. As a secondary objective,
the Fund seeks long-term capital appreciation. In pursuing these goals, the Fund
invests at least 50% of its total assets in high-yielding, high-risk debt
securities issued by governments and corporations in emerging markets. The Fund
considers "emerging markets" to include any country that is defined as an
emerging or developing economy by any one of the following: International Bank
for Reconstruction and Development (i.e., the World Bank), the International
Finance Corporation or the United Nations or its authorities. To reduce currency
risk, the Fund will invest at least 65% of its assets in U.S. dollar-denominated
debt securities. Therefore, no more than 35% of the Fund's assets may be
invested in debt securities denominated in foreign currencies. By focusing on
fixed-income instruments issued in emerging markets, the Fund invests
predominantly in debt securities that are rated below investment-grade. The Fund
may invest up to 5% of its net assets in non-performing securities whose quality
is comparable to securities rated as low as D by S&P or C by Moody's. The Fund
involves above-average bond fund risk and can invest entirely in high yield/high
risk bonds. Investments in emerging markets can be volatile. The Fund's share
price and yield can fluctuate daily in response to political events, changes in
the perceived creditworthiness of emerging nations, fluctuations in interest
rates and, to a certain extent, movements in foreign currencies.
In addition, Scudder Emerging Markets Income Fund may invest up to 35% of
its total assets in securities other than debt obligations issued in emerging
markets. These holdings include debt securities and money market instruments
issued by corporations and governments based in developed markets, including up
to 20% of total assets in U.S. fixed income-instruments. The Fund has adopted
144a procedures for the valuation of illiquid securities.
The Fund may for temporary, defensive or emergency purposes invest without
limit in U.S. debt securities including short-term money market securities. It
is impossible to accurately predict how long such alternative strategies may be
utilized. In addition, the Fund may invest in shares of closed end investment
companies, warrants, reverse repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
Scudder 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 Advisor. 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 Advisor. 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
8
<PAGE>
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 is designed to produce a high level of current income
but with less risk of loss to the Fund's portfolio than other GNMA mutual funds,
measured by the frequency and amount by which total return fluctuates downward.
The Fund is designed for investors who are seeking high current income from high
quality securities and who wish to receive a degree of protection from bond
market price risk. The Fund's investment objective is to produce a high level of
current income while actively seeking to reduce downside risk compared with
other GNMA mutual funds. It does this by investing at least 65% of net assets in
"Ginnie Maes": mortgage-backed securities that are issued or guaranteed by the
Government National Mortgage Association (GNMA). The Fund also invests in U.S.
Treasury securities. With both types of securities, the timely payment of
interest and principal is guaranteed by the full faith and credit of the U.S.
government. In addition, the Fund does not invest in securities issued by
tobacco-producing companies. The Fund has been designed with the conservative,
safety-conscious investor in mind. Although past performance is no guarantee of
future performance, historically, this Fund offers higher yields than such
short-term investments as insured savings accounts, insured six month
certificates of deposit, and fixed-price money market funds. The Fund invests in
U.S. Treasury bills, notes and bonds; other securities issued or backed by the
full faith and credit of the U.S. Government as to principal and interest,
including, but not limited to, Government National Mortgage Association ("GNMA")
mortgage-backed securities, Merchant Marine Bonds guaranteed by the Maritime
Administration and obligations of the Export-Import Bank; financial futures
contracts with respect to such securities; options on either such securities or
such financial futures contracts; and bank repurchase agreements. At least 65%
of the Fund's net assets will be directly invested in GNMAs. The Fund may also
utilize hedging techniques involving limited use of financial futures contracts
and the purchase and writing (selling) of put and call options on such
contracts. Under certain market conditions, these strategies may reduce current
income. At any time, the Fund may have a substantial portion of its assets in
securities of a particular type or maturity. The Fund may also write covered
call options on portfolio securities and purchase "when-issued" securities.
GNMA Mortgage-Backed Securities ("GNMAs"). GNMAs are mortgage-backed
securities representing part ownership of a pool of mortgage loans. These loans,
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). A "pool" or group of
such mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, a Government
corporation within the U.S. Department of Housing and Urban Development, the
timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government. This is not, however, a guarantee
related to the Fund's yield or the value of your investment principal.
As mortgage-backed securities, GNMAs differ from bonds in that principal
is paid back by the borrower over the length of the loan rather than returned in
a lump sum at maturity. GNMAs are called "pass-through" securities because both
interest and principal payments including prepayments are passed through to the
holder of the security (in this case, the Fund).
Mortgage-backed securities are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations as further described below.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and may expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities. Mortgage-backed securities are subject to the risk or prepayment and
the risk that the underlying loans will
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not be repaid. Because principal may be prepaid at any time, mortgage-backed
securities may involve significantly greater price and yield volatility than
traditional debt securities.
When interest rates rise, mortgage prepayment rates tend to decline, thus
lengthening the life of a mortgage-related security and increasing the price
volatility of that security, affecting the price volatility of the Fund's
shares. Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying property, refinancing or foreclosure, net of fees or
costs which may be incurred. Because principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities. Some mortgage-related securities
(such as securities issued by the Government National Mortgage Association
("GNMA") are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is the
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Fund shares. Also, GNMA securities often are purchased at a premium
over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include Fannie Mae and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Fannie Mae is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general regulation by
the Secretary of Housing and Urban Development. Fannie Mae purchases
conventional (i.e., not insured or guaranteed by any governmental agency)
mortgages from a list of approved seller/servicers which include state and
federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by Fannie Mae are guaranteed as to timely payment of principal and
interest by Fannie Mae but are not backed by the full faith and credit of the
U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Advisor determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
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The payment of principal on the underlying mortgages may exceed the
minimum required by the schedule of payments for the mortgages. Such prepayments
are made at the option of the mortgagors for a wide variety of reasons
reflecting their individual circumstances and may involve capital losses if the
mortgages were purchased at a premium. For example, mortgagors may speed up the
rate at which they prepay their mortgages when interest rates decline
sufficiently to encourage refinancing. The Fund, when such prepayments are
passed through to it, may be able to reinvest them only at a lower rate of
interest. The Advisor, in determining the attractiveness of GNMAs relative to
alternative fixed-income securities, and in choosing specific GNMA issues, will
have made assumptions as to the likely speed of prepayment. Actual experience
may vary from this assumption resulting in a higher or lower investment return
than anticipated. When interest rates rise, mortgage prepayment rates tend to
decline, thus lengthening the life of a mortgage-related security and increasing
the price volatility of that security, affecting the price volatility of the
Fund's shares.
Some investors may view the Fund as an alternative to a bank certificate
of deposit. While an investment in the Fund is not federally insured, and there
is no guarantee of price stability, an investment in the Fund--unlike a
certificate of deposit -- is not locked away for any period, may be redeemed at
any time without incurring early withdrawal penalties, and may provide a higher
yield.
The Fund may also invest in dollar roll transactions, mortgage-backed and
mortgage pass-though securities, securities purchased on a "forward delivery" or
"when-issued" basis, and covered call options.
For temporary defensive purposes, the fund may temporarily invest up to
100% of assets in cash or cash equivalents.
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 Advisor, 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 Advisor, 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-
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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 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 Advisor, 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 Advisor, 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 Advisor. 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 Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities.
The Fund is intended to provide -- through a single investment -- access
to a wide variety of seasoned stock and investment-grade bond investments.
Common stocks and other equity investments provide long-term growth potential to
help offset the effects of inflation on an investor's purchasing power. Bonds
and other fixed-income investments provide current income and may, over time,
help reduce fluctuations in the Fund's share price.
In seeking its objectives of a balance of growth and income as well as
long-term preservation of capital, the Fund invests in a diversified portfolio
of equity and fixed-income securities. The Fund invests, under normal
circumstances, 50% to 75% of its net assets in common stocks and other equity
investments. The Fund's remaining assets are allocated to investment-grade bonds
and other fixed-income securities, including cash reserves. For liquidity and
temporary defensive purposes, the Fund may invest without limit in cash and in
other money market and short-term instruments. It is impossible to predict for
how long such alternate strategies may be utilized. The Fund will, on occasion,
adjust its mix of investments among equity securities, bonds, and cash reserves.
While the Fund emphasizes U.S. equity and debt securities, it may invest a
portion of its assets in foreign securities, including depositary receipts. The
Fund's foreign holdings will meet the criteria applicable to its domestic
investments. The international component of the Fund's investment program is
intended to increase diversification, thus reducing risk, while providing the
opportunity for higher returns. In addition, the Fund may invest in securities
on a when-issued or forward delivery basis and may utilize various other
strategic transactions.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity securities. The
Fund's Advisor expects that the average gross income yield of the Fund will be
higher than the yield of the Standard & Poor's Composite Stock Price Index (the
"S&P 500 Index"), a commonly accepted benchmark for U.S. stock market
performance. The Fund invests primarily in dividend paying common stocks,
preferred stocks, securities convertible into common stock, and real estate
investment trusts ("REITs").
Under normal market conditions, the Fund will invest at least 80% of net
assets in income-paying equity securities, which the Advisor believes offer a
high level of current income and potential for long-term capital appreciation.
The Advisor believes that an actively managed portfolio of dividend paying
stocks, convertible securities, and REITs offers the potential for a higher
level of income and lower average share price volatility than the S&P 500
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Index. Under normal circumstances, the Fund will invest between 40% and 80% of
its net assets in dividend paying common stocks. The Fund may also purchase such
securities which do not pay current dividends but which offer prospects for
growth of capital and future income.
Under normal circumstances, the Fund will invest between 40% and 80% of
its net assets in dividend paying common stocks. The Advisor applies a
disciplined investment approach to selecting these stocks of primarily
medium-to-large sized U.S. companies. The Fund's portfolio may include stocks
which are out of favor in the market, but which, in the opinion of the Advisor,
offer compelling valuations and potential for long-term appreciation in price
and dividends. In investing the Fund's portfolio among different industry
sectors, the Advisor evaluates how each sector reacts to economic factors such
as interest rates, inflation, Gross Domestic Product, and consumer spending. The
Fund's portfolio is constructed by attaining a proper balance of stocks in these
sectors based on the Advisor's economic forecasts. In summary, the Advisor
applies disciplined buy and sell criteria, fundamental company and industry
analysis, and economic forecasts in managing the Fund to pursue long-term price
appreciation and income with lower overall volatility than the market.
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 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.
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 Advisor 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 Advisor 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
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20% of its net assets in debt securities when the Advisor 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.
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 Advisor 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 Advisor 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 Capital Growth Fund is designed to provide long-term capital
growth while actively seeking to reduce downside risk compared with other growth
mutual funds. The Fund pursues this investment objective by investing at least
65% of total assets in equities, mainly common stocks of established medium- and
large-sized companies. Through a broadly diversified portfolio consisting
primarily of the securities of high quality, medium- to large-sized companies
with strong competitive positions in their industries and reasonable stock
market valuation the Fund seeks to offer less share price volatility than many
growth funds. Unlike many other diversified growth funds that typically may
invest up to 5% in any one company, the fund adheres to a more restrictive
policy that limits the amount it invests in any one company to no more than 3.5%
of its total assets. It may also invest in rights to purchase common stocks, the
growth prospects of which are greater than most stocks but which may also have
above-average market risk. The Fund may also invest in preferred stocks
consistent with the Fund's objective. While most of the fund's investments are
common stocks, some may be other types of equities, such as convertible
securities and preferred stocks. The fund does not invest in securities issued
by tobacco-producing companies.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and companies of all sizes. In addition, since 1945, the overall
performance of common stocks has exceeded the rate of inflation. It is a
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fundamental policy of the Fund, which may not be changed without approval of a
majority of the Fund's outstanding shares (see "Investment Restrictions",
herein, for majority voting requirements), that the Fund will not concentrate
its investments in any particular industry.
The Fund may invest up to 100% of its assets in high-quality money market
instruments (including U.S. Treasury bills, commercial paper, certificates of
deposit, and bankers' acceptances), repurchase agreements and other debt
securities for temporary defensive purposes when the Fund Manager deems such a
position advisable in light of economic or market conditions.
The Fund may also invest in real estate investment trusts, futures
contracts, covered call options, options on stock indices, foreign securities,
and foreign currency exchange contracts.
Scudder 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 Advisor 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 Advisor 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 Advisor 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 Advisor to
be of equivalent quality. It is impossible to accurately predict how long such
alternative strategies may be utilized. In addition, the Fund may invest in
warrants, convertible bonds, preferred stocks, illiquid securities, reverse
repurchase agreements, repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
Scudder Emerging Markets Growth Fund is a non-diversified investment
company which seeks long-term growth of capital primarily through equity
investment in emerging markets around the globe. The Fund will invest in the
Asia-Pacific region, Latin America, less developed nations in Europe, the Middle
East and Africa, focusing investments in countries and regions where there
appear to be the best value and appreciation potential, subject to
considerations of portfolio diversification and liquidity. At least 65% of the
Fund's total assets will be invested in the equity securities of emerging market
issuers. The Fund considers "emerging markets" to include any country that is
defined as an emerging 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 Advisor 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.
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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 Advisor 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) 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
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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 Health Care Fund is a non-diversified fund which seeks long-term
growth of capital primarily through investment in common stocks of companies
that are engaged primarily in the development, production or distribution of
products or services related to the treatment or prevention of diseases and
other medical problems. These include companies that operate hospitals and other
health care facilities; companies that design, manufacture or sell medical
supplies, equipment and support services; and pharmaceutical firms. The Fund may
also invest in companies engaged in medical, diagnostic, biochemical and
biotechnological research and development. The Fund "concentrates," for purposes
of the Investment Company Act of 1940, its assets in securities related to a
particular industry, which means that at least 25% of its net assets will be
invested in these assets at all times. As a result, the Fund may be subject to
greater market fluctuation than a fund which has securities representing a
broader range of investment alternatives.
The Fund invests in the equity securities of health care companies located
throughout the world. In the opinion of the Advisor, investments in the health
care industry offer potential for significant growth due to favorable
demographic trends, technological advances in the industry, and innovations by
companies in the diagnosis and treatment of illnesses.
Under normal circumstances, the Fund will invest at least 80% of its total
assets in common stocks of companies in a group of related industries as
described below. The Fund will invest in securities of U.S. companies, but may
invest in foreign companies as well. A security will be considered appropriate
for the Fund if at least 50% of its total assets, revenues, or net income is
related to or derived from the industry or industries designated for the Fund.
The industries in the health care sector are pharmaceuticals, biotechnology,
medical products and supplies, and health care services. Common stock is issued
by companies to raise cash for business purposes and represents a proportionate
interest in the issuing companies. Therefore, the Fund participates in the
success or failure of any company in which it holds stock. The market values of
common stock can fluctuate significantly, reflecting the business performance of
the issuing company, investor perception and general economic or financial
market movements. Smaller companies are especially sensitive to these factors
and may even become valueless. Despite the risk of price volatility, however,
common stock also offers greater potential for long-term gain on investment,
compared to other classes of financial assets such as bonds or cash equivalents.
While the Fund invests predominantly in common stocks, the Fund may
purchase convertible securities, rights, warrants and illiquid securities. The
Fund 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. Securities may be listed on national exchanges or
traded over-the-counter. The Fund may invest up to 20% of its total assets in
U.S. Treasury securities, and agency and instrumentality obligations. For
temporary defensive purposes, the Fund may invest without limit in cash and cash
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equivalents when the Advisor deems such a position advisable in light of
economic or market conditions. It is impossible to predict accurately how long
such alternative strategies may be utilized.
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 Advisor. Rankings by S&P are not an appraisal of a
company's creditworthiness, as is true for S&P's debt security ratings, nor are
these rankings intended as a forecast of future stock market performance. In
addition to using S&P rankings of earnings and dividends of common stocks, the
Advisor 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 Advisor 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
Advisor. 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
Advisor 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;
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o Securities issued or guaranteed by the government of a country in
Latin America, its agencies or instrumentalities, political
subdivisions or the central bank of such country;
o Securities of companies, wherever organized, when at least 50% of an
issuer's non-current assets, capitalization, gross revenue or profit
in any one of the two most recent fiscal years represents (directly
or indirectly through subsidiaries) assets or activities located in
Latin America; or
o Securities of Latin American issuers, as defined above, in the form
of depositary shares.
The Fund may invest in debt securities which are unrated, rated or the
equivalent of those rated below investment-grade although the Fund will not
invest more than 10% of its net assets in securities rated B or lower by Moody's
or S&P and may invest in securities rated C by Moody's or D by S&P.
Scudder Latin America Fund may for temporary defensive purposes invest
without limit in cash and cash equivalents and money market instruments, or in
securities of U.S. or other non-Latin American issuers. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in closed end investment companies primarily in
Latin America, warrants, loan participations and assignments, when-issued
securities, convertible securities, illiquid securities, reverse repurchase
agreements, repurchase agreements and may engage in securities lending and
strategic transactions including derivatives.
Scudder 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 Advisor determines that the
capital appreciation of debt securities is likely to equal or exceed the capital
appreciation of equity securities.
Scudder Pacific Opportunities Fund may for temporary defensive purposes
invest without limit in debt instruments as well as cash and cash equivalents,
including foreign and domestic money market instruments, short-term government
and corporate obligations, and repurchase agreements. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in common stock, preferred stock (either
convertible or non-convertible), depository receipts, rights, warrants, illiquid
securities, when-issued securities, reverse repurchase agreements, repurchase
agreements and may engage in securities lending and strategic transactions
including derivatives.
Scudder Select 500 Fund is a diversified fund which seeks long-term growth
and income through investment in selected stocks of companies in the Standard &
Poor's 500 Composite Stock Price Index, also known as the S&P 500(R) Index, a
commonly recognized unmanaged measure of 500 widely held U.S. common stocks
listed on the New York Stock Exchange, the American Stock Exchange and the
Nasdaq National Market System. The Fund pursues its objective by investing at
least 80% of its total assets in the stocks of companies in the index. Under
normal circumstances, the Fund invests primarily in common stocks.
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The Fund's portfolio management team will apply a multi-step investment process
to select certain of the composite stocks in the Fund's benchmark index for its
portfolio. This process includes the following steps:
o Ranking - using a proprietary computer model, the stocks of
companies in the particular benchmark index are evaluated and ranked
based on their growth prospects, relative valuation, and history of
rising prices.
o Selection - the 20% lowest ranking stocks in the index are generally
excluded from the portfolio.
o Portfolio Construction - From the remaining 80% of stocks, a subset
is selected and weighted to ensure portfolio diversification and
attempts to create a portfolio that is similar to the benchmark
index. Factors to be considered in the allocation of the remaining
stocks include level of exposure to specific industries, company
specific financial data, price volatility, and market
capitalization.
o Ongoing Active Management - the fund's portfolio is rebalanced on an
ongoing basis as the rankings of the stocks in the benchmark indices
change over time.
The Fund may, but is not required to, invest up to 20% of its total assets in
investment grade debt securities. The Fund can purchase other types of equity
securities including preferred stocks (convertible securities), rights,
warrants, and illiquid securities. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may, but is not required to,
utilize other investments and investment techniques that may impact fund
performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).
The Fund manages risk by diversifying widely among industries and companies, and
using disciplined security selection. The Fund may, but is not required to, use
derivatives in an attempt to manage risk. The use of derivatives could magnify
losses. For temporary defensive purposes, the Fund may invest, without limit, in
cash and cash equivalents, U.S. government securities, money market instruments
and high quality debt securities without equity features.
Scudder Select 1000 Growth Fund is a non-diversified fund which seeks
long-term growth of capital through investment in selected stocks of companies
in the Russell 1000(R) Growth Index, an unmanaged index of growth-oriented
mid-sized and large company stocks. The Fund pursues its objective by investing
at least 80% of its total assets in the stocks of companies in the index. Under
normal circumstances, the Fund invests primarily in common stocks.
The Fund's portfolio management team will apply a multi-step investment process
to select certain of the composite stocks in the Fund's benchmark index for its
portfolio. This process includes the following steps:
o Ranking - using a proprietary computer model, the stocks of
companies in the particular benchmark index are evaluated and ranked
based on their growth prospects, relative valuation, and history of
rising prices.
o Selection - the 20% lowest ranking stocks in the index are generally
excluded from the portfolio.
o Portfolio Construction - From the remaining 80% of stocks, a subset
is selected and weighted to ensure portfolio diversification and
attempts to create a portfolio that is similar to the benchmark
index. Factors to be considered in the allocation of the remaining
stocks include level of exposure to specific industries, company
specific financial data, price volatility, and market
capitalization.
o Ongoing Active Management - the fund's portfolio is rebalanced on an
ongoing basis as the rankings of the stocks in the benchmark indices
change over time.
The Fund may, but is not required to, invest up to 20% of its total assets in
investment grade debt securities. The Fund can purchase other types of equity
securities including preferred stocks (convertible securities), rights,
warrants, and illiquid securities. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may, but is not required to,
utilize other investments and investment techniques that may impact fund
performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).
The Fund manages risk by diversifying widely among industries and
companies, and using disciplined security selection. The Fund may, but is not
required to, use derivatives in an attempt to manage risk. The use of
derivatives could magnify losses. For temporary defensive purposes, the Fund may
invest, without limit, in cash and cash
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equivalents, U.S. government securities, money market instruments and high
quality debt securities without equity features.
Scudder Small Company Stock Fund is designed to provide long-term capital
growth while actively seeking to reduce downside risk compared with other small
company stock funds. The Fund pursues this investment objective by investing at
least 65% of total assets in common stocks of small U.S. companies with
above-average long-term capital growth. The fund does not invest in securities
issued by tobacco-producing companies.
Under normal circumstances, the Fund may invest up to 5% of its assets in
certain short-term fixed income securities including high-quality money market
securities such as U.S. Treasury bills, repurchase agreements, commercial paper,
certificates of deposit issued by domestic and foreign branches of U.S. banks
and bankers' acceptances, although cash or cash equivalents are normally
expected to represent less than 1% of the Fund's assets. The Fund may invest up
to 20% of its assets in stock futures contracts and options in order to invest
uncommitted cash balances, to maintain liquidity to meet shareholder
redemptions, or to minimize trading costs.
The Fund may also invest in Standard & Poor's Depositary Receipts
("SPDRs"). SPDRs typically trade like a share of common stock and provide
investment results that generally correspond to the price and yield performance
of the component common stocks of the S&P 500 Composite Stock Index ("S&P 500
Index"). There can be no assurance that this can be accomplished as it may not
be possible for the trust to replicate and maintain exactly the composition and
relative weightings of the component securities of the S&P 500 Index. SPDRs are
subject to the risks of an investment in a broadly based portfolio of common
stocks, including the risk that the general level of stock prices may decline,
thereby adversely affecting the value of such investment. SPDRs are also subject
to risks other than those associated with an investment in a broadly based
portfolio of common stocks in that the selection of the stocks included in the
trust may affect trading in SPDRs, as compared with trading in a broadly based
portfolio of common stocks.
The Fund is neither sponsored by nor affiliated with Standard & Poor's.
In pursuing its objective of long-term capital growth, the Fund normally
remains substantially invested in the common stocks of small U.S. companies.
Using a quantitative investment approach developed by the Fund Manager, the Fund
focuses on equity securities of companies with market capitalization below $2
billion and that the Fund Manager believes are undervalued relative to the
stocks in Russell 2000 Index(R). The Russell 2000 Index(R) is a widely used
measure of small stock performance. The Fund will sell securities of companies
that have grown in market capitalization above this level as necessary to keep
the Fund focused on small companies.
The Fund takes a diversified approach to investing. It generally invests
no more than 2% of its assets in the securities of any one company and typically
invests in over 150 securities, representing a variety of U.S. industries.
While the Fund invests predominantly in common stocks, it can purchase
other types of equity securities including preferred stocks (either convertible
or non-convertible), rights and warrants. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and may make use of financial futures contracts and
related options. The Fund may purchase and sell options or futures on stock
indices for hedging purposes as a temporary investment to accommodate cash
flows. The Fund may also invest in real estate investment trusts, covered call
options, foreign securities, and foreign currency exchange contracts.
For temporary defensive purposes, the Fund may invest without limit in
high quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. government obligations and corporate debt instruments when the Fund
Manager deems such a position advisable in light of economic or market
conditions.
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:
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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.
Scudder Technology Fund is a non-diversified fund, which seeks long-term
growth of capital primarily through investment in common stocks of companies
engaged in the development, production or distribution of technology-related
products or services. These types of products and services currently include
computer hardware and software, semi-conductors, office equipment and
automation, and Internet-related products and services. The Fund "concentrates,"
for purposes of the Investment Company Act of 1940, its assets in securities
related to a particular industry, which means that at least 25% of its net
assets will be invested in these assets at all times. As a result, each Fund may
be subject to greater market fluctuation than a fund which has securities
representing a broader range of investment alternatives.
Under normal circumstances, the Fund will invest at least 80% of its total
assets in common stocks of companies in a group of related industries as
described below. The Fund will invest in securities of U.S. companies, but may
invest in foreign companies as well. A security will be considered appropriate
for the Fund if at least 50% of its total assets, revenues, or net income is
related to or derived from the industry or industries designated for the Fund.
The industries in the technology sector are computers (including software,
hardware and internet-related businesses), computer services, telecommunications
and semi-conductors. Common stock is issued by companies to raise cash for
business purposes and represents a proportionate interest in the issuing
companies. Therefore, a Fund participates in the success or failure of any
company in which it holds stock. The market values of common stock can fluctuate
significantly, reflecting the business performance of the issuing company,
investor perception and general economic or financial market movements. Smaller
companies are especially sensitive to these factors and may even become
valueless. Despite the risk of price volatility, however, common stock also
offers greater potential for long-term gain on investment, compared to other
classes of financial assets such as bonds or cash equivalents.
While the Fund invests predominantly in common stocks, the Fund may
purchase convertible securities, rights, warrants and illiquid securities. The
Fund 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. Securities may be listed on national exchanges or
traded over-the-counter. The Fund may invest up to 20% of its total assets in
U.S. Treasury securities, and agency and instrumentality obligations. For
temporary defensive purposes, the Fund may invest without limit in cash and cash
equivalents when the Advisor deems such a position advisable in light of
economic or market conditions. It is impossible to predict accurately how long
such alternative strategies may be utilized.
Securities issued through an initial public offering (IPO) can experience
an immediate drop in value if the demand for the securities does not continue to
support the offering price. Information about the issuers of IPO securities is
also difficult to acquire since they are new to the market and may not have
lengthy operating histories. The Fund may engage in short-term trading in
connection with its IPO investments, which could produce higher trading costs
and adverse tax consequences. The number of securities issued in an IPO is
limited, so it is likely that IPO securities will represent a smaller component
of the Fund's portfolio as the Fund's assets increase (and thus have a more
limited effect on the Fund's performance).
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
22
<PAGE>
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 Advisor 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 Advisor 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
Advisor 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 S&P 500 Index Fund seeks to match as closely as possible (before
the deduction of expenses) the total return of the Standard & Poor's 500
Composite Stock Price Index ("S&P 500 Index"), which emphasizes the stocks of
large U.S. companies. The Trust seeks to achieve the investment objective of the
Fund by investing substantially all of the investable assets of the Fund in an
open-end management investment company having the same investment objective as
the Fund. The investment company in which the Fund invests is the Equity 500
Index Portfolio (the "Portfolio"), advised by Bankers Trust.
The Portfolio may invest in equity securities listed on any domestic or
foreign securities exchange or traded in the over-the-counter market as well as
certain restricted or unlisted securities. "Equity securities" are defined as
common stock, preferred stock, trust or limited partnership interests, rights
and warrants to subscribe to or purchase such securities, sponsored or
unsponsored ADRs, EDRs, GDRs, and convertible securities, consisting of debt
securities or preferred stock that may be converted into common stock or that
carry the right to purchase common stock. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation. They may or may not
pay dividends or carry voting rights. Common stock occupies the most junior
position in a company's capital structure. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
When the Portfolio experiences large cash inflows through the sale of
securities and desirable equity securities, that are consistent with the
Portfolio's investment objective, which are unavailable in sufficient quantities
or at attractive prices, the Portfolio may hold short-term investments (or
shares of money market mutual funds) for a limited time pending availability of
such equity securities. Short-term instruments consist of foreign and domestic:
(i) short-term obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other short-term
debt securities rated AA or higher by Standard & Poor's Ratings Corporation
("S&P") or Aa or higher by Moody's Investors Service, Inc. ("Moody's") or, if
unrated, of comparable quality in the opinion of Bankers Trust; (iii) commercial
paper; (iv) bank obligations, including negotiable certificates of deposit, time
deposits and banker's acceptances; and (v) repurchase agreements. At the time
the Portfolio invests in commercial paper, bank obligations or repurchase
agreements, the issuer of the issuer's parent must have outstanding debt rated
AA or higher by S&P or Aa or higher by Moody's or outstanding commercial paper
or bank obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such
ratings are available, the instrument must be of comparable quality in the
opinion of Bankers Trust.
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 Advisor 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 Advisor allocates the
Fund's investments among many companies and
23
<PAGE>
different industries in the U.S. and, where opportunity warrants, abroad as
well. Emerging growth companies are those with the ability, in the Advisor'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 Advisor 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 Advisor 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], 2000 or the life of fund if shorter.
[to be updated]
<TABLE>
<CAPTION>
Assets
as of Average Annual Total Returns
Inception 11/1/00 One Five Ten Life of
Date (in millions) Year Years Years Fund
--------- ------------- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund
Scudder Cash Investment Trust 7/23/76
Scudder Money Market Series - Scudder 7/7/97
Premium Money Market Shares
Bond Mutual Funds
Scudder Corporate Bond Fund 8/31/98
Scudder Emerging Markets Income Fund 12/31/93
Scudder Global Bond Fund 3/1/91
Scudder GNMA Fund** 7/5/85
Scudder High Yield Bond Fund 6/28/96
Scudder Income Fund 5/10/28
Scudder Short Term Bond Fund 4/2/84
Equity Mutual Funds
Classic Growth Fund-Scudder Shares 9/9/96
Scudder Balanced Fund 1/4/93
Scudder Capital Growth Fund*** 11/30/84
Scudder Development Fund 1/18/71
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Assets
as of Average Annual Total Returns
Inception 11/1/00 One Five Ten Life of
Date (in millions) Year Years Years Fund
--------- ------------- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Scudder Dividend & Growth Fund 7/17/98
Scudder Emerging Markets Growth Fund 5/8/96
Global Discovery Fund-Scudder Shares 9/10/91
Scudder Global Fund 7/23/86
Scudder Gold Fund 8/22/88
Scudder Greater Europe Growth Fund 10/10/94
Scudder Growth and Income Fund 3/15/29
Scudder Health Care Fund 3/2/98
Scudder International Fund 6/15/54
Scudder Large Company Growth Fund 5/15/91
Scudder Large Company Value Fund 6/6/56
Scudder Latin America Fund 12/08/92
Scudder Pacific Opportunities Fund 12/08/92
Scudder S&P 500 Index Fund 8/29/97
Scudder Select 500 Fund 5/17/99
Scudder Select 1000 Growth Fund 5/17/99
Scudder Small Company Stock Fund*** 2/1/97
Scudder Small Company Value Fund 10/6/95
Scudder Technology Fund 3/2/98
Scudder 21st Century Growth Fund 9/9/96
Value Fund-Scudder Shares 12/31/92
The Japan Fund 4/19/62*
</TABLE>
* From April 19, 1962 until August 14, 1987, the Fund operated as a
closed-end diversified management investment company.
** On July 17, 2000, the Fund changed its investment objective.
*** On July 17, 2000, the Funds were reorganized from AARP Growth Trust into
two newly-created series of Investment Trust. The performance above
reflects the performance of Class AARP shares for the period ended [-----]
from when the Funds were AARP Capital Growth Fund and AARP Small Company
Stock Fund. If the Advisor had not maintained expenses, the total returns
would have been lower.
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 Advisor. 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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.")
25
<PAGE>
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.
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.
Taxation of the Portfolios and Their Shareholders
Each Portfolio intends to qualify annually and elects to be treated as a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, each Portfolio is required to distribute to its shareholders
at least 90 percent of its investment company taxable income (including net
short-term capital gain) and generally is not subject to federal income tax to
the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code.
If for any taxable year a Portfolio does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions, would be taxable to shareholders to the extent of
current accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations in the case of corporate
shareholders.
Each Portfolio is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of each Portfolio's ordinary income for the calendar
year, at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) realized during the one-year period
ending October 31 during such year, and all ordinary income and capital gains
for prior years that were not previously distributed.
Investment company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of a Portfolio. Presently,
each Portfolio has no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, the
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim a proportionate
share of federal income taxes paid by the Portfolio on such gains as a credit
against the shareholder's federal income tax liability, and will be entitled to
increase the adjusted tax basis of the shareholder's Portfolio shares by the
difference between the shareholder's pro rata share of such gains and the
shareholder's tax credit. If a Portfolio makes such an election, it may not be
treated as having met the excise tax distribution requirement.
26
<PAGE>
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 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
$2,250 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
27
<PAGE>
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.
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 Advisors about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations.
PERFORMANCE
From time to time, quotations of the Portfolios' performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Performance information will be computed separately for each class.
Class A, B and C shares are newly offered and therefore have no available
performance information. Returns for Class A, B and C shares are derived from
the historical performance of Class S shares, adjusted to reflect the estimated
operating expenses applicable to Class A, B and C shares, which may be higher or
lower than those of Class S shares.
Returns for Class A, B and C shares for the period November 15, 1996
(commencement of operations) to August 31, 2000 are derived from the historical
performance of Class S shares, adjusted to reflect the operating expenses
applicable to Class A, B and C shares, which may be higher or lower than those
of Class S shares. The performance figures are also adjusted to reflect the
maximum sales charge of [xxx] % for Class A shares and the maximum current
contingent deferred sales charge of [xxx]% for Class B shares and [xxx]% for
Class C shares.
The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of the Class A, B and C shares of each Portfolio as
described
28
<PAGE>
above; they do not guarantee future results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
Average Annual Total Return
Average annual total return is the average annual compound rate of return for
the periods of one year, five years and ten years (or such shorter periods as
may be applicable dating from the commencement of the Portfolio's operations),
all ended on the last day of a recent calendar quarter. Average annual total
return quotations reflect changes in the price of the 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 computing the average annual compound rates of return of a
hypothetical investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Returns for the Period Ended August 31, 2000 (1)(2)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Life of Portfolio
<S> <C> <C> <C> <C>
Conservative Portfolio
Scudder Pathway Series -- Class A ____% ____% ____% ____%
Scudder Pathway Series -- Class B ____% ____% ____% ____%
Scudder Pathway Series -- Class C ____% ____% ____% ____%
<CAPTION>
1 Year 5 Years 10 Years Life of Portfolio
<S> <C> <C> <C> <C>
Balanced Portfolio
Scudder Pathway Series -- Class A ____% ____% ____% ____%
Scudder Pathway Series -- Class B ____% ____% ____% ____%
Scudder Pathway Series -- Class C ____% ____% ____% ____%
<CAPTION>
1 Year 5 Years 10 Years Life of Portfolio
<S> <C> <C> <C> <C>
Growth Portfolio
Scudder Pathway Series -- Class A ____% ____% ____% ____%
Scudder Pathway Series -- Class B ____% ____% ____% ____%
Scudder Pathway Series -- Class C ____% ____% ____% ____%
</TABLE>
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the total return for Class A, B and C shares for the period prior to
their introduction is based upon the performance of Class S shares from
the commencement of investment operations, November 15, 1996 through
August 31, 2000.
(2) As described above, average annual total return is based on historical
earnings and is not intended to indicate future performance. Average
annual total return for each Portfolio or class will vary based on changes
in market conditions and the level of each Portfolio's and class'
expenses.
In connection with communicating its average annual total return to current or
prospective shareholders, the Portfolio also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Portfolio's shares and assume
that all
29
<PAGE>
dividends and capital gains distributions during the period were reinvested in
Portfolio shares. Cumulative total return is calculated by computing the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Cumulative Total Returns for the Period Ended August 31, 2000 (1)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Life of Portfolio
<S> <C> <C> <C> <C>
Conservative Portfolio
Scudder Pathway Series -- Class A ____% ____% ____% ____%
Scudder Pathway Series -- Class B ____% ____% ____% ____%
Scudder Pathway Series -- Class C ____% ____% ____% ____%
<CAPTION>
1 Year 5 Years 10 Years Life of Portfolio
<S> <C> <C> <C> <C>
Balanced Portfolio
Scudder Pathway Series -- Class A ____% ____% ____% ____%
Scudder Pathway Series -- Class B ____% ____% ____% ____%
Scudder Pathway Series -- Class C ____% ____% ____% ____%
<CAPTION>
1 Year 5 Years 10 Years Life of Portfolio
<S> <C> <C> <C> <C>
Growth Portfolio
Scudder Pathway Series -- Class A ____% ____% ____% ____%
Scudder Pathway Series -- Class B ____% ____% ____% ____%
Scudder Pathway Series -- Class C ____% ____% ____% ____%
</TABLE>
(1) Because Class A, B and C shares were not introduced until December 29,
2000, the total return for Class A, B and C shares for the period prior to
their introduction is based upon the performance of Class S shares from
the commencement of investment operations, November 15, 1996 through
August 31, 2000.
Total Return
Total return is the rate of return on an investment for a specified period of
time calculated in the same manner as cumulative total return.
From time to time, in advertisements, sales literature, and reports to
shareholders or prospective investors, figures relating to the growth in the
total net assets of each Portfolio apart from capital appreciation will be
cited, as an update to the information in this section, including, but not
limited to: net cash flow, net subscriptions, gross subscriptions, net asset
growth, net account growth, and subscription rates. Capital appreciation
generally will be covered by marketing literature as part of the Portfolios' and
classes' performance data.
Quotations of a Portfolio's performance are based on historical earnings, show
the performance of a hypothetical investment, and are not intended to indicate
future performance of that Portfolio. An investor's shares when redeemed may be
worth more or less than their original cost. Performance of a Portfolio will
vary based on changes in market conditions and the level of that Portfolio's
expenses.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors
30
<PAGE>
should consider the effects of the methods used to calculate performance when
comparing performance of each 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, the Portfolios also may compare these figures to the performance
of unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Historical information on the value of the dollar versus foreign
currencies may be used from time to time in advertisements concerning the
Portfolios. Such historical information is not indicative of future fluctuations
in the value of the U.S. dollar against these currencies. In addition, marketing
materials may cite country and economic statistics and historical stock market
performance for any of the countries in which the Portfolios invest.
From time to time, in advertising and marketing literature, each
Portfolio's performance may be compared to the performance of broad groups of
mutual funds with similar investment goals, as tracked by independent
organizations.
From time to time, in marketing and other literature, members of the Board
and officers of the Portfolios, the Portfolios' 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 Advisor 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.
Marketing and other Portfolio literature may include a description of the
potential risks and rewards associated with an investment in the Portfolios. 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 Portfolios to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond funds these factors include, but are
not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Evaluation of each Portfolio's 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 the Portfolios.
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Scudder Kemper Investments, Inc. (the "Advisor"), Two
International Place, Boston, Massachusetts, an investment counsel firm, acts as
investment advisor to the Portfolios. This organization, the predecessor of
which is Scudder, Stevens & Clark, Inc., ("Scudder") is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Advisor introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder entered into an agreement with Zurich Insurance
Company ("Zurich")
31
<PAGE>
pursuant to which Scudder and Zurich agreed to form an alliance. On December 31,
1997, Zurich acquired a majority interest in Scudder, and Zurich Kemper
Investments, Inc., a Zurich subsidiary, became part of Scudder. Scudder's name
has been changed to Scudder Kemper Investments, Inc. On September 7, 1998, the
businesses of Zurich (including Zurich's 70% interest in Scudder Kemper) and the
financial services businesses of B.A.T Industries p.l.c. ("B.A.T") were combined
to form a new global insurance and financial services company known as Zurich
Financial Services Group. By way of a dual holding company structure, former
Zurich shareholders initially owned approximately 57% of Zurich Financial
Services Group, with the balance initially owned by former B.A.T shareholders.
The Advisor manages the Portfolios' daily investment and business affairs
subject to the policies established by the Trust's Board of Trustees. The
Trustees have overall responsibility for the management of the Portfolios under
Massachusetts law.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
Pursuant to an investment management agreement with the Portfolios, the
Advisor acts as the Portfolio's investment Advisor, manages its investments,
administers its business affairs, furnishes office facilities and equipment,
provides clerical and administrative services and permits any of its officers or
employees to serve without compensation as trustees or officers of the
Portfolios if elected to such positions.
The principal source of the Advisor's income is professional fees received
from providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today it provides investment counsel
for many individuals and institutions, including insurance companies, industrial
corporations, and financial and banking organizations, as well as providing
investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Advisor receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world researching hundreds of companies.
Certain investments may be appropriate for the Portfolios and also for
other clients advised by the Advisor. Investment decisions for the Portfolios
and other clients are made with a view to achieving their respective investment
objectives and after consideration of such factors as their current holdings,
availability of cash for investment and the size of their investments generally.
Frequently, a particular security may be bought or sold for only one client or
in different amounts and at different times for more than one but less than all
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In addition, purchases
or sales of the same security may be made for two or more clients on the same
day. In such event, such transactions will be allocated among the clients in a
manner believed by the Advisor to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Portfolios. Purchase and sale orders for the Portfolios
may be combined with those of other clients of the Advisor in the interest of
achieving the most favorable net results to the Portfolios.
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
Agreement will continue in effect until September 30, 2001 and from year to year
thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreements or interested
persons of the Advisor or the Trust, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Trust's Trustees
or of a majority of the outstanding voting securities of the respective
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. The continuance of the Agreement was
last approved by the Trustees on July 10, 2000.
Each Portfolio expects to operate at a zero expense level. Under the
Agreement with the trust, and the Special Servicing Agreement, the Advisor 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
32
<PAGE>
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.
Under the Agreement, the Advisor regularly provides the Portfolios with
continuing investment management for the portfolios consistent with each
Portfolio's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of each Portfolio's
assets shall be held uninvested, subject to the Trust's Declaration of Trust,
By-Laws, the 1940 Act, the Code and to each Portfolio's investment objective,
policies and restrictions, and subject, further, to such policies and
instructions as the Board of Trustees of the Trust may from time to time
establish. The Advisor also advises and assists the officers of the Trust in
taking such steps as are necessary or appropriate to carry out the decisions of
its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of each Portfolio's.
Under the Agreement, the Advisor renders significant administrative
services (not otherwise provided by third parties) necessary for each
Portfolio's operations as an open-end investment company including, but not
limited to, preparing reports and notices to the Trustees and shareholders;
supervising, negotiating contractual arrangements with, and monitoring various
third-party service providers to the Portfolios (such as the Portfolios'
transfer agent, pricing agents, Custodian, accountants and others); preparing
and making filings with the SEC and other regulatory agencies; assisting in the
preparation and filing of the Portfolios' federal, state and local tax returns;
preparing and filing the Portfolios' federal excise tax returns; assisting with
investor and public relations matters; monitoring the valuation of securities
and the calculation of net asset value; monitoring the registration of shares of
the Portfolios under applicable federal and state securities laws; maintaining
the Portfolios' books and records to the extent not otherwise maintained by a
third party; assisting in establishing accounting policies of the Portfolios;
assisting in the resolution of accounting and legal issues; establishing and
monitoring each Portfolio's operating budget; processing the payment of each
Portfolio's bills; assisting the Portfolios in, and otherwise arranging for, the
payment of distributions and dividends; and otherwise assisting the Portfolios
in the conduct of its business, subject to the direction and control of the
Trustees.
The Advisor pays the compensation and expenses of all Trustees, officers
and executive employees (except expenses incurred attending Board and committee
meetings outside New York, New York; Boston, Massachusetts and Chicago,
Illinois) of the Portfolios affiliated with the Advisor and makes available,
without expense to the Trust, the services of such Trustees, officers and
employees of the Advisor as may duly be elected officers or Trustees of the
Trust, subject to their individual consent to serve and to any limitations
imposed by law, and provides the Portfolios' office space and facilities.
Under the Agreement the Fund is responsible for all of its other expenses
including: organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the Transfer Agent; any other expenses of issue, sale, underwriting,
distribution, redemption or repurchase of shares; the expenses of and the fees
for registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and employees of the Fund who are not affiliated with the
Advisor; the cost of printing and distributing reports and notices to
stockholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses of shareholders' meetings, the cost of responding to shareholders'
inquiries, and its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees of the Fund with respect thereto.
The Agreement identifies the Advisor as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the
Advisor concerning such Agreement, the Trustees of the Trust who are not
"interested persons" of the Advisor are represented by independent counsel at
the Fund's expense.
The Agreement provides that the Advisor shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Advisor's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
33
<PAGE>
The Advisor may serve as advisor to other funds with investment objectives
and policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the
Fund as principals in the purchase or sale of securities, except as individual
subscribers to or holders of Shares of the Fund.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
Management Fees of Underlying Scudder Funds
The Advisor has agreed not to be paid a management fee for performing its
services. However, the Advisor will receive management fees from managing the
Underlying Scudder Funds in which each Portfolio invests.
Each Underlying Scudder Fund pays the Advisor a management fee as
determined by the Investment Management Agreement between each Underlying
Scudder Fund and the Advisor. As manager of the assets of each Underlying
Scudder Fund, the Advisor directs the investments of an Underlying Scudder Fund
in accordance with each Underlying Scudder Fund's investment objective, policies
and restrictions. The Advisor 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 Advisor.
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>
Scudder Cash Investment Trust 5/31/00
Scudder Money Market Series - Scudder Premium 5/31/00
Money Market Shares
Scudder Corporate Bond Fund 1/31/00
Scudder Emerging Markets Income Fund 10/31/00
Scudder Global Bond Fund 10/31/00
Scudder GNMA Fund 3/31/00
Scudder High Yield Bond Fund 1/31/00
Scudder Income Fund 1/31/00
Scudder International Bond Fund 6/30/00
Scudder Short Term Bond Fund 12/31/99
Scudder Capital Growth Fund
Scudder Classic Growth Fund 10/31/00
Scudder Balanced Fund
Scudder Development Fund 7/31/00
Scudder Dividend & Growth Fund
Scudder Emerging Markets Growth Fund 10/31/00
Scudder Global Fund 8/31/00
Scudder Global Discovery Fund 10/31/00
Scudder Gold Fund 6/30/00
Scudder Greater Europe Growth Fund 10/31/00
Scudder Growth and Income Fund 12/31/99
Scudder Health Care Fund
Scudder International Fund 8/31/00
Scudder Large Company Growth Fund 7/31/00
Scudder Large Company Value Fund 7/31/00
Scudder Latin America Fund 10/31/00
Scudder Pacific Opportunities Fund 10/31/00
Scudder S&P 500 Index Fund
Scudder Select 500 Fund
</TABLE>
34
<PAGE>
<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>
Scudder Select 1000 Growth Fund
Scudder Small Company Stock Fund
Scudder Small Company Value Fund 7/31/00
Scudder Technology Fund
Scudder 21st Century Growth Fund 8/31/00
Scudder Value Fund 9/30/00
The Japan Fund, Inc. 12/31/99
</TABLE>
Officers and employees of the Advisor from time to time may have
transactions with various banks, including the Portfolios' custodian bank. It is
the Advisor's opinion that the terms and conditions of those transactions which
have occurred were not influenced by existing or potential custodial or other
Trust relationships.
The Advisor may serve as Advisor 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 Advisor, 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 Advisor 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.
The Special Servicing Agreement will terminate upon implementation of an
Administration Services Agreement by each Portfolio and each applicable
Underlying Scudder Fund.
Based on actual expense data from the Underlying Scudder Funds and certain
very conservative assumptions with respect to the Trust, the Advisor, 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 Advisor 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
35
<PAGE>
Underlying Scudder Funds before participating in the Service Agreement. For
future years, there will be an annual review of the Service Agreement to
determine its continued appropriateness for each Underlying Scudder Fund.
Certain non-recurring and extraordinary expenses will not be paid in
accordance with the Service Agreement including: the fees and costs of actions,
suits or proceedings and any penalties or damages in connection therewith, to
which the Trust and/or a Portfolio may incur directly, or may incur as a result
of its legal obligation to provide indemnification to its officers, director and
agents; the fees and costs of any governmental investigation and any fines or
penalties in connection therewith; and any federal, state or local tax, or
related interest penalties or additions to tax, incurred, for example, as a
result of the Trusts' failure to distribute all of its earnings, failure to
qualify under subchapter M of the Internal Revenue Code, or failure to timely
file any required tax returns or other filings; the fees and expenses incurred
in connection with membership in investment company organizations; fees and
expenses of the Portfolios' accounting agent; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the transfer agent; the expenses of the fees for registering or
qualifying securities for sale; the fees and expenses of Trustees, officers and
employees of a Portfolio who are not affiliated with the Advisor; 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 Advisor of its subsidiary and does not benefit the Advisor 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.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Code of Ethics
The Portfolios, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Portfolios and employees of the Advisor and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Portfolios, subject to
requirements and restrictions set forth in the applicable Code of Ethics. The
Advisor's Code of Ethics contains provisions and requirements designed to
identify and address certain conflicts of interest between personal investment
activities and the interests of the Portfolios. Among other things, the
Advisor's Code of Ethics prohibits certain types of transactions absent prior
approval, imposes time periods during which personal transactions may not be
made in certain securities, and requires the submission of duplicate broker
confirmations and quarterly reporting of securities transactions. Additional
restrictions apply to portfolio managers, traders, research analysts and others
involved in the investment advisory process. Exceptions to these and other
provisions of the Advisor's Code of Ethics may be granted in particular
circumstances after review by appropriate personnel.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, is the principal underwriter and distributor for the Class A, B and C
shares of the Fund and acts as agent of the Fund in the continuous offering of
its Shares. KDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. The Fund pays
the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI, as principal underwriter, pays for
the
36
<PAGE>
printing and distribution of copies thereof used in connection with the offering
of Shares to prospective investors. KDI also pays for supplementary sales
literature and advertising costs.
The distribution agreement continues in effect from year to year so long
as such continuance is approved for each class at least annually by a vote of
the Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees or a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the distribution agreement or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The distribution agreement may not be amended for a class to increase
the fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund, and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the distribution
agreement.
Class B Shares and Class C Shares. The Fund has adopted a plan under Rule
12b-1 (the "Rule 12b-1 Plan") that provides for fees payable as an expense of
the Class B shares and Class C shares that are used by KDI to pay for
distribution and services for those classes. Because 12b-1 fees are paid out of
fund assets on an ongoing basis they will, over time, increase the cost of an
investment and cost more than other types of sales charges.
Rule 12b-1 Plan. Since the distribution agreement provides for fees
payable as an expense of the Class B shares and the Class C shares that are used
by KDI to pay for distribution services for those classes, that agreement is
approved and reviewed separately for the Class B shares and the Class C shares
in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in
which an investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its
terms, the obligation of a Fund to make payments to KDI pursuant to the Plan
will cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under a Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under the Plan
may or may not be sufficient to reimburse KDI for its expenses incurred.
For its services under the distribution agreement, KDI receives a fee from
the Fund, payable monthly, at the annual rate of [xxx]% of average daily net
assets of the Fund attributable to Class B shares. This fee is accrued daily as
an expense of Class B shares. KDI also receives any contingent deferred sales
charges. KDI currently compensates firms for sales of Class B shares at a
commission rate of [xxx]%.
For its services under the distribution agreement, KDI receives a fee from
the Fund, payable monthly, at the annual rate of [xxx]% of average daily net
assets of the Fund attributable to Class C shares. This fee is accrued daily as
an expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of [xxx]% of the purchase price of Class C shares.
For periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of [xxx]% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or a Fund. KDI also receives any
contingent deferred sales charges.
Administrative Services. Administrative services are provided to the Fund on
behalf of Class A, B and C shareholders under an administrative services
agreement ("administrative agreement") with KDI. KDI bears all its expenses of
providing services pursuant to the administrative agreement between KDI and the
Fund, including the payment of service fees. The Fund pays KDI an administrative
services fee, payable monthly, at an annual rate of up to [xxx]% of average
daily net assets of Class A, B and C shares of the Fund.
KDI enters into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms") that provide services and
facilities for their customers or clients who are investors in the Fund. The
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class A Shares, KDI pays each firm a service fee,
payable quarterly, at an annual rate of up to [xxx]% of the net assets in Fund
accounts that it maintains and services attributable to Class A Shares,
commencing with the month after investment. With respect to Class B and Class C
Shares, KDI currently advances to firms the first-year service fee at a rate of
up to [xxx]% of the purchase price of such Shares. For periods
37
<PAGE>
after the first year, KDI currently intends to pay firms a service fee at a rate
of up to [xxx]% (calculated monthly and paid quarterly) of the net assets
attributable to Class B and Class C Shares maintained and serviced by the firm.
After the first year, a firm becomes eligible for the quarterly service fee and
the fee continues until terminated by KDI or the Fund. Firms to which service
fees may be paid include affiliates of KDI. In addition KDI may, from time to
time, from its own resources pay certain firms additional amounts for ongoing
administrative services and assistance provided to their customers and clients
who are shareholders of the Fund.
KDI also may provide some of the above services and may retain any portion
of the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of
[xxx]% based upon Fund assets in accounts for which a firm provides
administrative services and at the annual rate of [xxx]% based upon Fund assets
in accounts for which there is no firm of record (other than KDI) listed on the
Fund's records. The effective administrative services fee rate to be charged
against all assets of the Fund while this procedure is in effect will depend
upon the proportion of Fund assets that is in accounts for which a firm of
record provides administrative services. The Board of Trustees of the Fund, in
its discretion, may approve basing the fee to KDI at the annual rate of [xxx]%
on all Fund assets in the future
Certain trustees or officers of the Fund are also directors or officers of
the Advisor or KDI, as indicated under "Officers and Trustees."
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, a subsidiary of the Advisor,
computes net asset value for the Fund.
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company (the "Custodian"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian has custody of all securities and cash of the Fund held
outside the United States. The Custodian attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Fund. Kemper Service Company ("KSVC"), 811 Main Street, Kansas City,
Missouri 64105-2005, an affiliate of the Advisor, is the Fund's transfer agent,
dividend-paying agent and shareholder service agent for the Fund's Class A, B
and C shares. KSVC receives as transfer agent, annual account fees of $5 per
account, transaction and maintenance charges, annual fees associated with the
contingent deferred sales charge (Class B shares only) and out-of-pocket expense
reimbursement.
Independent Accountants and Reports to Shareholders. The financial highlights of
the Fund included in the Fund's prospectus and the Financial Statements
incorporated by reference in this Statement of Additional Information have been
so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. PricewaterhouseCoopers LLP audits the financial
statements of the Fund and provides other audit, tax and related services.
Shareholders will receive annual audited financial statements and semi-annual
unaudited financial statements.
PORTFOLIO TRANSACTIONS
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 Advisor.
38
<PAGE>
[update turnover #'s]
<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
Scudder Emerging Markets Income Fund
Scudder Global Bond Fund
Scudder GNMA Fund
Scudder High Yield Bond Fund
Scudder Income Fund
Scudder Short Term Bond Fund
Scudder Capital Growth Fund
Scudder Classic Growth Fund
Scudder Balanced Fund
Scudder Development Fund
Scudder Dividend & Growth Fund
Scudder Emerging Markets Growth Fund
Scudder Global Fund
Scudder Global Discovery Fund
Scudder Gold Fund
Scudder Greater Europe Growth Fund
Scudder Growth and Income Fund
Scudder Health Care Fund
Scudder International Fund
Scudder Large Company Growth Fund
Scudder Large Company Value Fund
Scudder Latin America Fund
Scudder Pacific Opportunities Fund
Scudder S&P 500 Index Fund
Scudder Select 500 Fund
Scudder Select 1000 Growth Fund
Scudder Small Company Stock Fund
Scudder Small Company Value Fund
Scudder Technology Fund
Scudder 21st Century Growth Fund
Scudder Value Fund
The Japan Fund
</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
NET ASSET VALUE
The net asset value of each class of each Portfolio is computed as of the
close of regular trading on the Exchange on each day the Exchange is open for
trading. The Exchange is scheduled to be closed on the following holidays: New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas and on the
preceding Friday or subsequent Monday when one of these holidays falls on
Saturday or Sunday, respectively. Net asset value per share is determined
separately for each class of shares by dividing the value of the total assets of
each Portfolio, less all liabilities attributable to that class, by the total
number of shares of that class outstanding. The per share net asset value of the
Class B and Class C Shares of the Fund will generally be lower than that of the
Class A Shares of the Fund because of the higher expenses borne by the Class B
and Class C Shares.
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
39
<PAGE>
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.
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Fund Shares are sold at their public offering price, which is the net
asset value per such shares next determined after an order is received in proper
form plus, with respect to Class A Shares, an initial sales charge. The minimum
initial investment for Class A, B or C is $[xxxx] and the minimum subsequent
investment is $[xxx] but such minimum amounts may be changed at any time. The
Fund may waive the minimum for purchases by trustees, directors, officers or
employees of the Fund or the Advisor and its affiliates. An order for the
purchase of Shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
PURCHASE OF SHARES
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in
their initial and contingent deferred sales charge structures and in their
ongoing expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. Each
class has distinct advantages and disadvantages for different investors, and
investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of [xxx] (1) Initial sales charge
[xxx]% of the public offering price waived or reduced for
certain purchases
Class B Maximum contingent deferred sales [xxx]% Shares convert to Class A
charge of [xx]% of redemption shares six years after
proceeds; declines to zero after issuance
six years
Class C Contingent deferred sales charge of [xxx]% No conversion feature
[xx]% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
(1) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a [xx]% contingent deferred sales
charge if redeemed within one year of purchase and a [xxx]% contingent
deferred sales charge if redeemed within the second year of purchase.
The minimum initial investment for each of Class A, B and C of the Fund is
$[xxxx] and the minimum subsequent investment is $[xxx]. The minimum initial
investment for an Individual Retirement Account is $[xxx] and the minimum
subsequent investment is $[xx]. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct
40
<PAGE>
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $[xx]. These minimum amounts may be changed at any time in
management's discretion.
Share certificates will not be issued unless requested in writing and may
not be available for certain types of account registrations. It is recommended
that investors not request share certificates unless needed for a specific
purpose. You cannot redeem shares by telephone or wire transfer or use the
telephone exchange privilege if share certificates have been issued. A lost or
destroyed certificate is difficult to replace and can be expensive to the
shareholder (a bond worth 2% or more of the certificate value is normally
required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of As a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $50,000 [xxx]% [xxx]% [xxx]%
$50,000 but less than $100,000 [xxx]% [xxx]% [xxx]%
$100,000 but less than $250,000 [xxx]% [xxx]% [xxx]%
$250,000 but less than $500,000 [xxx]% [xxx]% [xxx]%
$500,000 but less than $1 million [xxx]% [xxx]% [xxx]%
$1 million and over [xxx]** [xxx]** [xxx]***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI,
the Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Scudder
Kemper Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" totals at least $1,000,000 including purchases of Class A shares
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features"; or (b) a
participant-directed qualified retirement plan described in Code Section 401(a),
a participant-directed non-qualified deferred compensation plan described in
Code Section 457 or a participant-directed qualified retirement plan described
in Code Section 403(b)(7) which is not sponsored by a K-12 school district,
provided in each case that such plan has not less than 200 eligible employees
(the "Large Order NAV Purchase Privilege"). Redemption within two years of the
purchase of shares purchased under the Large Order NAV Purchase Privilege may be
subject to a contingent deferred sales charge. See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Large Order NAV Purchase
Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: [xxx]% of the net asset value of shares sold on amounts up to
$[xx] million, [xxx]% on the next $[xx] million and [xxx]% on amounts over $[xx]
million. The commission schedule will be reset on a calendar year basis for
sales of shares pursuant to the Large Order NAV Purchase Privilege to
employer-sponsored employee benefit plans using the subaccount recordkeeping
system made available through Kemper Service Company. For purposes of
determining the appropriate commission percentage to be applied to a particular
sale, KDI will consider the cumulative amount invested by the purchaser in the
Fund and other Scudder Kemper Mutual Fund listed under "Special Features --
Class A Shares -- Combined Purchases," including purchases pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
referred to above. The privilege of purchasing Class A shares of the Fund at net
asset value under the Large Order NAV Purchase Privilege is not available if
another net asset value purchase privilege also applies.
Class A shares of the Fund or of any other Scudder Kemper Mutual Fund
listed under "Special Features -- Class A Shares -- Combined Purchases" may be
purchased at net asset value in any amount by members of the plaintiff class in
41
<PAGE>
the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten-year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may in its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the Fund at net asset value under this privilege is not available if another net
asset value purchase privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons
who purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any
amount by certain professionals who assist in the promotion of Kemper Funds
pursuant to personal services contracts with KDI, for themselves or members of
their families. KDI in its discretion may compensate financial services firms
for sales of Class A shares under this privilege at a commission rate of 0.50%
of the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons
who purchase shares of the Fund through KDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a)
officers, trustees, employees (including retirees) and sales representatives of
the Fund, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families; (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI and officers, directors and employees of service agents of
the Fund, for themselves or their spouses or dependent children; (c) any trust,
pension, profit-sharing or other benefit plan for only such persons; (d) persons
who purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
programs described in the prospectuses of such trusts that have such programs.
Class A shares of the Fund may be sold at net asset value through certain
investment Advisors registered under the 1940 Act and other financial services
firms acting solely as agent for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
advisor or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another investment company, or
to shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will
42
<PAGE>
have to be placed through a single investment dealer or other firm and
identified as originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to [xxx]% of the amount of Class B shares purchased. KDI
is compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of
the Fund six years after issuance on the basis of the relative net asset value
per share of the Class B shares. The purpose of the conversion feature is to
relieve holders of Class B shares from the distribution services fee when they
have been outstanding long enough for KDI to have been compensated for
distribution related expenses. For purposes of conversion to Class A shares,
shares purchased through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's Fund account will be
converted to Class A shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares." KDI currently advances to firms the first year distribution fee
at a rate of [xxx]% of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of [xxx]% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this decision, investors should review their particular circumstances carefully
with their financial representative. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than six years might consider Class B shares. Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might consider Class C shares. KDI has established the following procedures
regarding the purchase of Class A, Class B and Class C shares. These procedures
do not reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $[xxxxxx] or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value where the combined
subaccount value in a Fund or other Kemper Mutual Funds listed under "Special
Features - Class A Shares - Combined Purchases" is in excess of $1 million for
Class B shares or $5 million for Class C shares including purchases pursuant to
the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features." KemFlex Plans that on May 1, 2000 have in
excess of $1 million invested in Class B shares of Kemper Mutual Funds, or have
in excess of $[xxxxxx] invested in Class B shares of Kemper Mutual Funds and are
able to qualify for the purchase of Class A shares at net asset value (e.g.,
pursuant to a Letter of Intent), will have future investments made in Class A
shares and will have the option to covert their holdings in Class B shares to
Class A shares free of any contingent deferred sales charge on May 1, 2002. For
more information about the three sales arrangements, consult your financial
representative or the Shareholder Service Agent. Financial services firms may
receive different compensation depending upon which class of shares they sell.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. KDI does not believe
that termination of a relationship with a bank would result in any material
adverse consequences to the Fund.
43
<PAGE>
KDI may, from time to time, pay or allow to firms a [xx]% commission on
the amount of shares of the Fund sold under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
Kemper Service Company, (iii) the registered representative placing the trade is
a member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will,
from time to tome, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other Funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price
based on the net asset value of the Fund next determined after receipt in good
order by KDI of the order accompanied by payment. However, orders received by
dealers or other financial services firms prior to the determination of net
asset value (see "Net Asset Value") and received in good order by KDI prior to
the close of its business day will be confirmed at a price based on the net
asset value effective on that day ("trade date"). The Fund reserves the right to
determine the net asset value more frequently than once a day if deemed
desirable. Dealers and other financial services firms are obligated to transmit
orders promptly. Collection may take significantly longer for a check drawn on a
foreign bank than for a check drawn on a domestic bank. Therefore, if an order
is accompanied by a check drawn on a foreign bank, funds must normally be
collected before shares will be purchased. See "Purchase and Redemption of
Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering
made by this prospectus and to reject purchase orders for any reason. Also, from
time to time, the Fund may temporarily suspend the offering of any class of its
shares to new investors. During the period of such suspension, persons who are
already shareholders of such class of such Fund normally are permitted to
continue to purchase additional shares of such class and to have dividends
reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811
Main Street, Kansas City, Missouri 64105-2005 or to the firm from which they
received this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper Funds, Attention: Redemption Department, P.O.
Box 219153, Kansas City, Missouri
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64141-9153. When certificates for shares have been issued, they must be mailed
to or deposited with the Shareholder Service Agent, along with a duly endorsed
stock power and accompanied by a written request for redemption. Redemption
requests and a stock power must be endorsed by the account holder with
signatures guaranteed by a commercial bank, trust company, savings and loan
association, federal savings bank, member firm of a national securities exchange
or other eligible financial institution. The redemption request and stock power
must be signed exactly as the account is registered including any special
capacity of the registered owner. Additional documentation may be requested, and
a signature guarantee is normally required, from institutional and fiduciary
account holders, such as corporations, custodians (e.g., under the Uniform
Transfers to Minors Act), executors, administrators, trustees or guardians.
The redemption price for shares of a class of the Fund will be the net
asset value per share of that class of the Fund next determined following
receipt by the Shareholder Service Agent of a properly executed request with any
required documents as described above. Payment for shares redeemed will be made
in cash as promptly as practicable but in no event later than seven days after
receipt of a properly executed request accompanied by any outstanding share
certificates in proper form for transfer. When the Fund is asked to redeem
shares for which it may not have yet received good payment (i.e., purchases by
check, EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of
redemption proceeds until it has determined that collected funds have been
received for the purchase of such shares, which will be up to 10 days from
receipt by the Fund of the purchase amount. The redemption within two years of
Class A shares purchased at net asset value under the Large Order NAV Purchase
Privilege may be subject to a contingent deferred sales charge (see "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares"), the redemption
of Class B shares within six years may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge -- Class B Shares" below), and the
redemption of Class C shares within the first year following purchase may be
subject to a contingent deferred sales charge (see "Contingent Deferred Sales
Charge -- Class C Shares" below).
Because of the high cost of maintaining small accounts, the Fund may
assess a quarterly fee of $[xx] on any account with a balance below $[xxxx] for
the quarter. The fee will not apply to accounts enrolled in an automatic
investment program, Individual Retirement Accounts or employer-sponsored
employee benefit plans using the subaccount record-keeping system made available
through the Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited
wire transfer redemptions and EXPRESS-Transfer transactions (see "Special
Features") and exchange transactions for individual and institutional accounts
and pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no
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charge by KDI with respect to repurchases; however, dealers or other firms may
charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $[xxxx]
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: [xx]% if they are redeemed within one year of purchase and [xxx]% if
they are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the discretionary commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
First [xx]%
Second [xx]%
Third [xx]%
Fourth [xx]%
Fifth [xx]%
Sixth [xx]%
The contingent deferred sales charge will be waived: (a) in the event of
the total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including a registered joint owner)
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occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
(g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly, and (g)
redemption of shares purchased through a dealer-sponsored asset allocation
program maintained on an omnibus record-keeping system provided the dealer of
record had waived the advance of the first year administrative services and
distribution fees applicable to such shares and has agreed to receive such fees
quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of [xx]% ($[xxx]) because it was in the second year after the purchase
was made.
The rate of the contingent deferred sales charge is determined by the
length of the period of ownership. Investments are tracked on a monthly basis.
The period of ownership for this purpose begins the first day of the month in
which the order for the investment is received. For example, an investment made
in March 1998 will be eligible for the second year's charge if redeemed on or
after March 1, 1999. In the event no specific order is requested when redeeming
shares subject to a contingent deferred sales charge, the redemption will be
made first from shares representing reinvested dividends and then from the
earliest purchase of shares. KDI receives any contingent deferred sales charge
directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Scudder Kemper Mutual Fund listed under "Special Features --
Class A Shares -- Combined Purchases" (other than shares of the Kemper Cash
Reserves Fund purchased directly at net asset value) may reinvest up to the full
amount redeemed at net asset value at the time of the reinvestment in Class A
shares of the Fund or of the other listed Scudder Kemper Mutual Funds. A
shareholder of the Fund or other Kemper Funds who redeems Class A shares
purchased under the Large Order NAV Purchase Privilege (see "Purchase of Shares
-- Initial Sales Charge Alternative -- Class A Shares") or Class B shares or
Class C shares and incurs a contingent deferred sales charge may reinvest up to
the full amount redeemed at net asset value at the time of the reinvestment, in
the same class of shares as the case may be, of the Fund or of other Kemper
Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will
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retain their original cost and purchase date for purposes of the contingent
deferred sales charge schedule. Also, a holder of Class B shares who has
redeemed shares may reinvest up to the full amount redeemed, less any applicable
contingent deferred sales charge that may have been imposed upon the redemption
of such shares, at net asset value in Class A shares of the Fund or of the other
Scudder Kemper Mutual Funds listed under "Special Features -- Class A Shares --
Combined Purchases." Purchases through the reinvestment privilege are subject to
the minimum investment requirements applicable to the shares being purchased and
may only be made for Kemper Funds available for sale in the shareholder's state
of residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same value used to
determine net asset value, and selecting the securities in such manner as the
Board of Trustees may deem fair and equitable. If such a distribution occurred,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Trust has elected, however, to be governed by Rule 18f-1
under the 1940 Act, as a result of which the Fund is obligated to redeem shares,
with respect to any one shareholder during any 90-day period, solely in cash up
to the lesser of $250,000 or 1% of the net asset value of a Share at the
beginning of the period.
SPECIAL FEATURES
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Strategic Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash
Reserves Fund (available only upon exchange or conversion from Class A shares of
another Kemper Fund), Kemper U.S. Mortgage Fund, Kemper Short-Intermediate
Government Fund, Kemper Value Plus Growth Fund, Kemper Horizon Fund, Kemper New
Europe Fund, Inc., Kemper Asian Growth Fund, Kemper Aggressive Growth Fund,
Kemper Global/International Series, Inc., Kemper Equity Trust and Kemper
Securities Trust, Scudder 21st Century Fund, The Japan Fund, Inc., Scudder High
Yield Tax Free Fund, Scudder Pathway Series - Balanced Portfolio, Scudder
Pathway Series - Conservative Portfolio, Scudder Pathway Series - Growth
Portfolio, Scudder International Fund, Scudder Growth and Income Fund, Scudder
Large Company Growth Fund, Scudder Health Care Fund, Scudder Technology Fund,
Global Discovery Fund, Value Fund, and Classic Growth Fund ("Scudder Kemper
Mutual Funds"). Except as noted below, there is no combined purchase credit for
direct purchases of shares of Zurich Money Funds, Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investor's
Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"), which are
not considered a "Scudder Kemper Mutual Fund" for purposes hereof. For purposes
of the Combined Purchases feature described above as well as for the Letter of
Intent and Cumulative Discount features described below, employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent may include: (a) Money Market Funds as
"Kemper Mutual Funds", (b) all classes of shares of any Kemper Fund and (c) the
value of any other plan investments, such as guaranteed investment contracts and
employer stock, maintained on such subaccount record keeping system.
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Scudder Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer-sponsored employee benefit plan maintained on
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<PAGE>
the subaccount record keeping system available through the Shareholder Service
Agent may have special provisions regarding payment of any increased sales
charge resulting from a failure to complete the intended purchase under the
Letter. A shareholder may include the value (at the maximum offering price) of
all shares of such Kemper Funds held of record as of the initial purchase date
under the Letter as an "accumulation credit" toward the completion of the
Letter, but no price adjustment will be made on such shares. Only investments in
Class A shares are included for this privilege.
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Scudder Kemper Mutual Funds (computed at the maximum
offering price at the time of the purchase for which the discount is applicable)
already owned by the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Scudder Kemper Mutual Funds and shares of
the Money Market Funds listed under "Special Features -- Class A Shares --
Combined Purchases" above may be exchanged for each other at their relative net
asset values. Shares of Money Market Funds and the Kemper Cash Reserves Fund
that were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. Series of
Kemper Target Equity Fund are available on exchange only during the Offering
Period for such series as described in the applicable prospectus. Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund and Investors Cash Trust are available on exchange
but only through a financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of calculating the contingent deferred sales charge.
Class B Shares. Class B shares of the Fund and Class B shares of any other
Scudder Kemper Mutual Fund listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class B shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of calculating the
contingent deferred sales charge that may be imposed upon the redemption of the
Class B shares received on exchange, amounts exchanged retain their original
cost and purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Scudder Kemper Mutual Fund listed under "Special Features -- Class A Shares --
Combined Purchases" may be exchanged for each other at their relative net asset
values. Class C shares may be exchanged without a contingent deferred sales
charge being imposed at the time of exchange. For purposes of determining
whether there is a contingent deferred sales charge that may be imposed upon the
redemption of the Class C shares received by exchange, they retain the cost and
purchase date of the shares that were originally purchased and exchanged.
General. Shares of a Kemper Fund with a value in excess of $[xxxxx] (except
Kemper Cash Reserves Fund) acquired by exchange through another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15-Day Hold Policy"). In addition, shares of a Kemper
fund with a value of $[xxxxxx] or less (except Kemper Cash Reserves Fund)
acquired by exchange from another Kemper fund, or from a money market fund, may
not be exchanged thereafter until they have been owned for 15 days, if, in the
Advisor's judgment, the exchange activity may have an adverse effect on the
fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Kemper fund and therefore may be
subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including, without limitation, accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged must
at least equal the minimum investment requirement of the Kemper Fund into which
they are being exchanged. Exchanges are made based on relative dollar values of
the shares involved in the exchange. There is no service fee for an exchange;
however, dealers or other firms may charge for their services in effecting
exchange transactions. Exchanges will be effected by
49
<PAGE>
redemption of shares of the fund held and purchase of shares of the other fund.
For federal income tax purposes, any such exchange constitutes a sale upon which
a gain or loss may be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis of
such shares. Shareholders interested in exercising the exchange privilege may
obtain prospectuses of the other Funds from dealers, other firms or KDI.
Exchanges may be accomplished by a written request to Kemper Service Company,
Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri
64141-6557, or by telephone if the shareholder has given authorization. Once the
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048, subject to the limitations on liability under
"Redemption or Repurchase of Shares -- General." Any share certificates must be
deposited prior to any exchange of such shares. During periods when it is
difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to use the telephone exchange privilege. The exchange privilege is not
a right and may be suspended, terminated or modified at any time. Exchanges may
only be made for Funds that are available for sale in the shareholder's state of
residence. Currently, Tax-Exempt California Money Market Fund is available for
sale only in California and Investors Municipal Cash Fund is available for sale
only in certain states. Except as otherwise permitted by applicable regulations,
60 days' prior written notice of any termination or material change will be
provided.
Systematic Exchange Privilege. The owner of $[xxxx] or more of any class of the
shares of a Kemper Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($[xxx] minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the shareholder or the Kemper Fund terminates the privilege.
Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $[xxxx] minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated ClearingHouse System (minimum $[xxx] and maximum $[xxxx]) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $[xxx] and maximum
$[xxxx]) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (maximum
$50,000) from the shareholder's account at a bank, savings and loan or credit
union into the shareholder's Fund account. By enrolling in Bank Direct Deposit,
the shareholder authorizes the Fund and its agents to either draw checks or
initiate Automated ClearingHouse debits against the designated account at a bank
or other financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri 64141-6415. Termination by a shareholder will become effective
within thirty days after the Shareholder Service Agent has received the request.
A Fund may immediately terminate a shareholder's Plan in the event that any item
is unpaid by the shareholder's financial institution. The Fund may terminate or
modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $[xxxx] or more of a class of the
Fund's shares at the offering price (net asset value plus, in the case of Class
A shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $[xxxx] minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $[xxx]. The maximum annual rate at which Class B shares may be
redeemed (and Class A shares
50
<PAGE>
purchased under the Large Order NAV Purchase Privilege and Class C shares in
their first year following the purchase) under a systematic withdrawal plan is
[xx]% of the net asset value of the account. Shares are redeemed so that the
payee will receive payment approximately the first of the month. Any income and
capital gain dividends will be automatically reinvested at net asset value. A
sufficient number of full and fractional shares will be redeemed to make the
designated payment. Depending upon the size of the payments requested and
fluctuations in the net asset value of the shares redeemed, redemptions for the
purpose of making such payments may reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic
withdrawal plan will ordinarily be disadvantageous to the investor because the
investor will be paying a sales charge on the purchase of shares at the same
time that the investor is redeeming shares upon which a sales charge may have
already been paid. Therefore, the Fund will not knowingly permit additional
investments of less than $[xxxx] if the investor is at the same time making
systematic withdrawals. KDI will waive the contingent deferred sales charge on
redemptions of Class A shares purchased under the Large Order NAV Purchase
Privilege, Class B shares and Class C shares made pursuant to a systematic
withdrawal plan. The right is reserved to amend the systematic withdrawal plan
on 30 days' notice. The plan may be terminated at any time by the investor or
the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Savings Incentive Match Plan for Employees of Small
Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP") IRA
accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to employees
of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be adopted
by employers. The maximum annual contribution per participant is the
lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit
plans, target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and
materials for establishing them are available from the Shareholder Service Agent
upon request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the Exchange is closed other than
customary weekend and holiday closings or during any period in which trading on
the Exchange is restricted, (b) during any period when an emergency exists as a
result of which (i) disposal of the Fund's investments is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund to determine
the value of its net assets, or (c) for such other periods as the SEC may by
order permit for the protection of the Fund's shareholders.
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B Shares and
not Class A Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B Shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their ages, their principal
occupations and their affiliations, if any, with the Advisor, and Scudder
Investor Services, Inc., are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ --------------------
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President, WGBH Educational Foundation --
WGBH
125 Western Avenue
Allston, MA 02134
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ --------------------
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Linda C. Coughlin (48)+* Trustee and President Managing Director of Scudder Kemper Director and Vice
Investments, Inc. Chairman
--------------------------------------------------------------------------------------------------------------------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
--------------------------------------------------------------------------------------------------------------------------
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic Counselor, --
50023 Brogden The Conference Board,
Chapel Hill, NC Inc.(not-for-profit business research
organization)
--------------------------------------------------------------------------------------------------------------------------
Keith R. Fox (45) Trustee General Partner, Exeter Group of Funds --
10 East 53rd Street
New York, NY 10022
--------------------------------------------------------------------------------------------------------------------------
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation Foundation; Department of State -
650 Fifth Avenue Undersecretary of State for Economic,
New York, NY 10128 Business and Agricultural Affairs
(March 1993 to January 1997)
--------------------------------------------------------------------------------------------------------------------------
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski (law
firm) (1978-1996)
--------------------------------------------------------------------------------------------------------------------------
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place 23rd Floor Capital, LLC (venture capital firm)
Boston, MA 02108
--------------------------------------------------------------------------------------------------------------------------
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street
Washington, D.C. 20004
--------------------------------------------------------------------------------------------------------------------------
Ann M. McCreary (43) ++ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------
Kathryn L. Quirk (47)+ Vice President and Managing Director of Scudder Kemper Director, Secretary,
Assistant Secretary Investments, Inc. Chief Legal Officer and
Vice President
--------------------------------------------------------------------------------------------------------------------------
John R. Hebble (42)+ Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Position with
Underwriter,
Kemper Distributors,
Name, Age, and Address Position with Fund Principal Occupation** Inc.
---------------------- ------------------ --------------------
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John Millette (37)+ Vice President and Vice President of Scudder Kemper --
Secretary Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------
Thomas V. Bruns (43)# Vice President Managing Director of Scudder Kemper President
Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------
James M. Eysenbach (38)@ Vice President Managing Director of Scudder Kemper --
Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------
William F. Glavin (41)# Vice President Managing Director of Scudder Kemper Managing Director
Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------
James E. Masur (40)+ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------
Howard S. Schneider (43)# Vice President Managing Director of Scudder Kemper --
Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------
Brenda Lyons (37)+ Assistant Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and its
counsel to be persons who are "interested persons" of the Advisor
or of the Trust, within the meaning of the Investment Company Act
of 1940, as amended.
** Unless otherwise stated, all of the Trustees and officers have
been associated with their respective companies for more than five
years, but not necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
# 222 South Riverside Plaza, Chicago, Illinois
@ 101 California Street, San Francisco, California
The Trustees and Officers of the Trusts also serve in similar capacities
with other Scudder Funds.
[TO BE UPDATED: INSERTION OF SHAREHOLDING INFORMATION]
Remuneration
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees of the Trust is responsible for the general
oversight of the Fund's business. A majority of the Board's members are not
affiliated with Scudder Kemper Investments, Inc. These "Independent Trustees"
have primary responsibility for assuring that the Fund is managed in the best
interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund of the Trust and other operational matters, including
policies and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to Scudder and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by Scudder and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
53
<PAGE>
All of the Independent Trustees serve on the Committee of Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees of the Fund
The Trust does not directly pay any Trustee an annual Trustees' fee or
fees for Board and committee meetings. The Independent Trustees receive payment
for service on the Trust's Board from certain underlying funds in which the Fund
invests (each an "Underlying Fund," together, the "Underlying Funds") pursuant
to special servicing agreement which provides that, subject to certain
limitations, the Underlying Funds assume all expenses of the Trust. Each
Independent Trustee receives and annual Trustee's fee of $2,000 per fund, and a
fee of $200 per fund for attending each Board meeting, Audit Committee meeting
or other meeting held for purpose of considering arrangements between the Trust
and Scudder Kemper, or any of its other affiliates. Each Independent Trustee
also receives $100 per fund for all other committee meetings attended. The
Trustees may be trustees/directors of the Underlying Funds. The Underlying Funds
generally pay their Independent trustees/directors an annual
trustee's/director's fee and fees for attending board meetings and reimburse
them for expenses related to the business of any series of the applicable
trust/corporation. The Board may determine to change this compensation structure
in the future.
The Independent Trustees also serve in the same capacity for other funds
managed by the Advisor. These funds differ broadly in type and complexity and in
some cases have substantially different Trustee fee schedules. The following
table shows the aggregate compensation received by each Independent Trustee
during 2000 from each Trust and from all of the Scudder funds as a group.
--------------------------------------------------------------------------------
NAME SCUDDER PATHWAY SERIES* ALL SCUDDER
FUNDS
--------------------------------------------------------------------------------
Henry P. Becton, Jr.** N/A $[xxxxxx] (-- funds)
--------------------------------------------------------------------------------
Dawn-Marie Driscoll** N/A [xxxxxx] (-- funds)
--------------------------------------------------------------------------------
Edgar R. Fiedler+ N/A [xxxxxx] (-- funds)
--------------------------------------------------------------------------------
Keith R. Fox** N/A [xxxxxx] (-- funds)
--------------------------------------------------------------------------------
Joan E. Spero** N/A [xxxxxx] (-- funds)
--------------------------------------------------------------------------------
Jean Gleason Stromberg N/A [xxxxxx] (-- funds)
--------------------------------------------------------------------------------
Jean C. Tempel** N/A [xxxxxx] (-- funds)
--------------------------------------------------------------------------------
* Scudder Pathway Series consists of three Portfolios: Conservative
Portfolio, Balanced Portfolio and Growth Portfolio
** Newly elected Trustee. On July 13, 2000, shareholders of the Fund elected
a new Board of Trustees. See the "Trustees and Officers" section for the
newly-constituted Board of Trustees.
+ Mr. Fiedler's total compensation includes the $9,900 accrued, but not
received, through the deferred compensation program.
Members of the Board of Trustees who are employees of the Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
SHAREHOLDER RIGHTS
The 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 is further divided into five classes of shares, Class AARP, Class
S, Class A, Class B and Class C shares.
54
<PAGE>
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.
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 shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which a Portfolio itself would be unable to meet its
obligations.
The Fund's activities are supervised by the Trust's Board of Trustees. The
Trust adopted a plan on March 17, 2000 pursuant to Rule 18f-3 under the 1940 Act
(the "Plan") to permit the Trust to establish a multiple class distribution
system for the Funds.
Under the Plan, shares of each class represent an equal pro rata interest
in the Fund and, generally, shall have identical voting, dividend, liquidation,
and other rights, preferences, powers, restrictions, limitations, qualifications
and terms and conditions, except that: (1) each class shall have a different
designation; (2) each class of shares shall bear its own "class expenses;" (3)
each class shall have exclusive voting rights on any matter submitted to
shareholders that relates to its administrative services, shareholder services
or distribution arrangements; (4) each class shall have separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class; (5) each class may have separate
and distinct exchange privileges; (6) each class may have different conversion
features; and (7) each class may have separate account size requirements.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
Each share of each class of the Fund shall be entitled to one vote (or
fraction thereof in respect of a fractional share) on matters that such shares
(or class of shares) shall be entitled to vote. Shareholders of the Fund shall
vote together on any matter, except to the extent otherwise required by the 1940
Act, or when the Board of Trustees has determined that the matter affects only
the interest of shareholders of one or more classes of the Fund, in which case
only the shareholders of such class or classes of the Fund shall be entitled to
vote thereon. Any matter shall be deemed to have been effectively acted upon
with respect to the Fund if acted upon as provided in Rule 18f-2 under the 1940
Act, or any successor rule, and in the Trust's Declaration of Trust. As used in
the Prospectus and in this Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with general matters affecting the Trust and all additional
portfolios (e.g., election of directors), means the vote of the lesser of (i)
67% of the Trust's shares represented at a meeting if the holders of more than
50% of the outstanding shares are present in person or by proxy, or (ii) more
than 50% of the Fund's outstanding shares. The term "majority", when referring
to the approvals to be obtained from shareholders in connection with matters
affecting a single Fund or any other single portfolio (e.g., annual approval of
investment management contracts), means the vote of the lesser of (i) 67% of the
shares of the portfolio represented at a meeting if the holders of more than 50%
of the outstanding shares of the portfolio are present in person or by proxy, or
(ii)
55
<PAGE>
more than 50% of the outstanding shares of the portfolio. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
Additional Information
Other Information
The CUSIP numbers of the classes are:
Class A: [INSERT CUSIP NUMBER]
Class B: [INSERT CUSIP NUMBER]
Class C: [INSERT CUSIP NUMBER]
The Fund has a fiscal year ending August 31, 2000.
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Fund. These transactions will reflect investment
decisions made by the Advisor in light of the Fund's investment objectives and
policies, its other portfolio holdings and tax considerations, and should not be
construed as recommendations for similar action by other investors.
Costs of [$xxxx] incurred by the Fund in conjunction with its organization
are amortized over the five-year period beginning [----------].
Portfolio securities of the Fund are held separately pursuant to a
custodian agreement, by the Fund's custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert is counsel to the Fund.
The 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.
The Portfolios' Shares prospectus and this Statement of Additional
Information omit certain information contained in the Registration Statement and
its amendments which the Portfolios have 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. The Registration Statement and its amendments are available for
inspection by the public at the SEC in Washington, D.C.
Financial Statements
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated August 31, 2000, are incorporated herein by reference and are hereby
deemed to be a part of this Statement of Additional Information.
56
<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 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 Advisor 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.
57
<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 Advisor 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 Advisor 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. The two principal
classifications of municipal obligations are "notes" and "bonds." The return on
municipal obligations is ordinarily lower than that of taxable obligations.
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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, 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
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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 Advisor not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of an
Underlying Scudder Fund's investment objective by investment in such securities
may be more dependent on the Advisor's credit analysis than is the case for
higher quality bonds. Should the rating of a portfolio security be downgraded,
the Advisor will determine whether it is in the best 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 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
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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 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
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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
Advisor determines that the securities meet the Underlying Scudder Fund's
quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series, (e.g.,
A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the event
of delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Advisor expects that governmental,
government-related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and mortgage-
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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 Advisor, 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 Advisor will, consistent with the Underlying Scudder Fund's
investment objective, policies, and quality standards, consider making
investments in such new types of mortgage-related securities.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgaged-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with an Underlying Scudder Fund's investment objectives
and policies, the Underlying Scudder Fund may invest in these and other types of
asset-backed securities that may be developed in the future. In general, the
collateral supporting these securities is of shorter maturity than mortgage
loans and is less likely to experience substantial prepayments with interest
rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile Receivables(SM) ("CARS(SM)").
CARS(SM) represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS(SM) are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARS(SM) may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage to
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, the securities may
contain elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. An Underlying Scudder
Fund will not pay any additional or separate fees for credit support. The degree
of credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
An Underlying Scudder Fund may also invest in residual interests in
asset-backed securities. In the case of asset-backed securities issued in a
pass-through structure, the cash flow generated by the underlying assets is
applied to make required payments on the securities and to pay related
administrative expenses. The residual in an asset-backed security pass-through
structure represents the interest in any excess cash flow remaining after making
the foregoing payments. The amount of residual cash flow resulting from a
particular issue of asset-backed securities will depend on, among other things,
the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals not registered under the Securities Act of 1933 may be subject to
certain restrictions on
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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 Advisor in determining whether a security is illiquid.
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; (iii) in limited quantities after they have been
held for a specified period of time and other conditions are met pursuant to an
exemption from registration; or (iv) in a public offering for which a
registration statement is in effect under the 1933 Act. Issuers of restricted
securities may not be subject to the disclosure and other investor protection
requirements that would be applicable if their securities were publicly traded.
If adverse market conditions were to develop during the period between a Fund's
decision to sell a restricted or illiquid security and the point at which the
Fund is permitted or able to sell such security, the Fund might obtain a price
less favorable than the price that prevailed when it decided to sell. Where a
registration statement is required for the resale of restricted securities, a
Fund may be required to bear all or part of the registration expenses. A Fund
may be deemed to be an "underwriter" for purposes of the 1933 Act when selling
restricted securities to the public and, in such event, the Fund may be liable
to purchasers of such securities if the registration statement prepared by the
issuer is materially inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Advisor will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Advisor may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
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 Advisor 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 Advisor 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
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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 Advisor seeks to minimize the risk of loss through
repurchase agreements by analyzing the creditworthiness of the obligor, in this
case the seller of the Obligation. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may fail to
repurchase the Obligation, in which case 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 Advisor,
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 enter into reverse repurchase agreements only when the
Advisor believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
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
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function of numerous variables including market conditions. The ability of the
Underlying Scudder Fund to utilize these Strategic Transactions successfully
will depend on the Advisor'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 Advisor's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the 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
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.
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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 anticipated benefit of the transaction. Accordingly, the Advisor must
assess the creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The 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 Advisor. 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
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(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 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,
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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 Advisor.
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.
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 Advisor 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
Advisor believes that the value of schillings will decline against the U.S.
dollar, the Advisor may enter into a commitment or option to sell D-marks and
buy dollars. Currency hedging involves some of the same risks and considerations
as other transactions with similar instruments. Currency transactions can result
in losses to the 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 Advisor, 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
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transactions are normally entered into based on the Advisor's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
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 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
Advisor 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 Advisor. 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
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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 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
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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.
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 Advisor 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
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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 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
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Underlying Scudder Fund endeavors to achieve the most favorable net results on
its portfolio transactions. There is generally less government supervision and
regulation of business and industry practices, securities exchanges, brokers,
dealers and listed companies than in the United States. Mail service between the
United States and foreign countries may be slower or less reliable than within
the United States, thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. In addition, with
respect to certain emerging markets, there is the possibility of expropriation
or confiscatory taxation, political or social instability, or diplomatic
developments which could affect the Underlying Scudder Fund's investments in
those countries. Moreover, individual emerging market economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The chart below sets forth
the risk ratings of selected emerging market countries' sovereign debt
securities.
Sovereign Risk Ratings for Selected Emerging Market Countries
(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 Advisor 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 Advisor 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.
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
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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,
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
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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.
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
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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.
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
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country has a developed stock market, but Poland, Hungary, and the Czech
Republic have small securities markets in operation. Ethnic and civil conflict
currently rage through the former Yugoslavia. The outcome is uncertain.
Both the EC and Japan, among others, have made overtures to establish
trading arrangements and assist in the economic development of the Eastern
European nations. A great deal of interest also surrounds opportunities created
by the reunification of East and West Germany. Following reunification, the
Federal Republic of Germany has remained a firm and reliable member of the EC
and numerous other international alliances and organizations. To reduce
inflation caused by the unification of East and West Germany, Germany has
adopted a tight monetary policy which has led to weakened exports and a reduced
domestic demand for goods and services. However, in the long-term, reunification
could prove to be an engine for domestic and international growth.
The conditions that have given rise to these developments are changeable,
and there is no assurance that reforms will continue or that their goals will be
achieved.
Portugal is a genuinely emerging market which has experienced rapid growth
since the mid-1980s, except for a brief period of stagnation over 1990-91.
Portugal's government remains committed to privatization of the financial system
away from one dependent upon the banking system to a more balanced structure
appropriate for the requirements of a modern economy. Inflation continues to be
about three times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in the
1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (GDP) increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may be
subject to risks due to the inexperience of financial intermediaries, the lack
of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims of which have not been entirely settled. There can be no assurance that
the Underlying Scudder Fund's investments in Eastern Europe would not also be
expropriated, nationalized or otherwise confiscated. Finally, any change in
leadership or policies of Eastern European countries, or countries that exercise
a significant influence over those countries, may halt the expansion of or
reverse the liberalization of foreign investment policies now occurring and
adversely affect existing investment opportunities.
Depositary Receipts. Certain Underlying Scudder Funds may invest indirectly in
securities of emerging country issuers through sponsored or unsponsored American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), International
Depositary Receipts ("IDRs") and other types of Depositary Receipts (which,
together with ADRs, GDRs and IDRs are hereinafter referred to as "Depositary
Receipts"). Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted. In
addition, the issuers of the stock of unsponsored Depositary Receipts are not
obligated to disclose material information in the United States and, therefore,
there may not be a correlation between such information and the market value of
the Depositary Receipts. ADRs are 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.
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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 Advisor 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 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,
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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. The Underlying Scudder Funds may acquire
securities of other investment companies to the extent consistent with its
investment objective and subject to the limitations of the 1940 Act. The
Underlying Scudder Fund will indirectly bear its proportionate share of any
management fees and other expenses paid by such other investment companies.
For example, the Underlying Scudder Fund may invest in a variety of investment
companies which seek to track the composition and performance of specific
indexes or a specific portion of an index. These index-based investments hold
substantially all of their assets in securities representing their specific
index. Accordingly, the main risk of investing in index-based investments is the
same as investing in a portfolio of equity securities comprising the index. The
market prices of index-based investments will fluctuate in accordance with both
changes in the market value of their underlying portfolio securities and due to
supply and demand for the instruments on the exchanges on which they are traded
(which may result in their trading at a discount or premium to their NAVs).
Index-based investments may not replicate exactly the performance of their
specified index because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
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Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
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.
Correlation of gold and gold securities. The Advisor 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 Advisor 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
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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 Advisor 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.
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 Advisor to be of good standing and will not be made unless, in the
judgment of the Advisor, the consideration to be earned from such loans would
justify the risk.
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 Advisor 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.
83
<PAGE>
Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during other good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
which are rated B generally lack 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.
84
<PAGE>
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.
(a)(4) Establishment and Designation of Shares of Beneficial Interest,
$0.01 par value, Class S and Class AARP with respect to
Balanced Portfolio, Conservative Portfolio and Growth Portfolio
is incorporated by reference to Post-Effective Amendment No. 8
to the 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)(1) 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. (Previously filed as Exhibit e to
Post-Effective Amendment No. 5.)
(e)(2) Underwriting Agreement between the Registrant and Scudder
Investor Services, Inc., dated May 18, 2000, is incorporated by
reference to Post-Effective Amendment No. 9 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.
<PAGE>
(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.
(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.
(h)(5) Form of Administrative Agreement between the Registrant and
Scudder Kemper Investments. Inc. dated September 25, 2000 is
incorporated by reference to Post-Effective Amendment No. 9 to
the Registration Statement.
(i) Opinion and Consent of Counsel to be filed by amendment.
(j) Consent of Independent Accountants to be filed by amendment..
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
Part C - Page 2
<PAGE>
(n)(1) Plan with respect to Scudder Pathway Balanced Portfolio
pursuant to Rule 18f-3 is incorporated by reference to
Post-Effective Amendment No. 9 to the Registration Statement..
(n)(2) Plan with respect to Scudder Pathway Conservative Portfolio
pursuant to Rule 18f-3 is incorporated by reference to
Post-Effective Amendment No. 9 to the Registration Statement.
(n)(3) Plan with respect to Scudder Pathway Growth Portfolio pursuant
to Rule 18f-3 is incorporated by reference to Post-Effective
Amendment No. 9 to the Registration Statement.
(n)(4) Amended and Restated Plan with respect to Scudder Pathway
Balanced Portfolio pursuant to Rule 18f-3 is incorporated by
reference to Post-Effective Amendment No. 9 to the Registration
Statement.
(n)(5) Amended and Restated Plan with respect to Scudder Pathway
Conservative Portfolio pursuant to Rule 18f-3 is incorporated
by reference to Post-Effective Amendment No. 9 to the
Registration Statement.
(n)(6) Amended and Restated Plan with respect to Scudder Pathway
Growth Portfolio pursuant to Rule 18f-3 is incorporated by
reference to Post-Effective Amendment No. 9 to the Registration
Statement.
(p)(1) Scudder Kemper Investments, Inc. and Scudder Investor Services,
Inc. Code of Ethics is incorporated by reference to
Post-Effective Amendment No. 8 Exhibit p to the Registration
Statement.
(p)(2) Code of Ethics of Scudder Pathway Series is incorporated by
reference to Post-Effective Amendment No. 9 to the Registration
Statement.
</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").
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;
Part C - Page 3
<PAGE>
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 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
Part C - Page 4
<PAGE>
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
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer, Scudder Kemper Investments, Inc.**
Director, Kemper Service Company
Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director and Treasurer, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Part C - Page 5
<PAGE>
Director and Chairman, Scudder Threadneedle International Ltd.
Director, Scudder Kemper Holdings (UK) Ltd. oo
Director and President, Scudder Realty Holdings Corporation *
Director, Scudder, Stevens & Clark Overseas Corporation o
Director and Treasurer, Zurich Investment Management, Inc. xx
Director and Treasurer, Zurich Kemper Investments, Inc.
Lynn S. Birdsong Director, Vice President and Chief Investment Officer, Scudder Kemper Investments,
Inc.**
Director and Chairman, Scudder Investments (Luxembourg) S.A.#
Director, Scudder Investments (U.K.) Ltd. oo
Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
Director and Chairman, Scudder Investments Japan, Inc. +
Senior Vice President, Scudder Investor Services, Inc.
Director and Chairman, Scudder Trust (Cayman) Ltd. @@@
Director, Scudder, Stevens & Clark Australia x
Director and Vice President, Zurich Investment Management, Inc. xx
Director and President, Scudder, Stevens & Clark Corporation **
Director and President, Scudder , Stevens & Clark Overseas Corporation o
Director, Scudder Threadneedle International Ltd.
Director, Korea Bond Fund Management Co., Ltd. @
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company xxx
Nicholas Bratt Director, Scudder Kemper Investments, Inc.**
Vice President, Scudder, Stevens & Clark Corporation **
Vice President, Scudder, Stevens & Clark Overseas Corporation o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, Chairman of the Board, Zurich Holding Company of America xxx
Director, ZKI Holding Corporation xx
Harold D. Kahn Chief Financial Officer, Scudder Kemper Investments, Inc.**
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Vice President, Chief Legal Officer and Secretary, Kemper Distributors, Inc.
Director and Secretary, Kemper Service Company
Director, Senior Vice President, Chief Legal Officer & Assistant Clerk, Scudder
Investor Services, Inc.
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director and Secretary, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Part C - Page 6
<PAGE>
Director, Scudder, Stevens & Clark Japan, Inc. ###
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. @@
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President, Chief Legal Officer and Secretary, Scudder Financial
Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd. @
Director, Scudder Threadneedle International Ltd.
Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
Director, Scudder Investments Japan, Inc. +
Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
Director and Secretary, Zurich Investment Management, Inc. xx
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas Corporation o
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. @@
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
Director, Scudder Threadneedle International Ltd.
Director, Scudder Investments Japan, Inc. +
Director, Scudder Kemper Holdings (UK) Ltd. oo
President and Director, Zurich Investment Management, Inc. xx
Director and Deputy Chairman, Scudder Investment Holdings Ltd.
</TABLE>
* Two International Place, Boston, MA
@@ 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg,
R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
@@@ Grand Cayman, Cayman Islands, British West Indies
o 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
xxx Zurich Towers, 1400 American Ln., Schaumburg, IL
@ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
oo One South Place, 5th Floor, London EC2M 2ZS England
ooo One Exchange Square, 29th Floor, Hong Kong
+ Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku,
Tokyo 105-0001
x Level 3, Five Blue Street, North Sydney, NSW 2060
Item 27. Principal Underwriters.
-------- ----------------------
Part C - Page 7
<PAGE>
(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)
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President President and Trustee
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
Part C - Page 8
<PAGE>
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
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 and Treasurer 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 None
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
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
Part C - Page 9
<PAGE>
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 10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant pursuant to Rule 485(a) under the
Securities Act of 1933 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
30th day of October 2000.
SCUDDER PATHWAY SERIES
By /s/ John Millette
-----------------
John Millette
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Linda C. Coughlin
--------------------------------------
Linda C. Coughlin Trustee and President (Chief October 30, 2000
Executive Officer)
/s/ Henry P. Becton, Jr.
--------------------------------------
Henry P. Becton, Jr.* Trustee October 30, 2000
/s/Dawn-Marie Driscoll
--------------------------------------
Dawn-Marie Driscoll* Trustee October 30, 2000
/s/ Edgar R. Fiedler
--------------------------------------
Edgar R. Fiedler * Trustee October 30, 2000
/s/ Keith R. Fox
--------------------------------------
Keith R. Fox* Trustee October 30, 2000
/s/ Joan E. Spero
--------------------------------------
Joan E. Spero* Trustee October 30, 2000
/s/ Jean Gleason Stromberg
--------------------------------------
Jean Gleason Stromberg * Trustee October 30, 2000
/s/ Jean C. Tempel
--------------------------------------
Jean C. Tempel* Trustee October 30, 2000
/s/ Steven Zaleznick
--------------------------------------
Steven Zaleznick* Trustee October 30, 2000
/s/ John R. Hebble
--------------------------------------
John R. Hebble Treasurer (Chief Financial Officer) October 30, 2000
</TABLE>
<PAGE>
*By: /s/ John Millette
-----------------
John Millette**,
Secretary
**Attorney-in-fact pursuant to the powers of
attorney contained in and incorporated by
reference to Post- Effective Amendment No. 9
to the Registration Statement, as filed on
July 14, 2000.
<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. 10
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 12
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER PATHWAY SERIES
<PAGE>
SCUDDER PATHWAY SERIES
EXHIBIT INDEX
2
