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IMPORTANT NEWS FOR
FARMERS MUTUAL FUND PORTFOLIOS SHAREHOLDERS
While we encourage you to read the full text of the enclosed Proxy
Statement/Prospectus, here is a brief overview of a matter affecting your
Farmers Fund that will be the subject of a shareholder vote.
QUESTIONS AND ANSWERS
Q: WHAT AM I BEING ASKED TO VOTE ON?
A: You are being asked to vote on a proposed combination of your Farmers Fund
into a corresponding Scudder Pathway Fund. The Board of your Fund
recommends that you vote in favor of this proposal.
Q: WHY HAS THE BOARD RECOMMENDED THAT I VOTE IN FAVOR OF THE COMBINATION?
A: The Board of your Fund is recommending that shareholders vote in favor of
this proposal for the following reasons:
o LOWER FUND OPERATING EXPENSES. Each Farmers Fund bears fund level
operating expenses, which are currently capped by contract at an annual
rate of 1.00% and 1.75% of average daily net assets attributable to the
Class A and Class B shares of each Farmers Fund, respectively. Class A
and Class B shares of each Scudder Pathway Fund, through an agreement
with Zurich Scudder Investments, Inc., currently bear no fund level
operating expenses other than distribution expenses at an annual rate
of 0.25% and 1.00% of average daily net assets attributable to the
Class A and Class B shares of each Scudder Pathway Fund, respectively.
Thus, if the combination of your Fund is approved, shareholders of your
Fund will benefit from lower total fund level operating expenses as
shareholders of a corresponding Scudder Pathway Fund.
o EXPANDED EXCHANGE PRIVILEGES. The shareholders of the Scudder Pathway
Funds are able to exchange into any fund in the Scudder Family of
Funds, while shareholders of the Farmers Funds currently may exchange
only into other Farmers Funds.
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o SIMILAR INVESTMENT OBJECTIVES AND POLICIES. As described in more
detail below, the Farmers Funds and Scudder Pathway Funds are both
portfolios that invest in mutual funds rather than individual
securities, using an asset allocation strategy to meet their
objectives. Each Scudder Pathway Fund allocates its assets among other
mutual funds in proportions similar to the allocations of its
corresponding Farmers Fund. There are differences between the target
allocations for each Farmers Fund and its corresponding Pathway Fund,
as described in the enclosed Proxy Statement/ Prospectus.
o TAX-FREE REORGANIZATION. It is a condition of the proposed combination
that your Fund receive an opinion of tax counsel that the transaction
would be a TAX-FREE transaction.
Q: ARE THE INVESTMENT POLICIES OF THE CORRESPONDING SCUDDER PATHWAY FUND
SIMILAR TO THOSE OF MY FUND?
A: Like each Farmers Fund, each Scudder Pathway Fund is a fund of funds
advised by Zurich Scudder Investments. Each Scudder Pathway Fund has
similar investment objectives, policies and risks as its corresponding
Farmers Fund. Your Fund seeks its objective by investing from among a
select group of 12 mutual funds, advised by Zurich Scudder Investments and
other investment advisors. Each Scudder Pathway Fund seeks its investment
objective by investing in a diversified group of more than 30 underlying
funds advised by Zurich Scudder Investments.
Q: WHOM SHOULD I CALL FOR MORE INFORMATION ABOUT THIS PROXY STATEMENT?
A: Please call the Shareholder Communications Corporation, your Fund's
information agent, at 1-888-676-7706.
<PAGE>
January 12, 2001
Dear Farmers Fund Shareholder:
Zurich Scudder Investments, Inc. ("ZSI"), the investment manager for the
Farmers Funds, Kemper Funds and Scudder Funds, has initiated a program to
reorganize and combine its fund families in response to changing industry
conditions and investor needs. Our goal is to create one streamlined,
multi-class family of funds under the Scudder brand. As part of the program, you
are being asked to approve a proposed combination of your Fund with a similar
Scudder Pathway Fund.
Please take the time to read the enclosed materials.
The question and answer section that begins on the front cover of the
proxy statement summarizes the proposed transaction involving your Fund. The
proxy statement itself provides greater detail about the proposals, why they are
being made and how they apply to your fund. After careful review, the Board of
Farmers Investment Trust has approved these proposals. The Board recommends that
you read the enclosed materials carefully and vote in favor of the proposal that
relates to the combination of your Fund with a corresponding Scudder Pathway
Fund.
To vote, simply fill out the enclosed proxy card -- be sure to sign and
date it -- and return it to us in the enclosed postage-paid envelope. Because
many of the funds for which ZSI acts as investment manager are holding
shareholder meetings regarding these and other issues, you may receive more than
one proxy card. If so, please vote each one.
Your vote is very important to us. If we do not hear from you by February
12, 2001 our proxy solicitor may contact you. Thank you for your response and
for your continued investment with ZSI.
Sincerely,
/s/ Edmond D. Villani /s/ Brian Cohen
Edmond D. Villani Brian Cohen
Chief Executive Officer President
Zurich Scudder Investments, Inc. Farmers Investment Trust
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<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
FARMERS INVESTMENT TRUST
Please take notice that a Special Meeting of Shareholders (the "Meeting")
of each series (each, a "Farmers Fund") of Farmers Investment Trust will be held
at the offices of Zurich Scudder Investments, Inc., 13th Floor, Two
International Place, Boston, MA 02110-4103, on March 14, 2001, at 4:30 p.m.,
Eastern time, for the following purposes:
PROPOSAL 1: To approve an Agreement and Plan of Reorganization (the "Plan")
(Farmers as it relates to (i) the transfer of all or substantially all of
Income the assets and all of the liabilities of Farmers Income
Portfolio) Portfolio to Scudder Pathway Series: Conservative Portfolio
("Pathway Conservative Portfolio"), (ii) the distribution to
each shareholder of Farmers Income Portfolio shares of Pathway
Conservative Portfolio of a corresponding class to those held by
the shareholder in Farmers Income Portfolio in an amount equal
to the value of the shareholder's holdings in Farmers Income
Portfolio and (iii) the termination of Farmers Income Portfolio.
PROPOSAL 2: To approve the Plan as it relates to (i) the transfer of all or
(Farmers substantially all of the assets and all of the liabilities of
Income Farmers Income with Growth Portfolio to Scudder Pathway Series:
with Growth Moderate Portfolio ("Pathway Moderate Portfolio"), (ii) the
Portfolio) distribution to each shareholder of Farmers Income with Growth
Portfolio shares of Pathway Moderate Portfolio of a
corresponding class to those held by the shareholder in Farmers
Income with Growth Portfolio in an amount equal to the value of
the shareholder's holdings in Farmers Income with Growth
Portfolio and (iii) the termination of Farmers Income with
Growth Portfolio.
PROPOSAL 3: To approve the Plan as it relates to (i) the transfer of all or
(Farmers substantially all of the assets and all of the liabilities of
Balanced Farmers Balanced Portfolio to Pathway Moderate Portfolio, (ii)
Portfolio) the distribution to each shareholder of Farmers Balanced
Portfolio shares of Pathway Moderate Portfolio of a
corresponding class to those held by the shareholder in Farmers
Balanced Portfolio in an amount equal to the value of the
shareholder's holdings in Farmers Balanced Portfolio and (iii)
the termination of Farmers Balanced Portfolio.
PROPOSAL 4: To approve the Plan as it relates to (i) the transfer of all or
(Farmers substantially all of the assets and all of the liabilities of
Growth Farmers Growth with Income Portfolio to Pathway Moderate
with Income Portfolio, (ii) the distribution to each shareholder of Farmers
Portfolio) Growth with Income Portfolio shares of Pathway Moderate
Portfolio of a corresponding class to those held by the
shareholder in Farmers
<PAGE>
Growth with Income Portfolio in an amount equal to the value of
the shareholder's holdings in Farmers Growth with Income
Portfolio and (iii) the termination of Farmers Growth with
Income Portfolio.
PROPOSAL 5: To approve the Plan as it relates to (i) the transfer of all or
(Farmers substantially all of the assets and all of the liabilities of
Growth Farmers Growth Portfolio to Scudder Pathway Series: Growth
Portfolio) Portfolio ("Pathway Growth Portfolio"), (ii) the distribution to
each shareholder of Farmers Growth Portfolio shares of Pathway
Growth Portfolio of a corresponding class to those held by the
shareholder in Farmers Growth Portfolio in an amount equal to
the value of the shareholder's holdings in Farmers Growth
Portfolio and (iii) the termination of Farmers Growth Portfolio.
The persons named as proxies will vote in their discretion on any other
business that may properly come before the Meeting or any adjournments or
postponements thereof.
Holders of record of shares of each Farmers Fund at the close of business
on January 10, 2001 are entitled to vote at the Meeting and at any adjournments
or postponements thereof.
In the event that the necessary quorum to transact business or the vote
required to approve any Proposal is not obtained at the Meeting, the persons
named as proxies may propose one or more adjournments of the Meeting in
accordance with applicable law to permit further solicitation of proxies with
respect to that Proposal. Any such adjournment as to a matter will require the
affirmative vote of the holders of a majority of the relevant Farmers Fund's
shares present in person or by proxy at the Meeting. The persons named as
proxies will vote FOR any such adjournment those proxies which they are entitled
to vote in favor of that Proposal and will vote AGAINST any such adjournment
those proxies to be voted against that Proposal.
By Order of the Board,
/s/ John Millette
John Millette
Secretary
January 12, 2001
IMPORTANT -- WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD(S) AND
RETURN IT IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE (OR TO TAKE
ADVANTAGE OF THE TELEPHONIC VOTING PROCEDURES DESCRIBED ON THE PROXY CARD(S)).
YOUR PROMPT RETURN OF THE ENCLOSED PROXY CARD(S) MAY SAVE THE NECESSITY AND
EXPENSE OF FURTHER SOLICITATIONS. IF YOU WISH TO ATTEND THE MEETING AND VOTE
YOUR SHARES IN PERSON AT THAT TIME, YOU WILL STILL BE ABLE TO DO SO.
<PAGE>
TABLE OF CONTENTS
INTRODUCTION ......................................................... 1
PROPOSALS 1-5: APPROVAL OF AGREEMENT AND PLAN OF ....................... 4
REORGANIZATION
SYNOPSIS ................................................ 4
PRINCIPAL RISK FACTORS .................................. 38
THE PROPOSED TRANSACTIONS ............................... 40
ADDITIONAL INFORMATION ..................................................... 47
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PROXY STATEMENT/PROSPECTUS
January 12, 2001
Relating to the acquisition of the assets of the series of
FARMERS INVESTMENT TRUST (the "Acquired Trust")
222 South Riverside Plaza
Chicago, Illinois 60606
(800) 621-1048
--------------------
by and in exchange for shares of beneficial interest of the series of
SCUDDER PATHWAY SERIES (the "Acquiring Trust")
Two International Place
Boston, Massachusetts 02110-4103
(800) 621-1048
--------------------
INTRODUCTION
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Trustees of the Acquired Trust in
connection with the Special Meeting of Shareholders of each series of the
Acquired Trust (Farmers Income Portfolio, Farmers Income with Growth Portfolio,
Farmers Balanced Portfolio, Farmers Growth with Income Portfolio and Farmers
Growth Portfolio) (each, a "Farmers Fund" and collectively, the "Farmers Funds")
to be held on March 14, 2001, at the offices of Zurich Scudder Investments, Inc.
("ZSI" or the "Investment Manager"), 13th Floor, Two International Place,
Boston, MA 02110-4103 at 4:30 p.m. (Eastern time), or at such later time made
necessary by all adjournments or postponements thereof (the "Meeting"). This
Proxy Statement/Prospectus, the Notice of Special Meeting and the proxy card(s)
are first being mailed to shareholders on or about January 12, 2001 or as soon
as practicable thereafter.
At the meeting, shareholders of each Farmers Fund, voting separately, will
be asked to vote on an Agreement and Plan of Reorganization (the "Plan")
pursuant to which all or substantially all of the assets of each Farmers Fund
would be acquired by a corresponding series of the Acquiring Trust (Scudder
Pathway Series: Conservative Portfolio; Scudder Pathway Series: Moderate
Portfolio (formerly known as Balanced Portfolio); and Scudder Pathway Series:
Growth
--------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Portfolio) (each, a "Pathway Fund" and collectively, the "Pathway Funds"), in
exchange for shares of beneficial interest of the applicable Pathway Fund and
the assumption by each Pathway Fund of all of the liabilities of its
corresponding Farmers Fund, listed in the chart below (each, a "Reorganization"
and collectively, the "Reorganizations"). Shares of each Pathway Fund received
would then be distributed to the shareholders of the corresponding Farmers Fund
in complete liquidation of each Farmers Fund. As a result of the
Reorganizations, each shareholder of a Farmers Fund will become a shareholder of
a corresponding Pathway Fund, as listed in the chart below, and will receive
shares of the applicable Pathway Fund in an amount equal to the value of their
holdings in the Farmers Fund as of the close of business on the business day
preceding the closing of each Reorganization (the "Valuation Date"). The closing
of each Reorganization (each, a "Closing") is contingent upon shareholder
approval of the Plan as it relates to such Reorganization. Each Farmers Fund
will vote separately on the Proposal relating to its reorganization into its
corresponding Pathway Fund and the approval of each Reorganization is not
contingent upon the approval of any other Reorganization. A copy of the Plan is
attached as Exhibit A. Each Reorganization is expected to occur on or about
April 9, 2001.
The Plan provides that each Farmers Fund will transfer all or
substantially all of its assets and all of its liabilities to the corresponding
Pathway Fund listed opposite its name in the following chart:
<TABLE>
<CAPTION>
Farmers Fund (Acquired Fund) Pathway Fund (Acquiring Fund)
----------------------------------------- -------------------------------------------------
<S> <C>
Farmers Income Portfolio Scudder Pathway Series: Conservative Portfolio
Farmers Income with Growth Portfolio Scudder Pathway Series: Moderate Portfolio
Farmers Balanced Portfolio Scudder Pathway Series: Moderate Portfolio
Farmers Growth with Income Portfolio Scudder Pathway Series: Moderate Portfolio
Farmers Growth Portfolio Scudder Pathway Series: Growth Portfolio
</TABLE>
Class A shareholders of each Farmers Fund will receive an amount of Class A
shares of the corresponding Pathway Fund equal in value to their Class A shares
of the Farmers Fund. Class B shareholders of each Farmers Fund will receive an
amount of Class B shares of the corresponding Pathway Fund equal in value to
their Class B shares of the Farmers Fund.
In the descriptions of the Proposals below, the word "fund" is sometimes
used to mean an investment company or series thereof in general, and not a
Farmers Fund whose proxy statement this is. In addition, for simplicity, actions
are described in this Proxy Statement/Prospectus as being taken by either a
Farmers Fund or a Pathway Fund (which are collectively referred to as the
"Funds" and each referred to as a "Fund"), although all actions are actually
taken either by the Acquired Trust or the Acquiring Trust (together with the
Acquired Trust, the "Trusts"), on behalf of the applicable Fund.
2
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This Proxy Statement/Prospectus sets forth concisely the information about
each Pathway Fund that a prospective investor should know before investing and
should be retained for future reference. For a more detailed discussion of the
investment objectives, policies, restrictions and risks of each Pathway Fund,
see the Pathway Funds' prospectus dated December 29, 2000, as supplemented from
time to time, which is included in the materials you received with this document
and incorporated herein by reference (meaning that it is legally part of this
document). For a more detailed discussion of the investment objectives,
policies, restrictions and risks of each Farmers Fund, see the Farmers Funds'
prospectus dated September 1, 2000, as supplemented from time to time, which is
also incorporated herein by reference and a copy of which may be obtained upon
request and without charge by calling or writing the Farmers Funds at the
telephone number or address listed above.
Also incorporated herein by reference is the Pathway Funds' statement of
additional information dated December 29, 2000, as supplemented from time to
time, which may be obtained upon request and without charge by calling or
writing the Pathway Funds at the telephone number or address listed above. A
Statement of Additional Information dated January 12, 2001, containing
additional information about each Reorganization has been filed with the
Securities and Exchange Commission (the "SEC" or the "Commission") and is
incorporated by reference into this Proxy Statement/Prospectus. A copy of this
Statement of Additional Information is available upon request and without charge
by calling or writing the Pathway Funds at the telephone number or address
listed above. Shareholder inquiries regarding the Pathway Funds and the Farmers
Funds may be made by calling (800) 621-1048. The information contained in this
document concerning each Fund has been provided by, and is included herein in
reliance upon, that Fund.
The Pathway Funds and the Farmers Funds are diversified series of shares of
beneficial interest of the Acquiring Trust and the Acquired Trust, respectively,
which are open-end management investment companies organized as Massachusetts
business trusts.
The Board of Trustees of the Acquired Trust unanimously recommends that
shareholders of each Farmers Fund vote FOR the Proposal that relates to the
Reorganization of their Fund into a corresponding Pathway Fund.
3
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PROPOSALS 1-5: APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION
I. SYNOPSIS
The following is a summary of certain information contained in this Proxy
Statement/Prospectus relating to the Reorganizations. This summary is qualified
by reference to the more complete information contained elsewhere in this Proxy
Statement/Prospectus, the prospectuses and statements of additional information
of the Funds and the Plan. Shareholders should read this entire Proxy
Statement/Prospectus carefully.
Introduction
The Board of Trustees of the Acquired Trust (unless otherwise noted,
references to the "Board of Trustees" or "Trustees" refers to the Board of
Trustees or Trustees of the Acquired Trust), including all of the Trustees who
have no affiliation with ZSI and who are not considered "interested" Trustees
(the "Independent Trustees"), approved the Plan at a meeting held on November 9,
2000. Subject to its approval by shareholders of each Farmers Fund, the Plan
provides for (a) the transfer of all or substantially all of the assets and all
of the liabilities of each Farmers Fund to its corresponding Pathway Fund in
exchange for Class A and Class B shares of the applicable Pathway Fund, as noted
in the chart above; (b) the distribution of such Pathway Fund shares to
shareholders of its corresponding Farmers Fund in complete liquidation of each
Farmers Fund; and (c) the termination of each Farmers Fund. As a result of the
Reorganizations, each shareholder of a Farmers Fund will become a shareholder of
a corresponding Pathway Fund, as noted in the chart above. Immediately after the
Reorganizations, each shareholder of a Farmers Fund will hold shares of the
class of shares of a Pathway Fund that corresponds to the class of shares of the
Farmers Fund held by that shareholder on the Valuation Date, having an aggregate
net asset value equal to the aggregate net asset value of such shareholder's
shares of the Farmers Fund on the Valuation Date. No front-end sales charges or
contingent deferred sales charges will be imposed on shares issued in the
Reorganizations.
ZSI is the investment manager of the Farmers Funds and the Pathway Funds.
If the Reorganizations are completed, the Farmers Funds' shareholders will
continue to enjoy all of the same shareholder privileges as they currently
enjoy, such as access to professional service representatives and automatic
dividend reinvestment, as well as expanded exchange privileges. See "Purchases,
Exchanges and Redemptions" below.
4
<PAGE>
Reasons for the Proposed Reorganizations; Board Approval
The Trustees have conducted a thorough review of all aspects of each
proposed Reorganization. See "The Proposed Transactions - Board Approval of the
Proposed Transactions" below. The Trustees believe that the Reorganizations will
provide shareholders of each Farmers Fund with the following benefits:
o LOWER FUND OPERATING EXPENSES. Each Fund invests in certain underlying
mutual funds ("Underlying Funds") and therefore bears a portion of the
expenses of those Underlying Funds. In addition, each Farmers Fund also
has fund level operating expenses, which are currently capped by contract
at an annual rate of 1.00% and 1.75% of average daily net assets
attributable to the Class A and Class B shares of each Farmers Fund,
respectively. Class A and Class B shares of each Pathway Fund, through an
agreement with ZSI, currently bear no fund level operating expenses other
than distribution expenses at an annual rate of 0.25% and 1.00% of
average daily net assets attributable to the Class A and Class B shares
of each Pathway Fund, respectively. Thus, if the Reorganizations are
approved, shareholders of each Farmers Fund will benefit from lower total
fund level operating expenses as shareholders of a corresponding Pathway
Fund. See "Comparison of Expenses" below.
o EXPANDED EXCHANGE PRIVILEGES. The shareholders of the Pathway Funds are
able to exchange into any fund in the Scudder Family of Funds ("Scudder
Funds"), while shareholders of the Farmers Funds currently may exchange
only into other Farmers Funds.
o SIMILAR INVESTMENT OBJECTIVES AND POLICIES. The combined Funds will
continue to allocate their assets among other mutual funds in proportions
similar to the allocations of the applicable Farmers Fund. There are
differences between the target allocations for each Farmers Fund and its
corresponding Pathway Fund, as described below in "Investment Objectives,
Policies and Restrictions of the Funds." As described below, the Pathway
Funds may invest in a group of more than thirty Scudder Funds. The
Farmers Funds may invest in a group of twelve funds, consisting of both
Scudder Funds and funds that are not managed by ZSI.
o TAX-FREE REORGANIZATION. It is a condition of each Reorganization that
each Farmers Fund receive an opinion of tax counsel that the transaction
would be a TAX-FREE transaction.
For these reasons, as more fully described below under "The Proposed
Transactions - Board Approval of the Proposed Transactions," the Board of
Trustees, including the Independent Trustees, has concluded that:
5
<PAGE>
o each Reorganization is in the best interests of the applicable Farmers
Fund and its shareholders; and
o the interests of the existing shareholders of each Farmers Fund will not
be diluted as a result of the Reorganization.
Accordingly, the Board of Trustees unanimously recommends approval of the
Plan effecting each Reorganization. If the Plan is not approved by a Farmers
Fund, that Farmers Fund will continue in existence unless other action is taken
by the Board of Trustees, which could include the liquidation of that Farmers
Fund in a taxable transaction.
Investment Objectives, Policies and Restrictions of the Funds
This Section will help you compare the investment objective and policies of
each Farmers Fund with its corresponding Pathway Fund. Please be aware that this
is only a summary. More complete information may be found in the Farmers Funds'
and Pathway Funds' prospectuses.
Farmers Income Portfolio - Scudder Pathway Series: Conservative Portfolio
("Pathway Conservative Portfolio")
The investment objectives, policies and restrictions of Farmers Income
Portfolio and Pathway Conservative Portfolio are similar. Some differences do
exist. The investment objective of Farmers Income Portfolio is to seek a high
level of current income. The investment objective of Pathway Conservative
Portfolio is to seek current income and, as a secondary objective, long-term
growth of capital. There can be no assurance that either Fund will achieve its
investment objective.
Each Fund invests mainly in the securities of Underlying Funds. A
significant difference in the Funds' investment policies is that the Pathway
Conservative Portfolio may invest in a group of more than thirty Scudder Funds
while the Farmers Income Portfolio may invest in a group of twelve funds,
consisting of both Scudder Funds and funds that are not managed by ZSI. Farmers
Income Portfolio and Pathway Conservative Portfolio invest different percentages
of their assets in Underlying Funds with particular goals. Each Fund has a
target allocation, which the portfolio managers use as a reference point in
setting each Fund's actual allocation. While the actual allocation may vary, the
portfolio managers expect that over the long term it will average out to be
similar to that Fund's target allocation. Farmers Income Portfolio's target
allocation is as follows: 97% of its total assets in bond funds and 3% of its
total assets in money funds. The portfolio managers of Farmers Income Portfolio
have the flexibility to adjust the allocation of the Fund's assets within the
following ranges: investments in
6
<PAGE>
bond funds must account for between 80% and 100% of total assets and money funds
must account for between 0% and 20% of total assets.
Pathway Conservative Portfolio's target allocation is as follows: 60% of
its total assets in bond funds and 40% of its total assets in equity funds. The
portfolio managers of Pathway Conservative Portfolio have the flexibility to
adjust the allocation of the Fund's assets within the following ranges:
investments in bond funds must account for between 50% and 70% of total assets,
of which no more than 20% of this allocation may be invested in high yield bond
funds, and equity funds must account for between 30% and 50% of total assets, of
which no more than 75% of this allocation may be invested in either all growth
or all value funds. Within the allocation of Pathway Conservative Portfolio's
assets in equity funds, the portfolio managers have the flexibility to invest
between 0% and 10% of the Fund's total assets in international equity funds, but
may not invest in funds that invest in emerging markets, and may invest between
0% and 5% of the Fund's total assets in small-cap stock equity funds. As a
temporary defensive measure, each Fund may shift up to 100% of its assets into
investments such as money market securities. This would mean that the Fund would
not be pursuing its objective.
The Funds are currently managed by different portfolio managers. The
respective managers of both Funds regularly review the actual allocation of each
respective Fund, and may adjust it in seeking to take advantage of current or
expected market conditions or to manage risk. In making their allocation
decisions for each respective Fund, 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
of the respective Funds then decide which funds to use as Underlying Funds and
how much to invest in each Underlying Fund.
Each Fund's Underlying Funds may use a range of investment styles, with
those of Farmers Income Portfolio emphasizing high-grade bonds. The Underlying
Funds of Farmers Income Portfolio can buy many types of income-producing
securities, among them, corporate bonds of varying credit qualities and
maturities, U.S. government and agency bonds, mortgage- and asset-backed
securities, money market instruments, and others. The Underlying Funds of
Pathway Conservative Portfolio can buy many types of securities, among them
common stock 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. Each Fund's Underlying Funds
invest mainly in securities from U.S. issuers but may also invest in securities
from foreign issuers.
7
<PAGE>
The Funds' investment restrictions (as such restrictions are set forth
under "Investment Restrictions of the Portfolios" in each Fund's statement of
additional information) are identical, except that, as noted above, Pathway
Conservative Portfolio may invest only in Underlying Funds managed by ZSI while
Farmers Income Portfolio has no such restriction. Investment restrictions of
each Fund that are fundamental policies may not be changed without the approval
of Fund shareholders, while non-fundamental policies may be changed by a Fund's
Board without shareholder approval. Investors should refer to each Fund's
statement of additional information for a more detailed description of that
Fund's investment policies and restrictions.
Farmers Income with Growth
Portfolio - Scudder Pathway Series: Moderate Portfolio
("Pathway Moderate Portfolio")
The investment objectives, policies and restrictions of Farmers Income with
Growth Portfolio and Pathway Moderate Portfolio are similar. Some differences do
exist. The investment objective of Farmers Income with Growth Portfolio is to
seek current income and, as a secondary objective, long-term growth of capital.
The investment objective of Pathway Moderate Portfolio is to seek a balance of
current income and growth of capital. There can be no assurance that either Fund
will achieve its investment objective.
Each Fund invests mainly in the securities of Underlying Funds. A
significant difference in the Funds' investment policies is that the Pathway
Moderate Portfolio may invest in a group of more than thirty Scudder Funds while
the Farmers Income with Growth Portfolio may invest in a group of twelve funds,
consisting of both Scudder Funds and funds that are not managed by ZSI. Farmers
Income with Growth Portfolio and Pathway Moderate Portfolio invest different
percentages of their assets in Underlying Funds with particular goals. Each Fund
has a target allocation, which the portfolio managers use as a reference point
in setting each Fund's actual allocation. While the actual allocation may vary,
the portfolio managers expect that over the long term it will average out to be
similar to that Fund's target allocation. Farmers Income with Growth Portfolio's
target allocation is as follows: 69% of its total assets in bond funds, 30% of
its total assets in equity funds, and 1% of its total assets in money funds. The
portfolio managers of Farmers Income with Growth Portfolio have the flexibility
to adjust the allocation of the Fund's assets within the following ranges:
investments in bond funds must account for between 60% and 80% of total assets;
equity funds must account for between 20% and 40% of total assets; and money
funds must account for between 0% and 15% of total assets.
8
<PAGE>
Pathway Moderate Portfolio's target allocation is as follows: 60% of its
total assets in equity funds and 40% of its total assets in bond funds. The
portfolio managers of Pathway Moderate Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following ranges: investment in
equity funds must account for between 50% and 70% of total assets, of which no
more than 75% of this allocation may be invested in either all growth or all
value funds, and bond funds must account for between 30% and 50% of total
assets, of which no more than 20% of this allocation may be invested in high
yield bond funds. Within the allocation of Pathway Moderate Portfolio's assets
in equity funds, the portfolio managers have the flexibility to invest between
0% and 20% of the Fund's total assets in international equity funds, including
up to 5% in equity funds that invest in emerging markets, and between 0% and 10%
of the Fund's total assets in small-cap stock equity funds. As a temporary
defensive measure, each Fund may shift up to 100% of its assets into investments
such as money market securities. This would mean that the Fund would not be
pursuing its objective.
The Funds are currently managed by different portfolio managers. The
respective managers of both Funds regularly review the actual allocation of each
respective Fund, and may adjust it in seeking to take advantage of current or
expected market conditions or to manage risk. In making their allocation
decisions for each respective Fund, 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
of the respective Funds then decide which funds to use as Underlying Funds and
how much to invest in each Underlying Fund.
Each Fund's Underlying Funds may use a range of investment styles. These
Underlying Funds can buy many types of securities, among them common stocks of
companies of any size, corporate bonds of varying credit qualities and
maturities, U.S. government and agency bonds, mortgage- and asset-backed
securities, money market instruments, and others. Each Fund's Underlying Funds
invest mainly in securities from U.S. issuers but may also invest in securities
from foreign issuers.
The Funds' investment restrictions (as such restrictions are set forth under
"Investment Restrictions of the Portfolios" in each Fund's statement of
additional information) are identical, except that, as noted above, Pathway
Moderate Portfolio may invest only in Underlying Funds managed by ZSI while
Farmers Income with Growth Portfolio has no such restriction. Investment
restrictions of each Fund that are fundamental policies may not be changed
without the approval of Fund shareholders, while non-fundamental policies may be
changed by a Fund's Board without shareholder approval. Investors should refer
to each Fund's
9
<PAGE>
statement of additional information for a more detailed description of that
Fund's investment policies and restrictions.
Farmers Balanced Portfolio - Pathway Moderate Portfolio
The investment objectives, policies and restrictions of Farmers Balanced
Portfolio and Pathway Moderate Portfolio are similar. Some differences do exist.
The investment objective of Farmers Balanced Portfolio is to seek a balance of
current income and long-term growth of capital. The investment objective of
Pathway Moderate Portfolio is to seek a balance of current income and growth of
capital. There can be no assurance that either Fund will achieve its investment
objective.
Each Fund invests mainly in the securities of Underlying Funds. A
significant difference in the Funds' investment policies is that the Pathway
Moderate Portfolio may invest in a group of more than thirty Scudder Funds while
the Farmers Balanced Portfolio may invest in a group of twelve funds, consisting
of both Scudder Funds and funds that are not managed by ZSI. Farmers Balanced
Portfolio and Pathway Moderate Portfolio invest different percentages of their
assets in Underlying Funds with particular goals. Each Fund has a target
allocation, which the portfolio managers use as a reference point in setting
each Fund's actual allocation. While the actual allocation may vary, the
portfolio managers expect that over the long term it will average out to be
similar to that Fund's target allocation. Farmers Balanced Portfolio's target
allocation is as follows: 49% of its total assets in bond funds, 50% of its
total assets in equity funds, and 1% of its total assets in money funds. The
portfolio managers of Farmers Balanced Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following ranges: investments in
bond funds must account for between 40% and 60% of total assets; equity funds
must account for between 40% and 60% of total assets; and money funds must
account for between 0% and 10% of total assets.
Pathway Moderate Portfolio's target allocation is as follows: 60% of its
total assets in equity funds and 40% of its total assets in bond funds. The
portfolio managers of Pathway Moderate Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following ranges: investment in
equity funds must account for between 50% and 70% of total assets, of which no
more than 75% of this allocation may be invested in either all growth or all
value funds, and bond funds must account for between 30% and 50% of total
assets, of which no more than 20% of this allocation may be invested in high
yield bond funds. Within the allocation of Pathway Moderate Portfolio's assets
in equity funds, the portfolio managers have the flexibility to invest between
0% and 20% of the Fund's total assets in international equity funds, including
up to 5% in equity
10
<PAGE>
funds that invest in emerging markets, and between 0% and 10% of the Fund's
total assets in small-cap stock equity funds. As a temporary defensive measure,
each Fund may shift up to 100% of its assets into investments such as money
market securities. This would mean that the Fund would not be pursuing its
objective.
The Funds are currently managed by different portfolio managers. The
respective managers of both Funds regularly review the actual allocation of each
respective Fund, and may adjust it in seeking to take advantage of current or
expected market conditions or to manage risk. In making their allocation
decisions for each respective Fund, 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
of the respective Funds then decide which funds to use as Underlying Funds and
how much to invest in each Underlying Fund.
Each Fund's Underlying Funds may use a range of investment styles. These
Underlying Funds can buy many types of securities, among them common stocks of
companies of any size, corporate bonds of varying credit qualities and
maturities, U.S. government and agency bonds, mortgage- and asset-backed
securities, money market instruments, and others. Each Fund's Underlying Funds
invest mainly in securities from U.S. issuers but may also invest in securities
from foreign issuers.
The Funds' investment restrictions (as such restrictions are set forth
under "Investment Restrictions of the Portfolios" in each Fund's statement of
additional information) are identical, except that, as noted above, Pathway
Moderate Portfolio may invest only in Underlying Funds managed by ZSI while
Farmers Balanced Portfolio has no such restriction. Investment restrictions of
each Fund that are fundamental policies may not be changed without the approval
of Fund shareholders, while non-fundamental policies may be changed by a Fund's
Board without shareholder approval. Investors should refer to each Fund's
statement of additional information for a more detailed description of that
Fund's investment policies and restrictions.
Farmers Growth with Income Portfolio - Pathway Moderate Portfolio
The investment objectives, policies and restrictions of Farmers Growth with
Income Portfolio and Pathway Moderate Portfolio are similar. Some differences do
exist. The investment objective of Farmers Growth with Income Portfolio is to
seek long-term growth of capital and modest income. The investment objective of
Pathway Moderate Portfolio is to seek a balance of current income and growth of
11
<PAGE>
capital. There can be no assurance that either Fund will achieve its investment
objective.
Each Fund invests mainly in the securities of Underlying Funds. A
significant difference in the Funds' investment policies is that the Pathway
Moderate Portfolio may invest in a group of more than thirty Scudder Funds while
the Farmers Growth with Income Portfolio may invest in a group of twelve funds,
consisting of both Scudder Funds and funds that are not managed by ZSI. Farmers
Growth with Income Portfolio and Pathway Moderate Portfolio invest different
percentages of their assets in Underlying Funds with particular goals. Each Fund
has a target allocation, which the portfolio managers use as a reference point
in setting each Fund's actual allocation. While the actual allocation may vary,
the portfolio managers expect that over the long term it will average out to be
similar to that Fund's target allocation. Farmers Growth with Income Portfolio's
target allocation is as follows: 70% of its total assets in equity funds, 29% of
its total assets in bond funds, and 1% of its total assets in money funds. The
portfolio managers of Farmers Growth with Income Portfolio have the flexibility
to adjust the allocation of the Fund's assets within the following ranges:
investments in equity funds must account for between 60% and 80% of total
assets; bond funds must account for between 20% and 40% of total assets; and
money funds must account for between 0% and 10% of total assets.
Pathway Moderate Portfolio's target allocation is as follows: 60% of its
total assets in equity funds and 40% of its total assets in bond funds. The
portfolio managers of Pathway Moderate Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following ranges: investment in
equity funds must account for between 50% and 70% of total assets, of which no
more than 75% of this allocation may be invested in either all growth or all
value funds, and bond funds must account for between 30% and 50% of total
assets, of which no more than 20% of this allocation may be invested in high
yield bond funds. Within the allocation of Pathway Moderate Portfolio's assets
in equity funds, the portfolio managers have the flexibility to invest between
0% and 20% of the Fund's total assets in international equity funds, including
up to 5% in equity funds that invest in emerging markets, and between 0% and 10%
of the Fund's total assets in small-cap stock equity funds. As a temporary
defensive measure, each Fund may shift up to 100% of its assets into investments
such as money market securities. This would mean that each Fund would not be
pursuing its objective.
The Funds are currently managed by different portfolio managers. The
respective managers of both Funds regularly review the actual allocation of each
respective Fund, and may adjust it in seeking to take advantage of current or
expected market conditions or to manage risk. In making their allocation
12
<PAGE>
decisions for each respective Fund, 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
of the respective Funds then decide which funds to use as Underlying Funds and
how much to invest in each Underlying Fund.
Each Fund's Underlying Funds may use a range of investment styles. These
Underlying Funds can buy many types of securities, among them common stocks of
companies of any size, corporate bonds of varying credit qualities and
maturities, U.S. government and agency bonds, mortgage- and asset-backed
securities, money market instruments, and others. Each Fund's Underlying Funds
invest mainly in securities from U.S. issuers but may also invest in securities
from foreign issuers.
The Funds' investment restrictions (as such restrictions are set forth
under "Investment Restrictions of the Portfolios" in each Fund's statement of
additional information) are identical, except that, as noted above, Pathway
Moderate Portfolio may invest only in Underlying Funds managed by ZSI while
Farmers Growth with Income Portfolio has no such restriction. Investment
restrictions of each Fund that are fundamental policies may not be changed
without the approval of Fund shareholders, while non-fundamental policies may be
changed by a Fund's Board without shareholder approval. Investors should refer
to each Fund's statement of additional information for a more detailed
description of that Fund's investment policies and restrictions.
Farmers Growth Portfolio - Scudder Pathway Series:
Growth Portfolio ("Pathway Growth Portfolio")
The investment objectives, policies and restrictions of Farmers Growth
Portfolio and Pathway Growth Portfolio are similar. Some differences do exist.
The investment objective of each Fund is to seek long-term growth of capital.
There can be no assurance that either Fund will achieve its investment
objective.
Each Fund invests mainly in the securities of Underlying Funds. A
significant difference in the Funds' investment policies is that the Pathway
Growth Portfolio may invest in a group of more than thirty Scudder Funds while
the Farmers Growth Portfolio may invest in a group of twelve funds, consisting
of both Scudder Funds and funds that are not managed by ZSI. Farmers Growth
Portfolio and Pathway Growth Portfolio invest different percentages of their
assets in Underlying Funds with particular goals. Each Fund has a target
allocation, which the portfolio managers use as a reference point in setting
each Fund's actual allocation. While the actual allocation may vary, the
portfolio managers expect that over the long term it will average out to be
similar to that Fund's target
13
<PAGE>
allocation. Farmers Growth Portfolio's target allocation is as follows: 99% of
its total assets in equity funds and 1% of its total assets in money funds. The
portfolio managers of Farmers Growth Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following ranges: investments in
equity funds must account for between 95% and 100% of total assets and money
funds must account for between 0% and 5% of total assets.
Pathway Growth Portfolio's target allocation is as follows: 85% of its
total assets in equity funds and 15% of its total assets in bond funds. The
portfolio managers of Pathway Growth Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following ranges: investment in
equity funds must account for between 75% and 95% of total assets, of which no
more than 75% of this allocation may be invested in either all growth or all
value funds, and bond funds must account for between 5% and 25% of total assets,
of which no more than 20% of this allocation may be invested in high yield bond
funds. Within the allocation of Pathway Growth Portfolio's assets in equity
funds, the portfolio managers have the flexibility to invest between 0% and 30%
of the Fund's total assets in international equity funds, including up to 10% in
equity funds that invest in emerging markets, and between 0% and 20% of the
Fund's total assets in small-cap stock equity funds. As a temporary defensive
measure, each Fund may shift up to 100% of its assets into investments such as
money market securities. This would mean that the Fund would not be pursuing its
objective.
The Funds are currently managed by different portfolio managers. The
respective managers of both Funds regularly review the actual allocation of each
respective Fund, and may adjust it in seeking to take advantage of current or
expected market conditions or to manage risk. In making their allocation
decisions for each respective Fund, 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
of the respective Funds then decide which funds to use as Underlying Funds and
how much to invest in each Underlying Fund.
Each Fund's Underlying Funds may use a range of investment styles, with
those of Farmers Growth Portfolio emphasizing the growth component of their
holdings. The Underlying Funds of Farmers Growth Portfolio can buy many types of
securities, among them common stocks of companies of any size, money market
instruments, and others. The Underlying Funds of Pathway Growth Portfolio 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.
Each Fund's Underlying Funds invest mainly in securities from U.S. issuers but
may also invest in securities from foreign issuers.
14
<PAGE>
The Funds' investment restrictions (as such restrictions are set forth
under "Investment Restrictions of the Portfolios" in each Fund's statement of
additional information) are identical, except that, as noted above, Pathway
Growth Portfolio may invest only in Underlying Funds managed by ZSI while
Farmers Growth Portfolio has no such restriction. Investment restrictions of
each Fund that are fundamental policies may not be changed without the approval
of Fund shareholders, while non-fundamental policies may be changed by a Fund's
Board without shareholder approval. Investors should refer to each Fund's
statement of additional information for a more detailed description of that
Fund's investment policies and restrictions.
Portfolio Turnover
The portfolio turnover rate for each Pathway Fund, i.e., the ratio of the
lesser of annual sales or purchases to the monthly average value of the
portfolio (excluding from both the numerator and the denominator securities with
maturities at the time of acquisition of one year or less), for the fiscal year
ended August 31, 2000, along with the portfolio turnover rate for each Farmers
Fund for the fiscal year ended April 30, 2000, is listed in the chart
immediately below.
<TABLE>
<CAPTION>
Turnover Rates for the Turnover Rates for the
Farmers Funds for the Pathway Funds for the
Fiscal Year Ended April 30, 2000 Fiscal Year ended August 31, 2000
-------------------------------- ---------------------------------
<S> <C> <C> <C>
Farmers Income Portfolio ................ 59% Pathway Conservative Portfolio ..... 26%
Farmers Income with Growth Portfolio .... 38% Pathway Moderate Portfolio ......... 28%
Farmers Balanced Portfolio .............. 20% Pathway Moderate Portfolio ......... 28%
Farmers Growth with Income Portfolio .... 56% Pathway Moderate Portfolio ......... 28%
Farmers Growth Portfolio ................ 31% Pathway Growth Portfolio ........... 27%
</TABLE>
Performance
The following tables show how the returns of each Farmers Fund and its
corresponding Pathway Fund over different periods average out. For context, each
table also includes broad-based market indices (which, unlike the Funds, do not
have any fees or expenses). The performances of each Fund and the indices vary
over time, and past performance is not necessarily indicative of future results.
All figures assume reinvestment of dividends and distributions.
15
<PAGE>
Farmers Income Portfolio - Pathway Conservative Portfolio
Average Annual Total Return
for the Periods Ended December 31, 2000
Since Since
Past Year Inception** Inception***
--------- ----------- ------------
Farmers Income Portfolio
Class A .......................... 2.11% 1.16%
Class B .......................... 2.78% 1.80%
Pathway Conservative Portfolio
Class A* ......................... (3.08%) 4.73%
Class B* ......................... (0.84%) 5.05%
LBAB (1) ......................... 11.63% 6.28% 6.78%
S&P 500 (2) ...................... (9.09%) 2.73% 16.26%
3-Month Treasury Bill ............ 6.07% 5.21%
MSCI EAFE (3) .................... (14.16%) 6.91%
------------
Class A performance is adjusted for maximum sales charge.
Class B performance is adjusted for maximum contingent deferred sales charge.
* Class A and Class B shares were not offered during the periods covered.
Performance shown is for shares of Pathway Conservative Portfolio existing
during the periods covered, adjusted to reflect the impact of the sales
charges and distribution fees borne by Class A and Class B shares.
** Inception date of Farmers Income Portfolio is March 9, 1999. Index
comparisons begin March 31, 1999.
*** Inception date of Pathway Conservative Portfolio is November 15, 1996.
Index comparisons begin November 30, 1996.
(1) The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged, market
value-weighted measure of U.S. Treasury and agency securities, corporate
bond issues and mortgage-backed securities.
(2) The Standard & Poor's 500 Composite Stock Price (S&P 500) Index is an
unmanaged, capitalization-weighted index that includes 500 large-cap U.S.
stocks. The index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks
representing all major industries.
(3) The MSCI EAFE Index is an unmanaged, capitalization-weighted measure of
international stock markets.
16
<PAGE>
Farmers Income with Growth Portfolio - Pathway Moderate Portfolio
Average Annual Total Return
for the Periods Ended December 31, 2000
Since Since
Past Year Inception** Inception***
--------- ----------- ------------
Farmers Income with Growth Portfolio
Class A ............................ (2.61%) 3.96%
Class B ............................ (1.90%) 4.70%
Pathway Moderate Portfolio
Class A* ........................... (8.47%) 6.75%
Class B* ........................... (6.16%) 7.11%
LBAB (1) ........................... 11.63% 6.28% 6.78%
S&P 500 (2) ........................ (9.09%) 2.73% 16.26%
3-Month Treasury Bill .............. 6.07% 5.21%
MSCI EAFE (3) ...................... (14.16%) 6.91%
Russell 2000 (4) ................... (3.03%) 9.31%
------------
Class A performance is adjusted for maximum sales charge.
Class B performance is adjusted for maximum contingent deferred sales charge.
* Class A and Class B shares were not offered during the periods covered.
Performance shown is for shares of Pathway Moderate Portfolio existing
during the periods covered, adjusted to reflect the impact of the sales
charges and distribution fees borne by Class A and Class B shares.
** Inception date of Farmers Income with Growth Portfolio is March 9, 1999.
Index comparisons begin March 31, 1999.
*** Inception date of Pathway Moderate Portfolio is November 15, 1996. Index
comparisons begin November 30, 1996.
(1) The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged, market
value-weighted measure of U.S. Treasury and agency securities, corporate
bond issues and mortgage-backed securities.
(2) The Standard & Poor's 500 Composite Stock Price (S&P 500) Index is an
unmanaged, capitalization-weighted index that includes 500 large-cap U.S.
stocks. The index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks
representing all major industries.
(3) The MSCI EAFE Index is an unmanaged, capitalization-weighted measure of
international stock markets.
(4) The Russell 2000 Index is an unmanaged measure of 2000 companies that
typically have a market capitalization of less than $2 billion.
17
<PAGE>
Farmers Balanced Portfolio - Pathway Moderate Portfolio
Average Annual Total Return
for the Periods Ended December 31, 2000
Since Since
Past Year Inception** Inception***
--------- ----------- ------------
Farmers Balanced Portfolio
Class A .............................. (5.71%) 1.80%
Class B .............................. (4.21%) 2.74%
Pathway Moderate Portfolio
Class A* ............................. (8.47%) 6.75%
Class B* ............................. (6.16%) 7.11%
LBAB (1) ............................. 11.63% 6.28% 6.78%
S&P 500 (2) .......................... (9.09%) 2.73% 16.26%
3-Month Treasury Bill ................ 6.07% 5.21%
MSCI EAFE (3) ........................ (14.16%) 6.91%
Russell 2000 (4) ..................... (3.03%) 9.31%
------------
Class A performance is adjusted for maximum sales charge.
Class B performance is adjusted for maximum contingent deferred sales charge.
* Class A and Class B shares were not offered during the periods covered.
Performance shown is for shares of Pathway Moderate Portfolio existing
during the periods covered, adjusted to reflect the impact of the sales
charges and distribution fees borne by Class A and Class B shares.
** Inception date of Farmers Balanced Portfolio is March 9, 1999. Index
comparisons begin March 31, 1999.
*** Inception date of Pathway Moderate Portfolio is November 15, 1996. Index
comparisons begin November 30, 1996.
(1) The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged, market
value-weighted measure of U.S. Treasury and agency securities, corporate
bond issues and mortgage-backed securities.
(2) The Standard & Poor's 500 Composite Stock Price (S&P 500) Index is an
unmanaged, capitalization-weighted index that includes 500 large-cap U.S.
stocks. The index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks
representing all major industries.
(3) The MSCI EAFE Index is an unmanaged, capitalization-weighted measure of
international stock markets.
(4) The Russell 2000 Index is an unmanaged measure of 2000 companies that
typically have a market capitalization of less than $2 billion.
18
<PAGE>
Farmers Growth with Income Portfolio - Pathway Moderate Portfolio
Average Annual Total Return
for the Periods Ended December 31, 2000
Since Since
Past Year Inception** Inception***
--------- ----------- ------------
Farmers Growth with Income Portfolio
Class A .............................. (10.29%) (1.22%)
Class B .............................. (9.27%) (0.35%)
Pathway Moderate Portfolio
Class A* ............................. (8.47%) 6.75%
Class B* ............................. (6.16%) 7.11%
LBAB (1) ............................. 11.63% 6.28% 6.78%
S&P 500 (2) .......................... (9.09%) 2.73% 16.26%
3-Month Treasury Bill ................ 6.07% 5.21%
MSCI EAFE (3) ........................ (14.16%) 6.91%
Russell 2000 (4) ..................... (3.03%) 9.31%
------------
Class A performance is adjusted for maximum sales charge.
Class B performance is adjusted for maximum contingent deferred sales charge.
* Class A and Class B shares were not offered during the periods covered.
Performance shown is for shares of Pathway Moderate Portfolio existing
during the periods covered, adjusted to reflect the impact of the sales
charges and distribution fees borne by Class A and Class B shares.
** Inception date of Farmers Growth with Income Portfolio is March 9, 1999.
Index comparisons begin March 31, 1999.
*** Inception date of Pathway Moderate Portfolio is November 15, 1996. Index
comparisons begin November 30, 1996.
(1) The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged, market
value-weighted measure of U.S. Treasury and agency securities, corporate
bond issues and mortgage-backed securities.
(2) The Standard & Poor's 500 Composite Stock Price (S&P 500) Index is an
unmanaged, capitalization-weighted index that includes 500 large-cap U.S.
stocks. The index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks
representing all major industries.
(3) The MSCI EAFE Index is an unmanaged, capitalization-weighted measure of
international stock markets.
(4) The Russell 2000 Index is an unmanaged measure of 2000 companies that
typically have a market capitalization of less than $2 billion.
19
<PAGE>
Farmers Growth Portfolio - Pathway Growth Portfolio
Average Annual Total Return
for the Periods Ended December 31, 2000
Since Since
Past Year Inception** Inception***
--------- ----------- ------------
Farmers Growth Portfolio
Class A ......................... (13.98%) (1.19%)
Class B ......................... (13.05%) (0.34%)
Pathway Growth Portfolio
Class A* ........................ (11.90%) 10.61%
Class B* ........................ (9.69%) 10.97%
LBAB (1) ........................ 11.63% 6.28% 6.78%
S&P 500 (2) ..................... (9.09%) 2.73% 16.26%
MSCI EAFE (3) ................... (14.16%) 6.91%
Russell 2000 (4) ................ (3.03%) 9.31%
------------
Class A performance is adjusted for maximum sales charge.
Class B performance is
adjusted for maximum contingent deferred sales charge.
* Class A and Class B shares were not offered during the periods covered.
Performance shown is for shares of Pathway Growth Portfolio existing during
the periods covered, adjusted to reflect the impact of the sales charges
and distribution fees borne by Class A and Class B shares.
** Inception date of Farmers Growth Portfolio is March 9, 1999. Index
comparisons begin March 31, 1999.
*** Inception date of Pathway Growth Portfolio is November 15, 1996. Index
comparisons begin November 30, 1996.
(1) The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged, market
value-weighted measure of U.S. Treasury and agency securities, corporate
bond issues and mortgage-backed securities.
(2) The Standard & Poor's 500 Composite Stock Price (S&P 500) Index is an
unmanaged, capitalization-weighted index that includes 500 large-cap U.S.
stocks. The index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks
representing all major industries.
(3) The MSCI EAFE Index is an unmanaged, capitalization-weighted measure of
international stock markets.
(4) The Russell 2000 Index is an unmanaged measure of 2000 companies that
typically have a market capitalization of less than $2 billion.
Total return for each Farmers Fund would have been lower for all periods
shown in the tables above if the Investment Manager had not maintained each
Farmers Fund's expenses since inception. In addition, total return for the
Farmers Funds and the Pathway Funds would have been lower for all periods shown
in the
20
<PAGE>
tables above if the Investment Manager had not maintained expenses of certain
Underlying Funds during those periods.
For management's discussion of each Pathway Fund's performance for the
fiscal year ended August 31, 2000, please refer to Exhibit B attached hereto.
Exhibit B presents information for the Pathway Funds prior to the creation of
Class A and Class B shares. Farmers Fund shareholders should be aware that the
performance discussion and data in Exhibit B has not been adjusted to reflect
the impact of the sales charges and distribution fees borne by Class A and Class
B shares, which would reduce performance.
Investment Manager; Fees and Expenses
Each Fund retains the investment management firm of ZSI, pursuant to
separate contracts, to manage its daily investment and business affairs, subject
to the policies established by each Fund's Trustees. ZSI is a Delaware
corporation located at Two International Place, Boston, Massachusetts
02110-4103.
The Investment Manager receives a fee for its services pursuant to its
investment management agreement with each Farmers Fund. For these services, each
Farmers Fund pays the Investment Manager a fee at an annual rate of 0.75% of the
average daily net assets of each class of the Farmers Funds payable monthly. As
of April 30, 2000, the total net assets for Farmers Income Portfolio were
$106,712, for Farmers Income with Growth Portfolio were $870,103, for Farmers
Balanced Portfolio were $1,363,832, for Farmers Growth with Income Portfolio
were $1,084,360 and for Farmers Growth Portfolio were $2,463,887. For the fiscal
year ended April 30, 2000, each class of the Farmers Funds paid the Investment
Manager a fee of 0.75% of its average daily net assets. Shareholders pay no
direct charges or fees for investment management or other services. The
Investment Manager also receives management fees for managing certain of the
Underlying Funds in which the Farmers Funds invest.
The Investment Manager has agreed not to be paid a management fee for
performing its services for the Pathway Funds. The Investment Manager does
receive management fees for managing the Underlying Funds in which each of the
Pathway Funds invest. Each Pathway Fund and Farmers Fund, as shareholders of the
Underlying Funds in which they invest, bear their proportionate share of fees
and expenses paid by the Underlying Funds.
Administration Agreement
The Acquiring Trust, on behalf of each Pathway Fund, has entered into an
administrative services agreement with ZSI (the "Administration Agreement"),
pursuant to which ZSI provides or pays others to provide substantially all of
the
21
<PAGE>
administrative services required by the Class A and Class B shares of each
Pathway Fund (other than those provided by ZSI under its investment management
agreement with the Pathway Funds). There is no fee currently payable by a
Pathway Fund under the Administration Agreement. One effect of this arrangement
is to make each Pathway Fund's future expense ratio more predictable. The
details of this arrangement are set out below.
Various service providers (the "Service Providers"), some of which are
affiliated with ZSI, provide certain services to each Pathway Fund pursuant to
separate agreements with each Pathway Fund. These Service Providers may differ
from current Service Providers of each Farmers Fund. Scudder Fund Accounting
Corporation, a subsidiary of ZSI, computes net asset value for each Pathway Fund
and maintains its accounting records. Kemper Service Company, also a subsidiary
of ZSI, is the transfer, shareholder servicing and dividend-paying agent for the
Class A and Class B shares of each Pathway Fund. Scudder Trust Company, an
affiliate of ZSI, provides subaccounting and recordkeeping services for
shareholder accounts in certain retirement and employee benefit plans. As
custodian, State Street Bank and Trust Company holds the portfolio securities of
each Pathway Fund, pursuant to a custodian agreement. Other Service Providers
include the independent public accountants and legal counsel for each Pathway
Fund.
Under the Administration Agreement, each Service Provider provides the
services to each Pathway Fund described above, except that ZSI pays these
entities for the provision of their services to each Pathway Fund and pays most
other fund expenses, including insurance, registration, printing and postage
fees.
The Administration Agreement will remain in effect with respect to the
Class A and Class B shares for an initial term ending September 30, 2003,
subject to earlier termination by the trustees that oversee each Pathway Fund.
ZSI has also agreed to bear certain other expenses of the Pathway Funds that are
not borne by ZSI under the Administration Agreement, such as taxes, brokerage,
interest and extraordinary expenses, and the fees and expenses of the
Independent Trustees (including the fees and expenses of their independent
counsel). In addition, each Pathway Fund pays any fees required by its
investment management agreement with ZSI.
Comparison of Expenses
The tables and examples below are designed to assist you in understanding
the various costs and expenses that you will bear directly or indirectly as an
investor in the Class A and Class B shares of each Pathway Fund, and compare
these with the expenses of the Class A and Class B shares of the corresponding
Farmers Fund. As indicated below, it is expected that the total expense ratio of
22
<PAGE>
each class of each Pathway Fund following the Reorganizations will be
substantially lower than the current expense ratio for the corresponding classes
of each corresponding Farmers Fund. The information is based on each Pathway
Fund's expenses and average daily net assets during the twelve months ended
September 30, 2000 and on each Farmers Fund's expenses and average daily net
assets during the twelve months ended April 30, 2000. The information shown for
each Pathway Fund also reflects the fees, expenses and examples for the combined
Funds on a pro forma basis as of September 30, 2000, giving effect to the
Reorganization.
Farmers Income Portfolio - Pathway Conservative Portfolio
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
Maximum Sales Maximum
Charge (Load) Contingent Deferred
Imposed on Sales Charge (Load)
Purchases (as a (as a % of
FUND % of offering price) redemption proceeds)
---- -------------------- --------------------
<S> <C> <C>
Farmers Income Portfolio (Class A) .................. 5.00% None*
Pathway Conservative Portfolio (Class A) ......... 5.75% None*
Farmers Income Portfolio (Class B) .................. None 4.00%**
Pathway Conservative Portfolio (Class B) .......... None 4.00%**
</TABLE>
------------
* Class A shares purchased under the Large Order NAV Purchase Privilege have
a 1% contingent deferred sales charge if sold during the first year after
purchase and 0.50% if sold during the second year after purchase.
** Contingent deferred sales charges on Class B shares sold during the first
six years of ownership are 4% in the first year, 3% in the second and third
year, 2% in the fourth and fifth year, and 1% in the sixth year.
23
<PAGE>
Annual Fund Operating Expenses (Unaudited)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Distri-
bution Total Net
and/or Annual Annual
Manage- Service Fund Expense Fund
ment (12b-1) Other Operating Reimburse- Operating
FUND Fees Fees Expenses Expenses ment Expenses
------ --------- ------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Farmers Income Portfolio ........... 0.75% 0.25% 3.92%* 4.92% 3.92%** 1.00%
(Class A)
Pathway Conservative Portfolio ..... None 0.25% None 0.25% N/A N/A
(Class A)
Farmers Income Portfolio ........... 0.75% 1.00% 3.92%* 5.67% 3.92%** 1.75%
(Class B)
Pathway Conservative Portfolio ..... None 1.00% None 1.00% N/A N/A
(Class B)
</TABLE>
------------
* Includes compensation and expenses of the Board of Trustees.
** By contract, compensation and expenses of the Board of Trustees are
reimbursed by the Investment Manager until the Fund's assets reach
$50,000,000.
The range for the average weighted expense ratio borne by Farmers Income
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.43% to 0.87%. The range has been restated to reflect new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
provided as a range since the average assets of Farmers Income Portfolio
invested in each of the Underlying Funds will fluctuate.
The range for the average weighted expense ratio borne by Pathway
Conservative Portfolio in connection with its investments in the Underlying
Funds is expected to be 0.59% to 1.01%. The range has been restated to reflect
new fixed rate administrative fees for certain affiliated Underlying Funds. This
information is provided as a range since the average assets of Pathway
Conservative Portfolio invested in each of the Underlying Funds will fluctuate.
Examples
Based on the costs above (including both Fund and Underlying Fund fees and
expenses), the following examples are intended to help you compare the cost of
investing in the Funds with the cost of investing in other mutual funds. The
examples assume that you invest $10,000 in each Fund for the time periods
indicated and that each Fund bears the midpoint of the range of expenses
expected to be borne by the Fund in connection with its investments in
Underlying Funds (discussed above). The examples also assume that your
investment has a 5% return each year, you reinvested all dividends and
distributions, each Fund's
24
<PAGE>
operating expenses remain the same, and includes one year of reimbursed expenses
for Farmers Income Portfolio in each period. The examples reflect the impact of
the maximum applicable sales charges (although, as discussed below, no sales
charges will be imposed on shares issued in the Reorganization). Expense
examples for Class B shares assume conversion to Class A shares six years after
purchase. Although your actual costs may be higher or lower, based on these
assumptions, your costs would be as follows:
Expenses assuming you sold your shares at the end of each period:
FUND 1 year 3 years 5 years 10 years
------ ------ ------- ------- --------
Farmers Income Portfolio ............ $659 $1,747 $2,822 $5,457
(Class A)
Pathway Conservative Portfolio ...... $676 $890 $1,121 $1,784
(Class A)
Farmers Income Portfolio ............ $643 $1,823 $2,969 $5,494
(Class B)
Pathway Conservative Portfolio ...... $583 $866 $1,175 $1,738
(Class B)
25
<PAGE>
Expenses assuming you held your shares at the end of each period:
FUND 1 year 3 years 5 years 10 years
---- ------ ------- ------- -------
Farmers Income Portfolio ............ $659 $1,747 $2,822 $5,457
(Class A)
Pathway Conservative Portfolio ...... $676 $890 $1,121 $1,784
(Class A)
Farmers Income Portfolio ............ $243 $1,523 $2,769 $5,494
(Class B)
Pathway Conservative Portfolio ...... $183 $566 $975 $1,738
(Class B)
Farmers Income with Growth Portfolio - Pathway Moderate Portfolio
Shareholder Transaction Expenses
Maximum Sales Maximum
Charge (Load) Contingent Deferred
Imposed on Sales Charge (Load)
Purchases (as a (as a % of
FUND % of offering price) redemption proceeds)
------- -------------------- --------------------
Farmers Income with Growth
Portfolio (Class A) ............ 5.25% None*
Pathway Moderate Portfolio
(Class A) ........................ 5.75% None*
Farmers Income with Growth
Portfolio (Class B) .............. None 4.00%**
Pathway Moderate Portfolio
(Class B) ........................ None 4.00%**
------------
* Class A shares purchased under the Large Order NAV Purchase Privilege have
a 1% contingent deferred sales charge if sold during the first year after
purchase and 0.50% if sold during the second year after purchase.
** Contingent deferred sales charges on Class B shares sold during the first
six years of ownership are 4% in the first year, 3% in the second and third
year, 2% in the fourth and fifth year, and 1% in the sixth year.
26
<PAGE>
Annual Fund Operating Expenses (Unaudited)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Distri-
bution Total Net
and/or Annual Annual
Manage- Service Fund Expense Fund
ment (12b-1) Other Operating Reimburse- Operating
FUND Fees Fees Expenses Expenses ment Expenses
------ --------- ------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Farmers Income with
Growth Portfolio .................. 0.75% 0.25% 1.41%* 2.41% 1.41%** 1.00%
(Class A)
Pathway Moderate Portfolio ........ None 0.25% None 0.25% N/A N/A
(Class A)
Farmers Income with
Growth Portfolio .................. 0.75% 1.00% 1.41%* 3.16% 1.41%** 1.75%
(Class B)
Pathway Moderate Portfolio ........ None 1.00% None 1.00% N/A N/A
(Class B)
</TABLE>
------------
* Includes compensation and expenses of the Board of Trustees.
** By contract, compensation and expenses of the Board of Trustees are
reimbursed by the Investment Manager until the Fund's assets reach
$50,000,000.
The range for the average weighted expense ratio borne by Farmers Income
with Growth Portfolio in connection with its investments in the Underlying Funds
is expected to be 0.54% to 0.88%. The range has been restated to reflect new
fixed rate administrative fees for certain affiliated Underlying Funds. This
information is provided as a range since the average assets of Farmers Income
with Growth Portfolio invested in each of the Underlying Funds will fluctuate.
The range for the average weighted expense ratio borne by Pathway Moderate
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.73% to 1.11%. The range has been restated to reflect new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
provided as a range since the average assets of Pathway Moderate Portfolio
invested in each of the Underlying Funds will fluctuate.
Examples
Based on the costs above (including both Fund and Underlying Fund fees and
expenses), the following examples are intended to help you compare the cost of
investing in the Funds with the cost of investing in other mutual funds. The
examples assume that you invest $10,000 in each Fund for the time periods
indicated and that each Fund bears the midpoint of the range of expenses
expected to be borne by the Fund in connection with its investments in
Underlying Funds
27
<PAGE>
(discussed above). The examples also assume that your investment has a 5% return
each year, you reinvested all dividends and distributions, each Fund's operating
expenses remain the same, and includes one year of reimbursed expenses for
Farmers Income with Growth Portfolio in each period. The examples reflect the
impact of the maximum applicable sales charges (although, as discussed below, no
sales charges will be imposed on shares issued in the Reorganization). Expense
examples for Class B shares assume conversion to Class A shares six years after
purchase. Although your actual costs may be higher or lower, based on these
assumptions, your costs would be as follows: Expenses assuming you sold your
shares at the end of each period:
<TABLE>
<CAPTION>
FUND 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Farmers Income with Growth
Portfolio ............................ $690 $1,312 $1,958 $3,682
(Class A)
Pathway Moderate Portfolio ........... $687 $925 $1,182 $1,914
(Class A)
Farmers Income with Growth
Portfolio ............................ $649 $1,352 $2,073 $3,695
(Class B)
Pathway Moderate Portfolio ........... $595 $903 $1,237 $1,869
(Class B)
</TABLE>
Expenses assuming you held your shares at the end of each period:
<TABLE>
<CAPTION>
FUND 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Farmers Income with Growth Portfolio ... $690 $1,312 $1,958 $3,682
(Class A)
Pathway Moderate Portfolio ............. $687 $925 $1,182 $1,914
(Class A)
Farmers Income with Growth Portfolio ... $249 $1,052 $1,873 $3,695
(Class B)
Pathway Moderate Portfolio ............. $195 $603 $1,037 $1,869
(Class B)
</TABLE>
28
<PAGE>
Farmers Balanced Portfolio - Pathway Moderate Portfolio
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
Maximum Sales Maximum
Charge (Load) Contingent Deferred
Imposed on Sales Charge (Load)
Purchases (as a (as a % of
FUND % of offering price) redemption proceeds)
------- -------------------- --------------------
<S> <C> <C>
Farmers Balanced Portfolio (Class A) ............ 5.75% None*
Pathway Moderate Portfolio (Class A) ............ 5.75% None*
Farmers Balanced Portfolio (Class B) ............ None 4.00%**
Pathway Moderate Portfolio (Class B) ............ None 4.00%**
</TABLE>
------------
* Class A shares purchased under the Large Order NAV Purchase Privilege have
a 1% contingent deferred sales charge if sold during the first year after
purchase and 0.50% if sold during the second year after purchase.
** Contingent deferred sales charges on Class B shares sold during the first
six years of ownership are 4% in the first year, 3% in the second and third
year, 2% in the fourth and fifth year, and 1% in the sixth year.
Annual Fund Operating Expenses (Unaudited)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Distri-
bution Total Net
and/or Annual Annual
Manage- Service Fund Expense Fund
ment (12b-1) Other Operating Reimburse- Operating
FUND Fees Fees Expenses Expenses ment Expenses
------ --------- ------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Farmers Balanced Portfolio 0.75% 0.25% 0.95%* 1.95% 0.95%** 1.00%
(Class A)
Pathway Moderate Portfolio None 0.25% None 0.25% N/A N/A
(Class A)
Farmers Balanced Portfolio 0.75% 1.00% 0.95%* 2.70% 0.95%** 1.75%
(Class B)
Pathway Moderate Portfolio None 1.00% None 1.00% N/A N/A
(Class B)
</TABLE>
------------
* Includes compensation and expenses of the Board of Trustees.
** By contract, compensation and expenses of the Board of Trustees are
reimbursed by the Investment Manager until the Fund's assets reach
$50,000,000.
The range for the average weighted expense ratio borne by Farmers Balanced
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.59% to 0.88%. The range has been restated to reflect new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
29
<PAGE>
provided as a range since the average assets of Farmers Balanced Portfolio
invested in each of the Underlying Funds will fluctuate.
The range for the average weighted expense ratio borne by Pathway Moderate
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.73% to 1.11%. The range has been restated to reflect new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
provided as a range since the average assets of Pathway Moderate Portfolio
invested in each of the Underlying Funds will fluctuate.
Examples
Based on the costs above (including both Fund and Underlying Fund fees and
expenses), the following examples are intended to help you compare the cost of
investing in the Funds with the cost of investing in other mutual funds. The
examples assume that you invest $10,000 in each Fund for the time periods
indicated and that each Fund bears the midpoint of the range of expenses
expected to be borne by the Fund in connection with its investments in
Underlying Funds (discussed above). The examples also assume that your
investment has a 5% return each year, you reinvested all dividends and
distributions, each Fund's operating expenses remain the same, and includes one
year of reimbursed expenses for Farmers Balanced Portfolio in each period. The
examples reflect the impact of the maximum applicable sales charges (although,
as discussed below, no sales charges will be imposed on shares issued in the
Reorganization). Expense examples for Class B shares assume conversion to Class
A shares six years after purchase. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be as follows:
Expenses assuming you sold your shares at the end of each period:
FUND 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
Farmers Balanced Portfolio ............ $742 $1,277 $1,838 $3,358
(Class A)
Pathway Moderate Portfolio ............ $687 $925 $1,182 $1,914
(Class A)
Farmers Balanced Portfolio ............ $652 $1,268 $1,907 $3,333
(Class B)
Pathway Moderate Portfolio ............ $595 $903 $1,237 $1,869
(Class B)
30
<PAGE>
Expenses assuming you held your shares at the end of each period:
FUND 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
Farmers Balanced Portfolio ............ $742 $1,277 $1,838 $3,358
(Class A)
Pathway Moderate Portfolio ............ $687 $925 $1,182 $1,914
(Class A)
Farmers Balanced Portfolio ............ $252 $968 $1,707 $3,333
(Class B)
Pathway Moderate Portfolio ............ $195 $603 $1,037 $1,869
(Class B)
Farmers Growth with Income Portfolio - Pathway Moderate Portfolio
Shareholder Transaction Expenses
Maximum Sales Maximum
Charge (Load) Contingent Deferred
Imposed on Sales Charge (Load)
Purchases (as a (as a % of
FUND % of offering price) redemption proceeds)
------- -------------------- --------------------
Farmers Growth with Income
Portfolio (Class A) ............... 5.75% None*
Pathway Moderate
Portfolio (Class A) ............... 5.75% None*
Farmers Growth with Income
Portfolio (Class B) ............... None 4.00%**
Pathway Moderate
Portfolio (Class B) ............... None 4.00%**
------------
* Class A shares purchased under the Large Order NAV Purchase Privilege have
a 1% contingent deferred sales charge if sold during the first year after
purchase and 0.50% if sold during the second year after purchase.
** Contingent deferred sales charges on Class B shares sold during the first
six years of ownership are 4% in the first year, 3% in the second and third
year, 2% in the fourth and fifth year, and 1% in the sixth year.
31
<PAGE>
Annual Fund Operating Expenses (Unaudited)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Distri-
bution Total Net
and/or Annual Annual
Manage- Service Fund Expense Fund
ment (12b-1) Other Operating Reimburse- Operating
FUND Fees Fees Expenses Expenses ment Expenses
------ --------- ------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Farmers Growth with
Income Portfolio ................. 0.75% 0.25% 1.18%* 2.18% 1.18%** 1.00%
(Class A)
Pathway Moderate Portfolio ....... None 0.25% None 0.25% N/A N/A
(Class A)
Farmers Growth with
Income Portfolio ................. 0.75% 1.00% 1.18%* 2.93% 1.18%** 1.75%
(Class B)
Pathway Moderate Portfolio None 1.00% None 1.00% N/A N/A
(Class B)
</TABLE>
------------
* Includes compensation and expenses of the Board of Trustees.
** By contract, compensation and expenses of the Board of Trustees are
reimbursed by the Investment Manager until the Fund's assets reach
$50,000,000.
The range for the average weighted expense ratio borne by Farmers Growth
with Income Portfolio in connection with its investments in the Underlying Funds
is expected to be 0.66% to 1.00%. The range has been restated to reflect new
fixed rate administrative fees for certain affiliated Underlying Funds. This
information is provided as a range since the average assets of Farmers Growth
with Income Portfolio invested in each of the Underlying Funds will fluctuate.
The range for the average weighted expense ratio borne by Pathway Moderate
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.73% to 1.11%. The range has been restated to reflect new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
provided as a range since the average assets of Pathway Moderate Portfolio
invested in each of the Underlying Funds will fluctuate.
Examples
Based on the costs above (including Fund and Underlying Fund fees and
expenses), the following examples are intended to help you compare the cost of
investing in the Funds with the cost of investing in other mutual funds. The
examples assume that you invest $10,000 in each Fund for the time periods
indicated and that each Fund bears the midpoint of the range of expenses
expected to be borne by the Fund in connection with its investments in
Underlying Funds
32
<PAGE>
(discussed above). The examples also assume that your investment has a 5% return
each year, you reinvested all dividends and distributions, each Fund's operating
expenses remain the same, and includes one year of reimbursed expenses for
Farmers Growth with Income Portfolio in each period. The examples reflect the
impact of the maximum applicable sales charges (although, as discussed below, no
sales charges will be imposed on shares issued in the Reorganization). Expense
examples for Class B shares assume conversion to Class A shares six years after
purchase. Although your actual costs may be higher or lower, based on these
assumptions, your costs would be as follows:
Expenses assuming you sold your shares at the end of each period:
FUND 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
Farmers Growth with Income Portfolio ... $750 $1,347 $1,968 $3,632
(Class A)
Pathway Moderate Portfolio ............. $687 $925 $1,182 $1,914
(Class A)
Farmers Growth with Income Portfolio ... $661 $1,341 $2,040 $3,612
(Class B)
Pathway Moderate Portfolio ............. $595 $903 $1,237 $1,869
(Class B)
Expenses assuming you held your shares at the end of each period:
FUND 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
Farmers Growth with Income Portfolio ... $750 $1,347 $1,968 $3,632
(Class A)
Pathway Moderate Portfolio ............. $687 $925 $1,182 $1,914
(Class A)
Farmers Growth with Income Portfolio ... $261 $1,041 $1,840 $3,612
(Class B)
Pathway Moderate Portfolio ............. $195 $603 $1,037 $1,869
(Class B)
33
<PAGE>
Farmers Growth Portfolio - Pathway Growth Portfolio
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
Maximum Sales Maximum
Charge (Load) Contingent Deferred
Imposed on Sales Charge (Load)
Purchases (as a (as a % of
FUND % of offering price) redemption proceeds)
------- -------------------- --------------------
<S> <C> <C>
Farmers Growth Portfolio (Class A) 5.75% None*
Pathway Growth Portfolio (Class A) 5.75% None*
Farmers Growth Portfolio (Class B) None 4.00%**
Pathway Growth Portfolio (Class B) None 4.00%**
</TABLE>
------------
* Class A shares purchased under the Large Order NAV Purchase Privilege have
a 1% contingent deferred sales charge if sold during the first year after
purchase and 0.50% if sold during the second year after purchase.
** Contingent deferred sales charges on Class B shares sold during the first
six years of ownership are 4% in the first year, 3% in the second and third
year, 2% in the fourth and fifth year, and 1% in the sixth year.
Annual Fund Operating Expenses (Unaudited)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Distri-
bution Total Net
and/or Annual Annual
Manage- Service Fund Expense Fund
ment (12b-1) Other Operating Reimburse- Operating
FUND Fees Fees Expenses Expenses ment Expenses
------ --------- ------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Farmers Growth Portfolio ......... 0.75% 0.25% 0.66%* 1.66% 0.66%** 1.00%
(Class A)
Pathway Growth Portfolio ......... None 0.25% None 0.25% N/A N/A
(Class A)
Farmers Growth Portfolio ......... 0.75% 1.00% 0.66%* 2.41% 0.66%** 1.75%
(Class B)
Pathway Growth Portfolio ......... None 1.00% None 1.00% N/A N/A
(Class B)
------------
* Includes compensation and expenses of the Board of Trustees.
** By contract, compensation and expenses of the Board of Trustees are
reimbursed by the Investment Manager until the Fund's assets reach
$50,000,000.
The range for the average weighted expense ratio borne by Farmers Growth
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.75% to 1.21%. The range has been restated to reflect new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
34
<PAGE>
provided as a range since the average assets of Farmers Growth Portfolio
invested in each of the Underlying Funds will fluctuate. The range for the
average weighted expense ratio borne by Pathway Growth Portfolio in connection
with its investments in the Underlying Funds is expected to be 0.47% to 1.22%.
The range has been restated to reflect new fixed rate administrative fees
for certain affiliated Underlying Funds. This information is provided as a range
since the average assets of Pathway Growth Portfolio invested in each of the
Underlying Funds will fluctuate.
Examples
Based on the costs above (including both Fund and Underlying Fund fees and
expenses), the following examples are intended to help you compare the cost of
investing in the Funds with the cost of investing in other mutual funds. The
examples assume that you invest $10,000 in each Fund for the time periods
indicated and that each Fund bears the midpoint of the range of expenses
expected to be borne by the Fund in connection with its investments in
Underlying Funds (discussed above). The examples also assume that your
investment has a 5% return each year, you reinvested all dividends and
distributions, each Fund's operating expenses remain the same, and includes one
year of reimbursed expenses for Farmers Growth Portfolio in each period. The
examples reflect the impact of the maximum applicable sales charges (although,
as discussed below, no sales charges will be imposed on shares issued in the
Reorganization). Expense examples for Class B shares assume conversion to Class
A shares six years after purchase. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be as follows:
Expenses assuming you sold your shares at the end of each period:
FUND 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
Farmers Growth Portfolio .............. $764 $1,289 $1,839 $3,332
(Class A)
Pathway Growth Portfolio .............. $681 $905 $1,146 $1,838
(Class A)
Farmers Growth Portfolio .............. $676 $1,281 $1,908 $3,307
(Class B)
Pathway Growth Portfolio .............. $588 $882 $1,201 $1,793
(Class B)
35
<PAGE>
Expenses assuming you held your shares at the end of each period:
FUND 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
Farmers Growth Portfolio .............. $764 $1,289 $1,839 $3,332
(Class A)
Pathway Growth Portfolio .............. $681 $905 $1,146 $1,838
(Class A)
Farmers Growth Portfolio .............. $276 $981 $1,708 $3,307
(Class B)
Pathway Growth Portfolio .............. $188 $582 $1,001 $1,793
(Class B)
Distribution and Services Fees
Pursuant to a shareholder services and distribution agreement with the
Acquiring Trust, Kemper Distributors, Inc. ("KDI"), 222 South Riverside Plaza,
Chicago, Illinois 60606, an affiliate of the Investment Manager, serves as
principal underwriter and distributor of the Class A and Class B shares of the
Pathway Funds and acts as agent of each Pathway Fund in the continuous offering
of its shares. KDI also provides execution services for the Pathway Funds in
connection with the purchase of Underlying Fund shares and receives compensation
of up to 1% of the purchase price of such shares from the Underlying Funds'
underwriters in connection therewith.
Each Pathway Fund has adopted a substantially similar shareholder services
and distribution plan on behalf of Class A and Class B shares in accordance with
Rule 12b-1 (the "12b-1 Plan") under the Investment Company Act of 1940, as
amended (the "1940 Act"). The 12b-1 Plan provides for fees payable as expenses
of the Class A and Class B shares that are used by KDI to pay for services for
Class A shares and services and distribution for Class B shares. Each fee is
payable monthly to KDI at an annual rate of 0.25% and 1.00% of average daily net
assets attributable to the Class A and Class B shares of each Pathway Fund,
respectively. KDI may engage other firms to provide information and shareholder
services for shareholders of each Pathway Fund. KDI may pay each such firm a
service fee at an annual rate of up to 0.25% of net assets of the Class A and
Class B shares maintained and serviced by the firm.
Purchases, Exchanges and Redemptions
The procedures for purchases, exchanges and redemptions of Class A and
Class B shares of the Pathway Funds are identical to those of the Farmers Funds.
Each Pathway Fund has a maximum initial sales charge of 5.75% on Class A shares.
Class A shares of Farmers Income Portfolio and Farmers Income with Growth
Portfolio have maximum initial sales charges of 5.00% and 5.25%,
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respectively, while Class A shares of the other Farmers Funds have a maximum
initial sales charge of 5.75%. Shareholders who purchase $1 million or more of
Class A shares pay no initial sales charge but may have to pay a contingent
deferred sales charge (a "CDSC") of up to 1.00% if the shares are sold within 2
years of the date on which they were purchased. Class B shares are sold without
a front-end sales charge, but may be subject to a CDSC upon redemption,
depending on the length of time the shares are held. The CDSC begins at 4.00%
for shares sold in the first year, declines to 1.00% in the sixth year and is
eliminated after the sixth year. After six years, Class B shares automatically
convert to Class A shares.
Class A and Class B shares of the Pathway Funds received in the
Reorganizations will be issued at net asset value, without a sales charge, and
no CDSC will be imposed on any shares of the Farmers Funds exchanged for
corresponding shares of the Pathway Funds in the Reorganizations. However,
following the Reorganizations, any CDSC that applies to shares of the Farmers
Funds will continue to apply to shares of the corresponding Pathway Funds
received in the Reorganizations, using the original purchase date for such
shares to calculate the holding period, rather than the date such shares are
received in the Reorganizations.
Services available to Class A and Class B shareholders of Pathway Funds are
identical to those available to shareholders of the Farmers Funds and include
the purchase and redemption of shares through an automated telephone system and
over the Internet, telephone redemptions and reinvestment privileges. In
addition, as noted above, unlike shareholders of the Farmers Funds, shareholders
of Pathway Funds may exchange their shares into most other Scudder Funds that
offer Class A and Class B shares. Please see the Pathway Funds' prospectus for
additional information.
Dividends and Other Distributions
Pathway Conservative Portfolio, Pathway Moderate Portfolio, Farmers Income
Portfolio, Farmers Income with Growth Portfolio and Farmers Balanced Portfolio
intend to declare dividends from their net investment income and distribute them
quarterly. Farmers Growth with Income Portfolio and Farmers Growth Portfolio
intend to declare dividends from their net investment income and distribute them
in November or December of each year. Pathway Growth Portfolio intends to
declare dividends from its net investment income and distribute them in December
of each year. Each Fund intends to distribute net realized capital gains after
utilization of capital loss carryforwards, if any, in November or December of
each year. An additional distribution may be made if necessary. Dividends and
distributions of each Fund will be invested in additional
37
<PAGE>
shares of the same class of that Fund at net asset value and credited to the
shareholder's account on the payment date or, at the shareholder's election,
paid in cash. For retirement plans, reinvestment is the only option.
If the Plan is approved by a Farmers Fund's shareholders, that Farmers
Funds will pay its shareholders a distribution of all undistributed net
investment income and undistributed realized net capital gains immediately prior
to the Closing.
Tax Consequences
As a condition to each Reorganization, each Pathway Fund and Farmers Fund will
have received an opinion of Willkie Farr & Gallagher in connection with the
Reorganization, to the effect that, based upon certain facts, assumptions and
representations, each Reorganization will constitute a tax-free reorganization
within the meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). If a Reorganization constitutes a tax-free reorganization,
no gain or loss will be recognized by the Farmers Funds or their shareholders as
a direct result of the Reorganization. See "The Proposed Transactions - Federal
Income Tax Consequences" below.
II. PRINCIPAL RISK FACTORS
Farmers Income Portfolio - Pathway Conservative Portfolio
Because of their similar investment objectives, policies and strategies,
the types of principal risks presented by Pathway Conservative Portfolio are
similar to those presented by Farmers Income Portfolio. Some differences do
exist. The main risks applicable to each Fund stem from investments in the
Underlying Funds and include, among others, market risk, credit risk, interest
rate risk and risk associated with exposure to foreign markets. Unlike Farmers
Income Portfolio, Pathway Conservative Portfolio has equity fund exposure in its
target allocation, including exposure to international equity funds, and
therefore Pathway Conservative Portfolio has a greater level of equity market
risk and risk associated with exposure to foreign markets. The Funds are not
insured or guaranteed by the FDIC or any other government agency. Share prices
will go up and down, so be aware that you could lose money.
Farmers Income with Growth Portfolio - Pathway Moderate Portfolio
Because of their similar investment objectives, policies and strategies,
the types of principal risks presented by Pathway Moderate Portfolio are similar
to those presented by Farmers Income with Growth Portfolio. Some differences do
exist. The main risks applicable to each Fund stem from investments in the
Underlying Funds and include, among others, market risk, credit risk, interest
rate
38
<PAGE>
risk and risk associated with exposure to foreign markets. Pathway Moderate
Portfolio has substantially greater equity fund exposure than Farmers Income
with Growth Portfolio in its target allocation, including exposure to
international equity funds, and therefore Pathway Moderate Portfolio has a
greater level of equity market risk and risk associated with exposure to foreign
markets. The Funds are not insured or guaranteed by the FDIC or any other
government agency. Share prices will go up and down, so be aware that you could
lose money.
Farmers Balanced Portfolio - Pathway Moderate Portfolio
Because of their similar investment objectives, policies and strategies,
the types of principal risks presented by Pathway Moderate Portfolio are similar
to those presented by Farmers Balanced Portfolio. The main risks applicable to
each Fund stem from investments in the Underlying Funds and include, among
others, market risk, credit risk, interest rate risk and risk associated with
exposure to foreign markets. The Funds are not insured or guaranteed by the FDIC
or any other government agency. Share prices will go up and down, so be aware
that you could lose money.
Farmers Growth with Income Portfolio - Pathway Moderate Portfolio
Because of their similar investment objectives, policies and strategies,
the types of principal risks presented by Pathway Moderate Portfolio are similar
to those presented by Farmers Growth with Income Portfolio. The main risks
applicable to each Fund stem from investments in the Underlying Funds and
include, among others, market risk, credit risk, interest rate risk and risk
associated with exposure to foreign markets. The Funds are not insured or
guaranteed by the FDIC or any other government agency. Share prices will go up
and down, so be aware that you could lose money.
Farmers Growth Portfolio - Pathway Growth Portfolio
Because of their similar investment objectives, policies and strategies,
the types of principal risks presented by Pathway Growth Portfolio are similar
to those presented by Farmers Growth Portfolio. Some differences do exist. The
main risks applicable to each Fund stem from investments in the Underlying Funds
and include, among others, market risk and risk associated with exposure to
foreign markets. Unlike Farmers Growth Portfolio, Pathway Growth Portfolio has
bond fund exposure in its target allocation, and therefore Pathway Growth
Portfolio may be subject to a higher level of interest rate risk. The Funds are
not insured or guaranteed by the FDIC or any other government agency. Share
prices will go up and down, so be aware that you could lose money.
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<PAGE>
* * * * * * * * * * * * *
For a further discussion of the investment techniques and risk factors
applicable to each Fund, see "Investment Objectives, Policies and Restrictions
of the Funds" above, and the prospectuses and statements of additional
information for the Funds.
III. THE PROPOSED TRANSACTIONS
Description of the Plan
As stated above, the Plan provides for the transfer of all or substantially
all of the assets of each Farmers Fund to its corresponding Pathway Fund in
exchange for that number of full and fractional Class A and Class B shares
having an aggregate net asset value equal to the aggregate net asset value of
the shares of the corresponding classes of the Farmers Fund as of the close of
business on the Valuation Date. Each Pathway Fund will assume all of the
liabilities of its corresponding Farmers Fund. Each Farmers Fund will distribute
the Class A and Class B shares received in the exchange to the shareholders of
that Farmers Fund in complete liquidation of the Farmers Fund. Each Farmers Fund
will then be terminated.
Upon completion of the Reorganization, each shareholder of a Farmers Fund
will own that number of full and fractional Class A and Class B shares having an
aggregate net asset value equal to the aggregate net asset value of such
shareholder's shares of the corresponding class held in that Farmers Fund as of
the close of business on the Valuation Date. Such shares will be held in an
account with the Pathway Fund identical in all material respects to the account
currently maintained by the Farmers Fund for such shareholder. In the interest
of economy and convenience, Class A and Class B shares issued to Farmers Funds'
shareholders in the Reorganizations will be in uncertificated form. If Class A
or Class B shares of the Farmers Funds are represented by certificates prior to
the Closing, such certificates should be returned to the Farmers Funds'
shareholder servicing agent. Any Class A and Class B shares of the Pathway Funds
distributed in the Reorganizations to shareholders in exchange for certificated
shares of the Farmers Funds may not be transferred, exchanged or redeemed
without delivery of such certificates.
Until the Closing, shareholders of the Farmers Funds will continue to be
able to redeem their shares at the net asset value next determined after receipt
by Farmers Funds' transfer agent of a redemption request in proper form.
Redemption and purchase requests received on or after the Valuation Date by the
transfer agent will be treated as requests received for the redemption or
purchase
40
<PAGE>
of Class A or Class B shares of the applicable Pathway Fund received by the
shareholder in connection with each Reorganization.
The obligations of each Trust on behalf of the respective Funds under the
Plan are subject to various conditions, as stated therein. Among other things,
the Plan requires that all filings be made with, and all authority be received
from, the SEC and state securities commissions as may be necessary in the
opinion of counsel to permit the parties to carry out the transactions
contemplated by the Plan. Each Fund is in the process of making the necessary
filings. To provide for unforeseen events, the Plan may be terminated: (i) by
the mutual agreement of the parties; (ii) by either party if the Closing has not
occurred by June 1, 2001, unless such date is extended by mutual agreement of
the parties; or (iii) by either party if the other party has materially breached
its obligations under the Plan or made a material misrepresentation in the Plan
or in connection with the Reorganizations. The Plan may also be amended by
mutual agreement in writing. However, no amendment may be made following the
Meeting if such amendment would have the effect of changing the provisions for
determining the number of shares of each Pathway Fund to be issued to its
corresponding Farmers Fund in the Plan to the detriment of the Farmers Funds'
shareholders without their approval. For a complete description of the terms and
conditions of each Reorganization, please refer to the Plan at Exhibit A.
Board Approval of the Proposed Transactions
ZSI presented the Reorganizations to the Trustees based on its
determination that the investment portfolios offered through the Acquired Trust
as presently configured had been unable to achieve an efficient operating size,
and in ZSI's judgment were unlikely to do so as currently structured. As a
result, ZSI proposed, and the Trustees considered, the merger of each portfolio
of the Acquired Trust with and into a Pathway Fund with similar investment
objectives and policies. The Independent Trustees of the Farmers Funds reviewed
the potential implications of these proposals for each Farmers Fund. They were
assisted in this review by their independent legal counsel and by independent
consultants with special expertise in financial and mutual fund industry
matters.
Following the conclusion of this process, the Board of each Farmers Fund,
including the Independent Trustees of each Farmers Fund, approved the terms of
the Reorganizations and certain related proposals. The Independent Trustees have
also unanimously agreed to recommend that the Reorganizations be approved by
each Farmers Fund's shareholders.
In determining to recommend that the shareholders of each Farmers Fund
approve the Reorganizations, the Board considered, among other factors: (a) the
fees and expense ratios of the Funds, including comparisons between the expenses
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<PAGE>
of each Farmers Fund and the estimated operating expenses of each corresponding
Pathway Fund, and between the estimated operating expenses of each Pathway Fund
and other mutual funds with similar investment objectives; (b) the terms and
conditions of each Reorganization and whether a Reorganization would result in
the dilution of shareholder interests; (c) the compatibility of each Farmers
Fund's and Pathway Fund's investment objectives, policies, restrictions and
portfolios; (d) the service features available to shareholders of each Farmers
Fund and Pathway Fund; (e) prospects for each participating Pathway Fund to
attract additional assets; (f) the tax consequences of each Reorganization on
the relevant Farmers Fund, Pathway Fund and their respective shareholders; and
(g) the investment performance of each Farmers Fund and Pathway Fund.
The Trustees also considered the impact of each Reorganization on the total
expenses to be borne by shareholders of each Farmers Fund. As noted above under
"Comparison of Expenses," the pro forma expense ratio for each combined Fund
following the Reorganization is substantially lower than the current expense
ratio for the relevant Farmers Fund. The Board also considered that the
Reorganizations would permit the shareholders of each Farmers Fund to pursue
similar investment goals in a larger fund. Finally, the Board considered the
fact that ZSI would pay all costs associated with the proposed Reorganizations.
Based on all of the foregoing, the Board concluded that each Farmers Fund's
participation in the Reorganizations would be in the best interests of the
Farmers Fund and would not dilute the interests of the Farmers Fund's
shareholders. The Board of Trustees, including the Independent Trustees,
unanimously recommends that shareholders of the Farmers Funds approve the
Reorganizations.
Description of the Securities to Be Issued
The Pathway Funds are series of the Acquiring Trust, a Massachusetts
business trust established under a Declaration of Trust dated July 1, 1994, as
amended. The Acquiring Trust's authorized capital consists of an unlimited
number of shares of beneficial interest, par value $0.01 per share. The Trustees
of the Acquiring Trust are authorized to divide the Acquiring Trust's shares
into separate series. The Pathway Funds are the only three active series of the
Acquiring Trust that the Board has created to date. The Trustees of the
Acquiring Trust are also authorized to further divide the shares of the series
of the Acquiring Trust into classes. The shares of the Pathway Funds are
currently divided into five classes, Class S, Class AARP, Class A, Class B and
Class C. Although shareholders of different classes of a series have an interest
in the same portfolio of assets, shareholders of different classes bear
different expense levels because
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<PAGE>
distribution costs and certain other expenses approved by the Trustees of the
Pathway Funds are borne directly by the class incurring such expenses.
Each share of each class of a Pathway Fund represents an interest in the
Pathway Fund that is equal to and proportionate with each other share of that
class of the Pathway Fund. Pathway Fund shareholders are entitled to one vote
per share held on matters on which they are entitled to vote. In the areas of
shareholder voting and the powers and conduct of the Trustees, there are no
material differences between the rights of shareholders of the Farmers Funds and
the rights of shareholders of the Pathway Funds.
Federal Income Tax Consequences
Each Reorganization is conditioned upon the receipt by each Fund of an
opinion from Willkie Farr & Gallagher substantially to the effect that, based
upon certain facts, assumptions and representations of the parties, for federal
income tax purposes: (i) the transfer to each Pathway Fund of all or
substantially all of the assets of its corresponding Farmers Fund in exchange
solely for Class A and Class B shares of the Pathway Fund and the assumption by
the Pathway Fund of all of the liabilities of the Farmers Fund, followed by the
distribution of such shares to the Farmers Fund's shareholders in exchange for
their shares of Farmers Fund in complete liquidation of the Farmers Fund, will
constitute a "reorganization" within the meaning of Section 368(a)(1) of the
Code, and the Pathway Fund and Farmers Fund will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code; (ii) no gain
or loss will be recognized by the Farmers Fund upon the transfer of all or
substantially all of its assets to its corresponding Pathway Fund in exchange
solely for Class A and Class B shares and the assumption by the Pathway Fund of
all of the liabilities of the Farmers Fund or upon the distribution of the Class
A and Class B shares to shareholders of the Farmers Fund in exchange for their
shares of the Farmers Fund; (iii) the basis of the assets of the Farmers Fund in
the hands of the corresponding Pathway Fund will be the same as the basis of
such assets of the Farmers Fund immediately prior to the transfer; (iv) the
holding period of the assets of the Farmers Fund in the hands of the Pathway
Fund will include the period during which such assets were held by the Farmers
Fund; (v) no gain or loss will be recognized by the Pathway Fund upon the
receipt of the assets of its corresponding Farmers Fund in exchange for Class A
and Class B shares and the assumption by the Pathway Fund of all of the
liabilities of the Farmers Fund; (vi) no gain or loss will be recognized by the
shareholders of the Farmers Fund upon the receipt of the Class A and Class B
shares solely in exchange for their shares of the Farmers Fund as part of the
transaction; (vii) the basis of the Class A and Class B shares received by each
shareholder of the Farmers Fund will be the same as the basis of the shares of
the Farmers Fund exchanged therefor; and (viii) the holding period of Class A
and
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Class B shares received by each shareholder of the Farmers Fund will include the
holding period during which the shares of the Farmers Fund exchanged therefor
were held, provided that at the time of the exchange the shares of the Farmers
Fund were held as capital assets in the hands of such shareholder of Farmers
Fund.
After the Closing, each Pathway Fund may dispose of certain securities
received by it from a Farmers Fund in connection with the Reorganizations, which
may result in transaction costs and capital gains.
While the Farmers Funds are not aware of any adverse state or local tax
consequences of the proposed Reorganizations, they have not requested any ruling
or opinion with respect to such consequences and shareholders may wish to
consult their own tax adviser with respect to such matters.
Expenses of the Transaction
ZSI has agreed to pay all expenses incurred in connection with the
Reorganizations. The Independent Trustees of the Farmers Funds are not entitled
to benefits under any pension or retirement plan. A one-time benefit will be
provided to each Independent Trustee of the Farmers Funds who will not serve on
the board of the Pathway Funds. Inasmuch as ZSI will also benefit from the
administrative efficiencies of merging the Farmers Funds with and into the
Pathway Funds, ZSI has agreed to pay the entire cost of this benefit, which is
expected to be an amount equal to two times each non-continuing Independent
Trustee's annual compensation from the Farmers Funds, without giving effect to
any fee waiver or deferral arrangements.
Legal Matters
Certain legal matters concerning the federal income tax consequences of the
Reorganizations will be passed on by Willkie Farr & Gallagher, 787 Seventh
Avenue, New York, New York 10019. Certain legal matters concerning the issuance
of shares of the Pathway Funds will be passed on by Dechert, Ten Post Office
Square-South, Boston, Massachusetts 02109.
Capitalization
The following table shows on an unaudited basis the capitalization of
Pathway Conservative Portfolio and Farmers Income Portfolio as of September 30,
2000 and on a pro forma basis, as of that date, giving effect to the
Reorganization:
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Pathway Farmers
Conservative Income Pro Forma Pro Forma
Portfolio Portfolio Adjustments (Combined)(1)
------------ --------- ----------- -------------
<S> <C> <C> <C> <C>
Net Asset Value
S Class ............................. $ 28,443,661 $ 28,443,661
AARP Shares ......................... $ 75,448,906 $ 75,448,906
Class A Shares ...................... $ 287,115 $287,115
Class B Shares ...................... $ 70,102 $70,102
-------------
Total Net Assets .................... $ 104,249,784
=============
Shares Outstanding
S Class ............................. 2,336,452 2,336,452
AARP Shares ......................... 6,196,137 6,196,137
Class A Shares ...................... 25,332 (1,740) 23,592
Class B Shares ...................... 6,184 (424) 5,760
Net Asset Value per Share
S Class ............................. $ 12.17 $ 12.17
AARP Shares ......................... $ 12.18 $ 12.18
Class A Shares ...................... $ 11.33 $ 12.17
Class B Shares ...................... $ 11.34 $ 12.17
</TABLE>
------------
(1) Assumes the Reorganization had been consummated on September 30, 2000, and
is for informational purposes only. No assurance can be given as to how
many shares of Pathway Conservative Portfolio will be received by the
shareholders of Farmers Income Portfolio on the date the Reorganization
takes place, and the foregoing should not be relied upon to reflect the
number of shares of Pathway Conservative Portfolio that actually will be
received on or after such date.
The following table shows on an unaudited basis the capitalization of
Pathway Moderate Portfolio, Farmers Income with Growth Portfolio, Farmers
Balanced Portfolio and Farmers Growth with Income Portfolio as of September 30,
2000 and on a pro forma basis, as of that date, giving effect to the
Reorganizations:
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<PAGE>
<TABLE>
<CAPTION>
Farmers Farmers
Income Growth Pro
Pathway with Farmers with Forma
Moderate Growth Balanced Income Adjust- Pro Forma
Portfolio Portfolio Portfolio Portfolio ments (Combined)(1)
---------- --------- --------- --------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value
S Class ....................... $251,643,694 $251,643,694
Class A Shares ................ $ 608,243 $ 867,951 $ 873,525 $ 2,349,719
Class B Shares ................ $ 384,699 $1,148,062 $ 1,110,665 $ 2,643,426
------------
Total Net Assets .............. $256,636,839
============
Shares Outstanding
S Class ....................... 18,211,066 18,211,066
Class A Shares ................ 46,786 66,615 67,369 (10,747) 170,023
Class B Shares ................ 29,642 88,205 85,935 (12,507) 191,275
Net Asset Value per Share
S Class ....................... $ 13.82 $ 13.82
Class A Shares ................ $ 13.00 $ 13.03 $ 12.97 $ 13.82
Class B Shares ................ $ 12.98 $ 13.02 $ 12.92 $ 13.82
</TABLE>
------------
(1) Assumes the Reorganizations had been consummated on September 30, 2000, and
is for informational purposes only. No assurance can be given as to how
many shares of Pathway Moderate Portfolio will be received by the
shareholders of Farmers Income with Growth Portfolio, Farmers Balanced
Portfolio and Farmers Growth with Income Portfolio on the date the
Reorganization takes place, and the foregoing should not be relied upon to
reflect the number of shares of Pathway Moderate Portfolio that actually
will be received on or after such date.
The following table shows on an unaudited basis the capitalization of
Pathway Growth Portfolio and Farmers Growth Portfolio as of September 30, 2000
and on a pro forma basis, as of that date, giving effect to the Reorganization:
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<PAGE>
<TABLE>
<CAPTION>
Pathway Farmers
Growth Growth Pro Forma Pro Forma
Portfolio Portfolio Adjustments (Combined)(1)
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Net Asset Value
S Class ...................... $123,151,028 $ 123,151,028
AARP Shares .................. $133,314,183 $ 133,314,183
Class A Shares ............... $2,755,302 $ 2,755,302
Class B Shares ............... $1,698,677 $ 1,698,677
-------------
Total Net Assets ............. $ 260,919,190
=============
Shares Outstanding
S Class ...................... 8,047,782 8,047,782
AARP Shares .................. 8,711,832 8,711,832
Class A Shares ............... 204,709 (24,624) 180,085
Class B Shares ............... 126,759 (15,734) 111,025
Net Asset Value per Share
S Class ...................... $ 15.30 $ 15.30
AARP Shares .................. $ 15.30 $ 15.30
Class A Shares ............... $ 13.46 $ 15.30
Class B Shares ............... $ 13.40 $ 15.30
</TABLE>
------------
(1) Assumes the Reorganization had been consummated on September 30, 2000, and
is for informational purposes only. No assurance can be given as to how
many shares of Pathway Growth Portfolio will be received by the
shareholders of Farmers Growth Portfolio on the date the Reorganization
takes place, and the foregoing should not be relied upon to reflect the
number of shares of Pathway Growth Portfolio that actually will be received
on or after such date.
The Board of Trustees unanimously recommends that shareholders of each
Farmers Fund vote FOR the Proposal that relates to the Reorganization
of their Fund into a corresponding Pathway Fund.
ADDITIONAL INFORMATION
Information about the Funds
Additional information about the Trusts, the Funds and the Reorganizations
has been filed with the SEC and may be obtained without charge by writing to
Kemper Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606-5808, or
by calling 1-800-621-1048.
The Trusts are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith,
file reports, proxy material and other information about each of the Funds with
the SEC. Such reports, proxy material and other information filed by the
Acquiring Trust, and those filed by the Acquired Trust, can be inspected and
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<PAGE>
copied at the Public Reference Room maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following SEC Regional Offices:
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, NY 10048;
Southeast Regional Office, 1401 Brickell Avenue, Suite 200, Miami, FL 33131;
Midwest Regional Office, Citicorp Center, 500 W. Madison Street, Chicago, IL
60661-2511; Central Regional Office, 1801 California Street, Suite 4800, Denver,
CO 80202-2648; and Pacific Regional Office, 5670 Wilshire Boulevard, 11th Floor,
Los Angeles, CA 90036-3648. Copies of such material can also be obtained from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The SEC maintains an Internet World
Wide Web site (at http://www.sec.gov) which contains the prospectuses and
statements of additional information for the Funds, materials that are
incorporated by reference into the prospectuses and statements of additional
information, and other information about the Trusts and the Funds.
Interests of Certain Persons
The Investment Manager has a financial interest in the Reorganizations
because it manages all of the Underlying Funds in which the Pathway Funds
invest, but only certain of the Underlying Funds in which the Farmers Funds
invest. Accordingly, the Investment Manager may benefit from increased fees as a
result of the Reorganizations.
General
Proxy Solicitation. Proxy solicitation costs will be considered
Reorganization expenses and will be allocated accordingly. In addition to
solicitation by mail, certain officers and representatives of the Acquired
Trust, officers and employees of ZSI and certain financial services firms and
their representatives, who will receive no extra compensation for their
services, may solicit proxies by telephone, telegram or personally.
Any shareholder of a Farmers Fund giving a proxy has the power to revoke it
by mail (addressed to the Secretary at the principal executive office of the
Farmers Funds, c/o Zurich Scudder Investments, Inc., at the address for Farmers
Funds shown at the beginning of this Proxy Statement/Prospectus) or in person at
the Meeting, by executing a superseding proxy or by submitting a notice of
revocation to the applicable Farmers Fund. All properly executed proxies
received in time for the Meeting will be voted as specified in the proxy or, if
no specification is made, in favor of each Proposal.
The presence at any shareholders' meeting, in person or by proxy, of the holders
of one-third of the shares of a Farmers Fund entitled to be cast shall be
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<PAGE>
necessary and sufficient to constitute a quorum for the transaction of business
for that Farmers Fund. In the event that the necessary quorum to transact
business or the vote required to approve any Proposal is not obtained at the
Meeting, the persons named as proxies may propose one or more adjournments of
the Meeting in accordance with applicable law to permit further solicitation of
proxies with respect to that Proposal. Any such adjournment as to a matter will
require the affirmative vote of the holders of a majority of a Farmers Fund's
shares present in person or by proxy at the Meeting. The persons named as
proxies will vote in favor of any such adjournment those proxies which they are
entitled to vote in favor of that Proposal and will vote against any such
adjournment those proxies to be voted against that Proposal. For purposes of
determining the presence of a quorum for transacting business at the Meeting,
abstentions and broker "non-votes" will be treated as shares that are present
but which have not been voted. Broker non-votes are proxies received by Farmers
Funds from brokers or nominees when the broker or nominee has neither received
instructions from the beneficial owner or other persons entitled to vote nor has
discretionary power to vote on a particular matter. Accordingly, shareholders
are urged to forward their voting instructions promptly.
Each Farmers Fund will vote separately on the Proposal relating to its
reorganization into its corresponding Pathway Fund. Approval of a Proposal
requires the affirmative vote of the holders of a majority of the applicable
Farmers Fund's shares outstanding and entitled to vote thereon. Abstentions and
broker non-votes will have the effect of a "no" vote on the applicable Proposal.
Holders of record of the shares of each Farmers Fund at the close of
business on January 10, 2001 will be entitled to one vote per share on all
business of the Meeting. As of January 4, 2001 there were 30,422 Class A shares
and 3,343 Class B shares of Farmers Income Portfolio outstanding; there were
61,822 Class A shares and 41,478 Class B shares of Farmers Income with Growth
Portfolio outstanding; there were 91,744 Class A shares and 111,179 Class B
shares of Farmers Balanced Portfolio outstanding; there were 128,820 Class A
shares and 151,282 Class B shares of Farmers Growth with Income Portfolio
outstanding; and there were 279,500 Class A shares and 250,999 Class B shares of
Farmers Growth Portfolio outstanding.
As of November 30, 2000, the officers and Trustees of the Acquired Trust as
a group owned beneficially less than 1% of the outstanding shares of each class
of each Farmers Fund and the officers and Trustees of the Acquiring Trust as a
group owned beneficially less than 1% of the outstanding shares of each class of
each Pathway Fund. The Appendix hereto sets forth the beneficial owners of more
than 5% of each class of shares of each Farmers Fund and Pathway Fund. To the
best of each Trust's knowledge, as of November 30, 2000, no person owned
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beneficially more than 5% of any class of shares of any Pathway Fund or Farmers
Fund, except as stated on the Appendix.
Shareholder Communications Corporation ("SCC") has been engaged to assist
in the solicitation of proxies, at an estimated cost of $2,875, all of which
will be borne by ZSI. As the Meeting date approaches, certain shareholders of
Farmers Funds may receive a telephone call from a representative of SCC if their
votes have not yet been received. Authorization to permit SCC to execute proxies
may be obtained by telephonically transmitted instructions from shareholders of
Farmers Funds. Proxies that are obtained telephonically will be recorded in
accordance with the procedures described below. The Trustees believe that these
procedures are reasonably designed to ensure that both the identity of the
shareholder casting the vote and the voting instructions of the shareholder are
accurately determined.
In all cases where a telephonic proxy is solicited, the SCC representative
is required to ask for each shareholder's full name and address, or the last
four digits of the shareholder's social security or employer identification
number, or both, and to confirm that the shareholder has received the proxy
materials in the mail. If the shareholder is a corporation or other entity, the
SCC representative is required to ask for the person's title and confirmation
that the person is authorized to direct the voting of the shares. If the
information solicited agrees with the information provided to SCC, then the SCC
representative has the responsibility to explain the process, read the Proposal
on the proxy card(s), and ask for the shareholder's instructions on the
Proposal. Although the SCC representative is permitted to answer questions about
the process, he or she is not permitted to recommend to the shareholder how to
vote, other than to read any recommendation set forth in the Proxy
Statement/Prospectus. SCC will record the shareholder's instructions on the
card. Within 72 hours, the shareholder will be sent a letter or mailgram to
confirm his or her vote and asking the shareholder to call SCC immediately if
his or her instructions are not correctly reflected in the confirmation.
If a shareholder wishes to participate in the Meeting, but does not wish to
give a proxy by telephone, the shareholder may still submit the proxy card(s)
originally sent with the Proxy Statement/Prospectus or attend in person. Should
shareholders require additional information regarding the proxy or replacement
proxy card(s), they may contact SCC toll-free at 1-888-676-7706. Any proxy given
by a shareholder is revocable until voted at the Meeting.
Shareholder Proposals for Subsequent Meetings. Shareholders wishing to
submit proposals for inclusion in a proxy statement for a shareholder meeting
subsequent to the Meeting, if any, should send their written proposals to the
Secretary of the Acquired Trust, c/o Zurich Scudder Investments, Inc., 222 South
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Riverside Plaza, Chicago, Illinois 60606, within a reasonable time before the
solicitation of proxies for such meeting. The timely submission of a proposal
does not guarantee its inclusion.
Other Matters to Come Before the Meeting. The Board is not aware of any
matters that will be presented for action at the Meeting other than the matters
described in this material. Should any other matters requiring a vote of
shareholders arise, the proxy in the accompanying form will confer upon the
person or persons entitled to vote the shares represented by such proxy the
discretionary authority to vote the shares as to any such other matters in
accordance with their best judgment in the interest of the Acquired Trust and/or
the applicable Farmers Fund.
PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) (OR TAKE
ADVANTAGE OF AVAILABLE TELEPHONIC VOTING PROCEDURES) PROMPTLY. NO POSTAGE IS
REQUIRED IF MAILED IN THE UNITED STATES.
By Order of the Board,
/s/ John Millette
John Millette
Secretary
51
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INDEX OF EXHIBITS AND APPENDIX
EXHIBIT A: FORM OF AGREEMENT AND PLAN OF REORGANIZATION
EXHIBIT B: MANAGEMENT'S DISCUSSION OF PATHWAY CONSERVATIVE PORTFOLIO'S,
PATHWAY MODERATE PORTFOLIO'S AND PATHWAY GROWTH PORTFOLIO'S
PERFORMANCE
APPENDIX: BENEFICIAL OWNERS OF FUND SHARES
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EXHIBIT A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this [ ] day of [ ], 2001, by and among Scudder Pathway Series (the "Acquiring
Trust"), a Massachusetts business trust, on behalf of each of Scudder Pathway
Series: Conservative Portfolio, Scudder Pathway Series: Moderate Portfolio and
Scudder Pathway Series: Growth Portfolio (each, an "Acquiring Fund" and
collectively, the "Acquiring Funds"), each a separate series of the Acquiring
Trust, Farmers Investment Trust (the "Acquired Trust" and, together with the
Acquiring Trust, each a "Trust" and collectively the "Trusts"), a Massachusetts
business trust, on behalf of each of Farmers Income Portfolio, Farmers Income
with Growth Portfolio, Farmers Balanced Portfolio, Farmers Growth with Income
Portfolio and Farmers Growth Portfolio (each, an "Acquired Fund" and
collectively, the "Acquired Funds" and, together with an Acquiring Fund, each a
"Fund" and collectively, the "Funds"), each a separate series of the Acquired
Trust, and Zurich Scudder Investments, Inc. ("ZSI"), investment adviser to the
Funds (for purposes of Paragraph 10.2 of the Agreement only). The principal
place of business of the Acquiring Trust is Two International Place, Boston,
Massachusetts 02110-4103. The principal place of business of the Acquired Trust
is 222 South Riverside Plaza, Chicago, Illinois 60606.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). The reorganizations (each, a
"Reorganization" and collectively, the "Reorganizations") will consist of the
transfer of all or substantially all of the assets of each Acquired Fund to its
corresponding Acquiring Fund in exchange solely for Class A and Class B voting
shares of beneficial interest ($0.01 par value per share) of its corresponding
Acquiring Fund (the "Acquiring Fund Shares") as set forth on Schedule A attached
hereto, the assumption by each Acquiring Fund of all of the liabilities of its
corresponding Acquired Fund and the distribution of the Acquiring Fund Shares to
the Class A and Class B shareholders of each Acquired Fund in complete
liquidation of each Acquired Fund as provided herein, all upon the terms and
conditions hereinafter set forth in this Agreement. Notwithstanding anything to
the contrary in this Agreement, the rights and obligations of each Acquired
Fund, and the Acquired Trust with respect to that Acquired Fund, and each
Acquiring Fund, and the Acquiring Trust with respect to that Acquiring Fund, are
not contingent upon the satisfaction by any other Acquired Fund or Acquiring
Fund, as applicable, of its obligations under this Agreement.
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NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF EACH ACQUIRED FUND TO ITS CORRESPONDING ACQUIRING
FUND IN EXCHANGE FOR ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED
FUND LIABILITIES AND THE LIQUIDATION OF EACH ACQUIRED FUND
1.1. Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, each Acquired Fund
agrees to transfer to its corresponding Acquiring Fund all or substantially all
of the Acquired Fund's assets as set forth in section 1.2, and each Acquiring
Fund agrees in exchange therefor (i) to deliver to its corresponding Acquired
Fund that number of full and fractional Class A and Class B Acquiring Fund
Shares determined by dividing the value of its corresponding Acquired Fund's
assets net of any liabilities of each Acquired Fund with respect to the Class A
and Class B shares of Acquired Fund, computed in the manner and as of the time
and date set forth in section 2.1, by the net asset value of one Acquiring Fund
Share of the corresponding class, computed in the manner and as of the time and
date set forth in section 2.2; and (ii) to assume all of the liabilities of its
corresponding Acquired Fund. All Acquiring Fund Shares delivered to the Acquired
Funds shall be delivered at net asset value without a sales load, commission or
other similar fee being imposed. Such transactions shall take place at the
closing provided for in section 3.1 (the "Closing").
1.2. The assets of each Acquired Fund to be acquired by its corresponding
Acquiring Fund (the "Assets") shall consist of all assets, including, without
limitation, all cash, cash equivalents, securities, commodities and futures
interests and dividends or interest or other receivables that are owned by the
Acquired Fund and any deferred or prepaid expenses shown on the unaudited
statement of assets and liabilities of such Acquired Fund prepared as of the
effective time of its respective Closing in accordance with generally accepted
accounting principles ("GAAP") applied consistently with those of the Acquired
Fund's most recent audited balance sheet. The Assets shall constitute at least
90% of the fair market value of the net assets, and at least 70% of the fair
market value of the gross assets, held by each Acquired Fund immediately before
its respective Closing (excluding for these purposes assets used to pay the
dividends and other distributions paid pursuant to section 1.4).
1.3. Each Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date as defined in section 3.6.
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1.4. On or as soon as practicable prior to the Closing Date as defined in
section 3.1, each Acquired Fund will declare and pay to its shareholders of
record one or more dividends and/or other distributions so that it will have
distributed substantially all of its investment company taxable income (computed
without regard to any deduction for dividends paid) and realized net capital
gain, if any, for the current taxable year through the Closing Date.
1.5. Immediately after the transfer of Assets provided for in section 1.1,
each Acquired Fund will distribute to such Acquired Fund's shareholders of
record with respect to each class of its shares (the "Acquired Fund
Shareholders"), determined as of the Valuation Time (as defined in section 2.1),
on a pro rata basis within that class, the Acquiring Fund Shares of the same
class received by such Acquired Fund pursuant to section 1.1 and will completely
liquidate. Such distribution and liquidation will be accomplished with respect
to each class of each Acquired Fund by the transfer of the Acquiring Fund Shares
then credited to the account of the applicable Acquired Fund on the books of the
Acquiring Fund to open accounts on the share records of the Acquiring Fund in
the names of the Acquired Fund Shareholders. Each Acquiring Fund shall have no
obligation to inquire as to the validity, propriety or correctness of such
records, but shall assume that such transaction is valid, proper and correct.
The aggregate net asset value of Class A and Class B Acquiring Fund Shares to be
so credited to the Class A and Class B Acquired Fund Shareholders shall, with
respect to each class, be equal to the aggregate net asset value of the
applicable Acquired Fund shares of the same class owned by such shareholders as
of the Valuation Time. All issued and outstanding shares of each Acquired Fund
will simultaneously be cancelled on the books of that Acquired Fund, although
share certificates representing interests in Class A and Class B shares of each
Acquired Fund will represent a number of Acquiring Fund Shares after the Closing
Date as determined in accordance with section 2.3. The Acquiring Funds will not
issue certificates representing Acquiring Fund Shares in connection with such
exchange.
1.6. Ownership of Acquiring Fund Shares will be shown on the books of each
Acquiring Fund. Shares of each Acquiring Fund will be issued in the manner
described in the Acquiring Funds' then-current prospectus and statement of
additional information.
1.7. Any reporting responsibility of each Acquired Fund including, without
limitation, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "Commission"),
any state securities commission, and any federal, state or local tax authorities
or any other relevant regulatory authority, is and shall remain the
responsibility of the applicable Acquired Fund.
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1.8. All books and records of each Acquired Fund, including all books and
records required to be maintained under the Investment Company Act of 1940, as
amended (the "1940 Act"), and the rules and regulations thereunder, shall be
available to its corresponding Acquiring Fund from and after its Closing Date
and shall be turned over to its corresponding Acquiring Fund as soon as
practicable following the Closing Date.
2. VALUATION
2.1. The value of the Assets shall be computed as of the close of regular
trading on The New York Stock Exchange, Inc. (the "NYSE") on the business day
immediately preceding the Closing Date, as defined in section 3.1 (the
"Valuation Time") after the declaration and payment of any dividends and/or
other distributions on that date, using the valuation procedures set forth in
the Acquiring Trust's Declaration of Trust, as amended, and thencurrent
prospectus or statement of additional information, copies of which have been
delivered to each Acquired Fund.
2.2. The net asset value of a Class A and Class B Acquiring Fund Share
shall be the net asset value per share computed with respect to that class as of
the Valuation Time using the valuation procedures referred to in section 2.1.
Notwithstanding anything to the contrary contained in this Agreement, in the
event that, as of the Valuation Time, there are no Class A and/or Class B
Acquiring Fund Shares issued and outstanding, then, for purposes of this
Agreement, the per share net asset value of a Class A and/or Class B share, as
applicable, shall be equal to the net asset value of one Class S Acquiring Fund
Share.
2.3. The number of the Class A and Class B Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Assets shall be
determined with respect to each such class by dividing the value of the Assets
with respect to Class A and Class B shares of the applicable Acquired Fund, as
the case may be, determined in accordance with section 2.1 by the net asset
value of an Acquiring Fund Share of the same class determined in accordance with
section 2.2.
2.4. All computations of value hereunder shall be made by or under the
direction of each Fund's respective accounting agent, if applicable, in
accordance with its regular practice and the requirements of the 1940 Act and
shall be subject to confirmation by each Fund's respective independent
accountants upon the reasonable request of the other Fund.
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<PAGE>
3. CLOSING AND CLOSING DATE
3.1. The Closing of the transactions contemplated by this Agreement shall
be April 9, 2001, or such later date as the parties may agree in writing (the
"Closing Date"). All acts taking place at the Closing shall be deemed to take
place simultaneously as of 9:00 a.m., Eastern time, on the Closing Date, unless
otherwise agreed to by the parties. The Closing shall be held at the offices of
Dechert, Ten Post Office Square - South, Boston, MA 02109, or at such other
place and time as the parties may agree.
3.2. Each Acquired Fund shall deliver to its corresponding Acquiring Fund
on the Closing Date a schedule of Assets. 3.3. State Street Bank and Trust
Company ("State Street"), custodian for each Acquired Fund, shall deliver at the
Closing a certificate of an authorized officer stating that (a) the Assets shall
have been delivered in proper form to State Street, custodian for each Acquiring
Fund, prior to or on the Closing Date and (b) all necessary taxes in connection
with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made. Each Acquired Fund's portfolio securities represented by a certificate or
other written instrument shall be presented by the custodian for each Acquired
Fund to the custodian for each Acquiring Fund for examination no later than five
business days preceding the Closing Date and transferred and delivered by each
Acquired Fund as of the Closing Date by each Acquired Fund for the account of
its corresponding Acquiring Fund duly endorsed in proper form for transfer in
such condition as to constitute good delivery thereof. Each Acquired Fund's
portfolio securities and instruments deposited with a securities depository, as
defined in Rule 17f-4 under the 1940 Act, shall be delivered as of the Closing
Date by book entry in accordance with the customary practices of such
depositories and the custodian for its corresponding Acquiring Fund. The cash to
be transferred by each Acquired Fund shall be delivered by wire transfer of
federal funds on the Closing Date.
3.4. Kemper Service Company, as transfer agent for each Acquired Fund, on
behalf of each Acquired Fund, shall deliver at the Closing a certificate of an
authorized officer stating that its records contain the names and addresses of
the Acquired Fund Shareholders and the number and percentage ownership (to three
decimal places) of outstanding each Class A and Class B Acquired Fund shares
owned by each such shareholder immediately prior to the Closing. Each Acquiring
Fund shall issue and deliver a confirmation evidencing the Acquiring Fund Shares
to be credited on the Closing Date to its corresponding Acquired Fund or provide
evidence satisfactory to its corresponding Acquired Fund that such Acquiring
Fund Shares have been credited to that Acquired Fund's account on the books of
the Acquiring Fund. At the Closing, each party shall deliver to
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the other such bills of sale, checks, assignments, share certificates, if any,
receipts or other documents as such other party or its counsel may reasonably
request to effect the transactions contemplated by this Agreement.
3.5. In the event that immediately prior to the Valuation Time (a) the NYSE
or another primary trading market for portfolio securities of an Acquiring Fund
or an Acquired Fund shall be closed to trading or trading thereupon shall be
restricted, or (b) trading or the reporting of trading on such Exchange or
elsewhere shall be disrupted so that, in the judgment of the Board members of
either party to this Agreement, accurate appraisal of the value of the net
assets with respect to the Class A and Class B shares of an Acquiring Fund or an
Acquired Fund is impracticable, the Closing Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.6. The liabilities of each Acquired Fund shall include all of such
Acquired Fund's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Closing Date, and whether or not specifically referred to in this Agreement
including but not limited to any deferred compensation to such Acquired Fund's
board members.
4. REPRESENTATIONS AND WARRANTIES
4.1. The Acquired Trust, on behalf of each Acquired Fund, represents and
warrants to the respective Acquiring Fund as follows:
(a) The Acquired Trust is a voluntary association with transferable
shares commonly referred to as a Massachusetts business trust duly
organized and validly existing under the laws of The Commonwealth of
Massachusetts with power under the Acquired Trust's Declaration of Trust,
as amended, to own all of its properties and assets and to carry on its
business as it is now being conducted and, subject to approval of
shareholders of the Acquired Fund, to carry out the Agreement. The Acquired
Fund is a separate series of the Acquired Trust duly designated in
accordance with the applicable provisions of the Acquired Trust's
Declaration of Trust. The Acquired Trust and Acquired Fund are qualified to
do business in all jurisdictions in which they are required to be so
qualified, except jurisdictions in which the failure to so qualify would
not have material adverse effect on the Acquired Trust or Acquired Fund.
The Acquired Fund has all material federal, state and local authorizations
necessary to own all of the properties and assets and to carry on its
business
A-6
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as now being conducted, except authorizations which the failure to so so
obtain would not have a material adverse effect on the Acquired Fund;
(b) The Acquired Trust is registered with the Commission as an
open-end management investment company under the 1940 Act, and such
registration is in full force and effect and the Acquired Fund is in
compliance in all material respects with the 1940 Act and the rules and
regulations thereunder;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated herein, except such as have been
obtained under the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the 1940
Act and such as may be required by state securities laws;
(d) Other than with respect to contracts entered into in connection
with the portfolio management of the Acquired Fund which shall terminate on
or prior to the Closing Date, the Acquired Trust is not, and the execution,
delivery and performance of this Agreement by the Acquired Trust will not
result (i) in violation of Massachusetts law or of the Acquired Trust's
Declaration of Trust, as amended, or By-Laws, (ii) in a violation or breach
of, or constitute a default under, any material agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquired Fund
is a party or by which it is bound, and the execution, delivery and
performance of this Agreement by the Acquired Fund will not result in the
acceleration of any obligation, or the imposition of any penalty, under any
agreement, indenture, instrument, contract, lease, judgment or decree to
which the Acquired Fund is a party or by which it is bound, or (iii) in the
creation or imposition of any lien, charge or encumbrance on any property
or assets of the Acquired Fund;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquired Fund or any
properties or assets held by it. The Acquired Fund knows of no facts which
might form the basis for the institution of such proceedings which would
materially and adversely affect its business and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities, Operations, and Changes
in Net Assets, the Financial Highlights, and the Investment Portfolio of
the
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Acquired Fund at and for the fiscal year ended April 30, 2000, have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are in
accordance with GAAP consistently applied, and such statements (a copy of
each of which has been furnished to its corresponding Acquiring Fund)
present fairly, in all material respects, the financial position of the
Acquired Fund as of such date in accordance with GAAP, and there are no
known contingent liabilities of the Acquired Fund required to be reflected
on a balance sheet (including the notes thereto) in accordance with GAAP as
of such date not disclosed therein;
(g) Since April 30, 2000, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquired Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred except as otherwise
disclosed to and accepted in writing by the Acquiring Fund. For purposes of
this subsection (g), a decline in net asset value per share of the Acquired
Fund due to declines in market values of securities in the Acquired Fund's
portfolio, the discharge of Acquired Fund liabilities, or the redemption of
Acquired Fund shares by Acquired Fund Shareholders shall not constitute a
material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other
tax returns and reports of the Acquired Fund required by law to have been
filed by such dates (including any extensions) shall have been filed and
are or will be correct in all material respects, and all federal and other
taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the
payment thereof, and, to the best of the Acquired Fund's knowledge, no such
return is currently under audit and no assessment has been asserted with
respect to such returns;
(i) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met the requirements of
Subchapter M of the Code for qualification as a regulated investment
company and has elected to be treated as such, has been eligible to and has
computed its federal income tax under Section 852 of the Code, and will
have distributed all of its investment company taxable income and net
capital gain (as defined in the Code) that has accrued through the Closing
Date;
(j) All issued and outstanding shares of the Acquired Fund (i) have
been offered and sold in every state and the District of Columbia in
compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws, (ii) are, and on
the Closing Date
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will be, duly and validly issued and outstanding, fully paid and
non-assessable and not subject to preemptive or dissenter's rights
(recognizing that, under Massachusetts law, Acquired Fund Shareholders,
under certain circumstances, could be held personally liable for
obligations of the Acquired Fund), and (iii) will be held at the time of
the Closing by the persons and in the amounts set forth in the records of
Kemper Service Company, as provided in section 3.4. The Acquired Fund does
not have outstanding any options, warrants or other rights to subscribe for
or purchase any of the Acquired Fund shares, nor is there outstanding any
security convertible into any of the Acquired Fund shares;
(k) At the Closing Date, the Acquired Fund will have good and
marketable title to the Acquired Fund's assets to be transferred to the
Acquiring Fund pursuant to section 1.2 and full right, power, and authority
to sell, assign, transfer and deliver such assets hereunder free of any
liens or other encumbrances, except those liens or encumbrances as to which
the Acquiring Fund has received notice at or prior to the Closing, and upon
delivery and payment for such assets, the Acquiring Fund will acquire good
and marketable title thereto, subject to no restrictions on the full
transfer thereof, including such restrictions as might arise under the 1933
Act and the 1940 Act, except those restrictions as to which the Acquiring
Fund has received notice and necessary documentation at or prior to the
Closing;
(l) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary action
on the part of the Board members of the Acquired Trust, (including the
determinations required by Rule 17a-8(a) under the 1940 Act), and, subject
to the approval of the Acquired Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Acquired Trust, on behalf
of the Acquired Fund, enforceable in accordance with its terms, subject, as
to enforcement, to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(m) The information to be furnished by the Acquired Fund for use in
applications for orders, registration statements or proxy materials or for
use in any other document filed or to be filed with any federal, state or
local regulatory authority (including the National Association of
Securities Dealers, Inc. (the "NASD")), which may be necessary in
connection with the transactions contemplated hereby, shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations applicable thereto;
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(n) The current prospectus and statement of additional information of
the Acquired Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading; and
(o) The proxy statement of the Acquired Fund to be included in the
Registration Statement referred to in section 5.7 (the "Proxy Statement"),
insofar as it relates to the Acquired Fund, will, on the effective date of
the Registration Statement and on the Closing Date, (i) comply in all
material respects with the provisions and Regulations of the 1933 Act, 1934
Act and 1940 Act, as applicable, and (ii) not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements are made, not materially
misleading; provided, however, that the representations and warranties in
this section shall not apply to statements in or omissions from the Proxy
Statement and the Registration Statement made in reliance upon and in
conformity with information that was furnished or should have been
furnished by the Acquiring Fund for use therein.
4.2. The Acquiring Trust, on behalf of each Acquiring Fund, represents and
warrants to the respective Acquired Fund as follows:
(a) The Acquiring Trust is a voluntary association with transferable
shares commonly referred to as a Massachusetts business trust duly
organized and validly existing under the laws of The Commonwealth of
Massachusetts with power under the Acquiring Trust's Declaration of Trust,
as amended, to own all of its properties and assets and to carry on its
business as it is now being conducted and, subject to the approval of
shareholders of the Acquired Fund, to carry out the Agreement. The
Acquiring Fund is a separate series of the Acquiring Trust duly designated
in accordance with the applicable provisions of the Acquiring Trust's
Declaration of Trust. The Acquiring Trust and Acquiring Fund are qualified
to do business in all jurisdictions in which they are required to be so
qualified, except jurisdictions in which the failure to so qualify would
not have material adverse effect on the Acquiring Trust or Acquiring Fund.
The Acquiring Fund has all material federal, state and local authorizations
necessary to own all of the properties and assets and to carry on its
business as now being conducted, except authorizations which the failure to
so obtain would not have a material adverse effect on the Acquiring Fund;
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(b) The Acquiring Trust is registered with the Commission as an
open-end management investment company under the 1940 Act, and such
registration is in full force and effect and the Acquiring Fund is in
compliance in all material respects with the 1940 Act and the rules and
regulations thereunder;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may
be required by state securities laws;
(d) The Acquiring Trust is not, and the execution, delivery and
performance of this Agreement by the Acquiring Trust will not result (i) in
violation of Massachusetts law or of the Acquiring Trust's Declaration of
Trust, as amended, or By-Laws, (ii) in a violation or breach of, or
constitute a default under, any material agreement, indenture, instrument,
contract, lease or other undertaking known to counsel to which the
Acquiring Fund is a party or by which it is bound, and the execution,
delivery and performance of this Agreement by the Acquiring Fund will not
result in the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease,
judgment or decree to which the Acquiring Fund is a party or by which it is
bound, or (iii) in the creation or imposition of any lien, charge or
encumbrance on any property or assets of the Acquiring Fund;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any
properties or assets held by it. The Acquiring Fund knows of no facts which
might form the basis for the institution of such proceedings which would
materially and adversely affect its business and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities, Operations, and Changes
in Net Assets, the Financial Highlights, and the Investment Portfolio of
the Acquiring Fund at and for the fiscal year ended August 31, 2000, have
been audited by PricewaterhouseCoopers LLP, independent accountants, and
are in accordance with GAAP consistently applied, and such statements (a
copy of each of which has been furnished to the Acquired Fund) present
fairly, in all material respects, the financial position of the Acquiring
Fund as of such date in accordance with GAAP, and there are no known
contingent liabilities
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of the Acquiring Fund required to be reflected on a balance sheet
(including the notes thereto) in accordance with GAAP as of such date not
disclosed therein;
(g) Since August 31, 2000, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquiring Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred except as otherwise
disclosed to and accepted in writing by the Acquired Fund. For purposes of
this subsection (g), a decline in net asset value per share of the
Acquiring Fund due to declines in market values of securities in the
Acquiring Fund's portfolio, the discharge of Acquiring Fund liabilities, or
the redemption of Acquiring Fund shares by Acquiring Fund shareholders
shall not constitute a material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other
tax returns and reports of the Acquiring Fund required by law to have been
filed by such dates (including any extensions) shall have been filed and
are or will be correct in all material respects, and all federal and other
taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the
payment thereof, and, to the best of the Acquiring Fund's knowledge, no
such return is currently under audit and no assessment has been asserted
with respect to such returns;
(i) For each taxable year of its operation, the Acquiring Fund has met
the requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as such, has
been eligible to and has computed its federal income tax under Section 852
of the Code, and will do so for the taxable year including the Closing
Date;
(j) All issued and outstanding shares of the Acquiring Fund (i) have
been offered and sold in every state and the District of Columbia in
compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws and (ii) are, and on
the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable, and not subject to preemptive or dissenter's
rights (recognizing that, under Massachusetts law, Acquiring Fund
Shareholders, under certain circumstances, could be held personally liable
for the obligations of the Acquiring Fund). The Acquiring Fund does not
have outstanding any options, warrants or other rights to subscribe for or
purchase any of the Acquiring Fund shares, nor is there outstanding any
security convertible into any of the Acquiring Fund shares;
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(k) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant
to the terms of this Agreement, will at the Closing Date have been duly
authorized and, when so issued and delivered, will be duly and validly
issued and outstanding Acquiring Fund Shares, and will be fully paid and
non-assessable (recognizing that, under Massachusetts law, Acquiring Fund
Shareholders, under certain circumstances, could be held personally liable
for the obligations of the Acquiring Fund);
(l) At the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets, free of any liens or other
encumbrances, except those liens or encumbrances as to which the Acquired
Fund has received notice at or prior to the Closing;
(m) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary action
on the part of the Board members of the Acquiring Trust (including the
determinations required by Rule 17a-8(a) under the 1940 Act) and this
Agreement will constitute a valid and binding obligation of the Acquiring
Trust, on behalf of the Acquiring Fund, enforceable in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and other laws relating to or
affecting creditors' rights and to general equity principles;
(n) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements or proxy materials or for
use in any other document filed or to be filed with any federal, state or
local regulatory authority (including the NASD), which may be necessary in
connection with the transactions contemplated hereby, shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations applicable thereto;
(o) The current prospectus and statement of additional information of
the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading;
(p) The Proxy Statement to be included in the Registration Statement,
only insofar as it relates to the Acquiring Fund, will, on the effective
date of the Registration Statement and on the Closing Date, (i) comply in
all material respects with the provisions and Regulations of the 1933 Act,
1934
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Act, and 1940 Act and (ii) not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which such statements were made, not materially misleading; provided,
however, that the representations and warranties in this section shall not
apply to statements in or omissions from the Proxy Statement and the
Registration Statement made in reliance upon and in conformity with
information that was furnished or should have been furnished by the
Acquired Fund for use therein; and (q) The Acquiring Fund agrees to use all
reasonable efforts to obtain the approvals and authorizations required by
the 1933 Act, the 1940 Act and such of the state securities laws as may be
necessary in order to continue its operations after the Closing Date.
5. COVENANTS OF EACH ACQUIRING FUND AND EACH ACQUIRED FUND
5.1. Each Acquiring Fund and each Acquired Fund covenants to operate its
business in the ordinary course between the date hereof and the Closing Date, it
being understood that (a) such ordinary course of business will include (i) the
declaration and payment of customary dividends and other distributions and (ii)
such changes as are contemplated by the Funds' normal operations; and (b) each
Fund shall retain exclusive control of the composition of its portfolio until
the Closing Date. No party shall take any action that would, or reasonably would
be expected to, result in any of its representations and warranties set forth in
this Agreement being or becoming untrue in any material respect. Each Acquiring
Fund and each Acquired Fund covenants and agrees to coordinate the respective
portfolios of each Acquiring Fund and each Acquired Fund from the date of the
Agreement up to and including the Closing Date in order that at Closing, when
the Assets are added to each Acquiring Fund's portfolio, the resulting portfolio
will meet the applicable Acquiring Fund's investment objective, policies and
restrictions, as set forth in the Acquiring Funds' Prospectus, a copy of which
has been delivered to each Acquired Fund.
5.2. Upon reasonable notice, each Acquiring Fund's officers and agents
shall have reasonable access to its corresponding Acquired Fund's books and
records necessary to maintain current knowledge of its corresponding Acquired
Fund and to ensure that the representations and warranties made by its
corresponding Acquired Fund are accurate.
5.3. Each Acquired Fund covenants to call a meeting of the Acquired Fund
Shareholders entitled to vote thereon to consider and act upon this Agreement
and to take all other reasonable action necessary to obtain approval of the
transactions
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contemplated herein. Such meeting shall be scheduled for no later than
March 14, 2001.
5.4. Each Acquired Fund covenants that the Acquiring Fund Shares to be
issued hereunder are not being acquired for the purpose of making any
distribution thereof other than in accordance with the terms of this Agreement.
5.5. Each Acquired Fund covenants that it will assist its corresponding
Acquiring Fund in obtaining such information as the Acquiring Fund reasonably
requests concerning the beneficial ownership of the Acquired Fund shares.
5.6. Subject to the provisions of this Agreement, each Acquiring Fund and
Acquired Fund will each take, or cause to be taken, all actions, and do or cause
to be done, all things reasonably necessary, proper, and/or advisable to
consummate and make effective the transactions contemplated by this Agreement.
5.7. Each Fund covenants to prepare in compliance with the 1933 Act, the
1934 Act and the 1940 Act the Registration Statement on Form N-14 (the
"Registration Statement") in connection with the meeting of the Acquired Fund
Shareholders to consider approval of this Agreement and the transactions
contemplated herein. Each Acquiring Fund will file the Registration Statement,
including the Proxy Statement, with the Commission. Each Acquired Fund will
provide its corresponding Acquiring Fund with information reasonably necessary
for the preparation of a prospectus, which will include the Proxy Statement
referred to in section 4.1(o), all to be included in the Registration Statement,
in compliance in all material respects with the 1933 Act, the 1934 Act and the
1940 Act.
5.8. Each Acquired Fund covenants that it will, from time to time, as and
when reasonably requested by its corresponding Acquiring Fund, execute and
deliver or cause to be executed and delivered all such assignments and other
instruments, and will take or cause to be taken such further action as the
Acquiring Fund may reasonably deem necessary or desirable in order to vest in
and confirm the Acquiring Fund's title to and possession of all the assets and
otherwise to carry out the intent and purpose of this Agreement.
5.9. Each Acquiring Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act and 1940 Act, and such
of the state securities laws as it deems appropriate in order to continue its
operations after the Closing Date and to consummate the transactions
contemplated herein; provided, however, that each Acquiring Fund may take such
actions it reasonably deems advisable after the Closing Date as circumstances
change.
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<PAGE>
5.10. Each Acquiring Fund covenants that it will, from time to time, as and
when reasonably requested by its corresponding Acquired Fund, execute and
deliver or cause to be executed and delivered all such assignments, assumption
agreements, releases, and other instruments, and will take or cause to be taken
such further action, as its corresponding Acquired Fund may reasonably deem
necessary or desirable in order to (i) vest and confirm to the Acquired Fund
title to and possession of all Acquiring Fund shares to be transferred to the
Acquired Fund pursuant to this Agreement and (ii) assume the liabilities from
the Acquired Fund.
5.11. As soon as reasonably practicable after the Closing, each Acquired
Fund shall make a liquidating distribution to its shareholders consisting of the
Acquiring Fund Shares received at the Closing.
5.12. Each Acquiring Fund and each Acquired Fund shall use its reasonable
best efforts to fulfill or obtain the fulfillment of the conditions precedent to
effect the transactions contemplated by this Agreement as promptly as
practicable.
5.13. The intention of the parties is that each transaction will qualify as
a reorganization within the meaning of Section 368(a) of the Code. Neither the
Trusts nor the Funds shall take any action, or cause any action to be taken
(including, without limitation, the filing of any tax return) that is
inconsistent with such treatment or results in the failure of a transaction to
qualify as a reorganization within the meaning of Section 368(a) of the Code. At
or prior to the Closing Date, each Trust and each Fund will take such action, or
cause such action to be taken, as is reasonably necessary to enable Willkie Farr
& Gallagher to render the tax opinion contemplated herein in section 8.5.
5.14. At or immediately prior to the Closing, each Acquired Fund may
declare and pay to its stockholders a dividend or other distribution in an
amount large enough so that it will have distributed substantially all (and in
any event not less than 98%) of its investment company taxable income (computed
without regard to any deduction for dividends paid) and realized net capital
gain, if any, for the current taxable year through the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH ACQUIRED FUND
The obligations of each Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1. All representations and warranties of the Acquiring Trust, on behalf
of each Acquiring Fund, contained in this Agreement shall be true and correct in
all
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material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date; and there
shall be (i) no pending or threatened litigation brought by any person (other
than an Acquired Fund, its adviser or any of their affiliates) against an
Acquiring Fund or its investment adviser(s), Board members or officers arising
out of this Agreement and (ii) no facts known to an Acquiring Fund which an
Acquiring Fund reasonably believes might result in such litigation.
6.2. Each Acquiring Fund shall have delivered to its corresponding Acquired
Fund on the Closing Date a certificate executed in its name by its President or
a Vice President, in a form reasonably satisfactory to the Acquired Trust, on
behalf of the Acquired Fund, and dated as of the Closing Date, to the effect
that the representations and warranties of the Acquiring Fund made in this
Agreement are true and correct on and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquired Fund shall reasonably request.
6.3. Each Acquired Fund shall have received on the Closing Date an opinion
of Dechert, in a form reasonably satisfactory to the Acquired Fund, and dated as
of the Closing Date, to the effect that:
(a) The Acquiring Trust has been duly formed and is an existing
business trust; (b) the Acquiring Fund has the power to carry on its
business as presently conducted in accordance with the description thereof
in the Acquiring Fund's registration statement under the 1940 Act; (c) the
Agreement has been duly authorized, executed and delivered by the Acquiring
Trust, on behalf of the Acquiring Fund, and constitutes a valid and legally
binding obligation of the Acquiring Trust, on behalf of the Acquiring Fund,
enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and laws of
general applicability relating to or affecting creditors' rights and to
general equity principles; (d) the execution and delivery of the Agreement
did not, and the exchange of the Acquired Fund's assets for Acquiring Fund
Shares pursuant to the Agreement will not, violate the Acquiring Trust's
Declaration of Trust, as amended, or By-laws; and (e) to the knowledge of
such counsel, and without any independent investigation, (i) the Acquiring
Trust is not subject to any litigation or other proceedings that might have
a materially adverse effect on the operations of the Acquiring Trust, (ii)
the Acquiring Trust is duly registered as an investment company with the
Commission and is not subject to any stop order; and (iii) all regulatory
consents, authorizations, approvals or filings required to be obtained or
made by the Acquiring Fund under the federal laws of the United States or
the laws of
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The Commonwealth of Massachusetts for the exchange of the Acquired Fund's
assets for Acquiring Fund Shares, pursuant to the Agreement have been
obtained or made.
The delivery of such opinion is conditioned upon receipt by Dechert of
customary representations it shall reasonably request of each of the Acquiring
Trust and the Acquired Trust, on behalf of each of the Acquiring Funds and the
Acquired Funds, respectively.
6.4. Each Acquiring Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by each Acquiring Fund on or before the Closing Date.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH ACQUIRING FUND
The obligations of each Acquiring Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by its
corresponding Acquired Fund of all of the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
further conditions:
7.1. All representations and warranties of the Acquired Trust, on behalf of
each Acquired Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date; and there
shall be (i) no pending or threatened litigation brought by any person (other
than an Acquiring Fund, its adviser or any of their affiliates) against an
Acquired Fund or its investment adviser(s), Board members or officers arising
out of this Agreement and (ii) no facts known to an Acquired Fund which an
Acquired Fund reasonably believes might result in such litigation.
7.2. Each Acquired Fund shall have delivered to its corresponding Acquiring
Fund a statement of the Acquired Fund's assets and liabilities as of the Closing
Date, certified by the Treasurer of the Acquired Fund.
7.3. Each Acquired Fund shall have delivered to its corresponding Acquiring
Fund on the Closing Date a certificate executed in its name by its President or
a Vice President, in a form reasonably satisfactory to the Acquiring Trust, on
behalf of the Acquiring Fund, and dated as of the Closing Date, to the effect
that the representations and warranties of the Acquired Trust with respect to
the Acquired Fund made in this Agreement are true and correct on and as of the
Closing Date, except as they may be affected by the transactions contemplated by
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this Agreement, and as to such other matters as the Acquiring Fund shall
reasonably request.
7.4. Each Acquiring Fund shall have received on the Closing Date an opinion
of Dechert, in a form reasonably satisfactory to the Acquiring Fund, and dated
as of the Closing Date, to the effect that:
(a) The Acquired Trust has been duly formed and is an existing
business trust; (b) the Acquired Fund has the power to carry on its
business as presently conducted in accordance with the description thereof
in the Acquired Trust's registration statement under the 1940 Act; (c) the
Agreement has been duly authorized, executed and delivered by the Acquired
Trust, on behalf of the Acquired Fund, and constitutes a valid and legally
binding obligation of the Acquired Trust, on behalf of the Acquired Fund,
enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and laws of
general applicability relating to or affecting creditors' rights and to
general equity principles; (d) the execution and delivery of the Agreement
did not, and the exchange of the Acquired Fund's assets for Acquiring Fund
Shares pursuant to the Agreement will not, violate the Acquired Trust's
Declaration of Trust, as amended, or By-laws; and (e) to the knowledge of
such counsel, and without any independent investigation, (i) the Acquired
Trust is not subject to any litigation or other proceedings that might have
a materially adverse effect on the operations of the Acquired Trust, (ii)
the Acquired Trust is duly registered as an investment company with the
Commission and is not subject to any stop order, and (iii) all regulatory
consents, authorizations, approvals or filings required to be obtained or
made by the Acquired Fund under the federal laws of the United States or
the laws of The Commonwealth of Massachusetts for the exchange of the
Acquired Fund's assets for Acquiring Fund Shares, pursuant to the Agreement
have been obtained or made.
The delivery of such opinion is conditioned upon receipt by Dechert of
customary representations it shall reasonably request of each of the Acquiring
Trust and the Acquired Trust, on behalf of each of the Acquiring Funds and the
Acquired Funds, respectively.
7.5. Each Acquired Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by each Acquired Fund on or before the Closing Date.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH ACQUIRING FUND AND EACH
ACQUIRED FUND
If any of the conditions set forth below have not been met on or before the
Closing Date with respect to each Acquired Fund or its corresponding Acquiring
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Fund, the other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement:
8.1. This Agreement and the transactions contemplated herein, with respect
to each Acquired Fund, shall have been approved by the requisite vote of the
holders of the outstanding shares of that respective Acquired Fund in accordance
with the provisions of the Acquired Trust's Declaration of Trust, as amended,
and By-Laws, applicable Massachusetts law and the 1940 Act, and certified copies
of the resolutions evidencing such approval shall have been delivered to its
corresponding Acquiring Fund. Notwithstanding anything herein to the contrary,
neither an Acquiring Fund nor an Acquired Fund may waive the conditions set
forth in this section 8.1.
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending or to its knowledge threatened before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain material damages or
other relief in connection with, this Agreement or the transactions contemplated
herein.
8.3. All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities deemed necessary by
an Acquiring Fund or an Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of an
Acquiring Fund or an Acquired Fund, provided that either party hereto may for
itself waive any of such conditions.
8.4. The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act.
8.5. The parties shall have received an opinion of Willkie Farr & Gallagher
addressed to each of the Acquiring Funds and the Acquired Funds, in a form
reasonably satisfactory to each such party to this Agreement, substantially to
the effect that, based upon certain facts, assumptions and representations of
the parties, for federal income tax purposes: (i) the transfer to the Acquiring
Fund of all or substantially all of the assets of the Acquired Fund in exchange
solely for Acquiring Fund Shares and the assumption by the Acquiring Fund of all
of the liabilities of the Acquired Fund, followed by the distribution of such
shares to the Acquired Fund Shareholders in exchange for their shares of the
Acquired Fund in complete liquidation of the Acquired Fund, will constitute a
"reorganization" within the meaning of Section 368(a)(1) of the Code, and the
Acquiring Fund and
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the Acquired Fund will each be "a party to a reorganization" within the meaning
of Section 368(b) of the Code; (ii) no gain or loss will be recognized by the
Acquired Fund upon the transfer of all or substantially all of its assets to the
Acquiring Fund in exchange solely for Acquiring Fund Shares and the assumption
by the Acquiring Fund of all of the liabilities of the Acquired Fund; (iii) the
basis of the assets of the Acquired Fund in the hands of the Acquiring Fund will
be the same as the basis of such assets of the Acquired Fund immediately prior
to the transfer; (iv) the holding period of the assets of the Acquired Fund in
the hands of the Acquiring Fund will include the period during which such assets
were held by the Acquired Fund; (v) no gain or loss will be recognized by the
Acquiring Fund upon the receipt of the assets of the Acquired Fund in exchange
for Acquiring Fund Shares and the assumption by the Acquiring Fund of all of the
liabilities of the Acquired Fund; (vi) no gain or loss will be recognized by
Acquired Fund Shareholders upon the receipt of the Acquiring Fund Shares solely
in exchange for their shares of the Acquired Fund as part of the transaction;
(vii) the basis of the Acquiring Fund Shares received by Acquired Fund
Shareholders will be the same as the basis of the shares of the Acquired Fund
exchanged therefor; and (viii) the holding period of Acquiring Fund Shares
received by Acquired Fund Shareholders will include the holding period during
which the shares of the Acquired Fund exchanged therefor were held, provided
that at the time of the exchange the shares of the Acquired Fund were held as
capital assets in the hands of Acquired Fund Shareholders. The delivery of such
opinion is conditioned upon receipt by Willkie Farr & Gallagher of
representations it shall request of each of the Acquiring Trust and Acquired
Trust. Notwithstanding anything herein to the contrary, neither the Acquiring
Funds nor the Acquired Funds may waive the condition set forth in this section
8.5.
9. INDEMNIFICATION
9.1. Each Acquiring Fund agrees to indemnify and hold harmless its
corresponding Acquired Fund and each of such Acquired Fund's Board members and
officers from and against any and all losses, claims, damages, liabilities or
expenses (including, without limitation, the payment of reasonable legal fees
and reasonable costs of investigation) to which jointly and severally, the
Acquired Fund or any of its Board members or officers may become subject,
insofar as any such loss, claim, damage, liability or expense (or actions with
respect thereto) arises out of or is based on any breach by the Acquiring Fund
of any of its representations, warranties, covenants or agreements set forth in
this Agreement.
9.2. Each Acquired Fund agrees to indemnify and hold harmless its
corresponding Acquiring Fund and each of such Acquiring Fund's Board members and
officers from and against any and all losses, claims, damages, liabilities or
expenses (including, without limitation, the payment of reasonable
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legal fees and reasonable costs of investigation) to which jointly and
severally, the Acquiring Fund or any of its Board members or officers may become
subject, insofar as any such loss, claim, damage, liability or expense (or
actions with respect thereto) arises out of or is based on any breach by the
Acquired Fund of any of its representations, warranties, covenants or agreements
set forth in this Agreement.
10. FEES AND EXPENSES
10.1. Each of the Acquiring Trust, on behalf of the Acquiring Funds, and
the Acquired Trust, on behalf of the Acquired Funds, represents and warrants to
the other that it has no obligations to pay any brokers or finders fees in
connection with the transactions provided for herein.
10.2. ZSI will pay all the expenses in connection with the Reorganizations.
Any such expenses which are so borne by ZSI will be solely and directly related
to the Reorganization within the meaning of Revenue Ruling 73-54, 1973-1 C.B.
187.
11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
11.1. Each Acquiring Fund and each Acquired Fund agree that no party has
made any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
11.2. Except as specified in the next sentence set forth in this section
11.2, the representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall not
survive the consummation of the transactions contemplated hereunder. The
covenants to be performed after the Closing and the obligations of each
Acquiring Fund and Acquired Fund in sections 9.1 and 9.2 shall survive the
Closing.
12. TERMINATION
12.1. This Agreement may be terminated and the transactions contemplated
hereby may be abandoned by any party as it relates to the transaction applicable
to such party by (i) mutual agreement of the parties, or (ii) by either party if
the Closing shall not have occurred on or before June 1, 2001, unless such date
is extended by mutual agreement of the parties, or (iii) by either party if the
other party shall have materially breached its obligations under this Agreement
or made a material and intentional misrepresentation herein or in connection
herewith. In the event of any such termination, this Agreement shall become void
and there shall be no liability hereunder on the part of any party or their
respective Board members or officers, except for any such material breach or
intentional misrepresentation, as to each of which all remedies at law or in
equity of the party adversely affected shall survive.
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13. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by any authorized officer of the Acquired
Funds and any authorized officer of the Acquiring Funds; provided, however, that
following each meeting of the Acquired Fund Shareholders called by the Acquired
Funds pursuant to section 5.3 of this Agreement, no such amendment may have the
effect of changing the provisions for determining the number of the Acquiring
Fund Shares to be issued to the Acquired Fund Shareholders under this Agreement
to the detriment of such shareholders without their further approval.
14. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly given
if delivered by hand (including by Federal Express or similar express courier)
or transmitted by facsimile or three days after being mailed by prepaid
registered or certified mail, return receipt requested, addressed to the
applicable Acquired Fund, 222 South Riverside Plaza, Chicago, Illinois 60606,
with a copy to Dechert, Ten Post Office Square-South, Boston, Massachusetts
02109-4603, Attention: Joseph R. Fleming, Esq., or to the applicable Acquiring
Fund, Two International Place, Boston, Massachusetts 02110-4103, with a copy to
Dechert, Ten Post Office Square-South, Boston, MA 02109-4603, Attention: Joseph
R. Fleming, Esq., or to any other address that the Acquired Fund or the
Acquiring Fund shall have last designated by notice to the other party.
15. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY
15.1. The Article and section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15.2. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
15.3. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and the shareholders of each
Acquiring Fund and each Acquired Fund and their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
A-23
<PAGE>
15.4. References in this Agreement to each Trust mean and refer to the
Board members of each Trust from time to time serving under its Declaration of
Trust on file with the Secretary of State of The Commonwealth of Massachusetts,
as the same may be amended from time to time, pursuant to which each Trust
conducts its business. It is expressly agreed that the obligations of each Trust
hereunder shall not be binding upon any of the Board members, shareholders,
nominees, officers, agents, or employees of the Trusts or the Funds personally,
but bind only the respective property of the Funds, as provided in each Trust's
Declaration of Trust. Moreover, no series of either Trust other than the Funds
shall be responsible for the obligations of the Trusts hereunder, and all
persons shall look only to the assets of the Funds to satisfy the obligations of
the Trusts hereunder. The execution and the delivery of this Agreement have been
authorized by each Trust's Board members, on behalf of the applicable Fund, and
this Agreement has been signed by authorized officers of each Fund acting as
such, and neither such authorization by such Board members, nor such execution
and delivery by such officers, shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the respective property of the Funds, as provided in each Trust's
Declaration of Trust.
Notwithstanding anything to the contrary contained in this Agreement, the
obligations, agreements, representations and warranties with respect to each
Fund shall constitute the obligations, agreements, representations and
warranties of that Fund only (the "Obligated Fund"), and in no event shall any
other series of the Trusts or the assets of any such series be held liable with
respect to the breach or other default by the Obligated Fund of its obligations,
agreements, representations and warranties as set forth herein.
15.5. This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of The State of Massachusetts, without regard to its
principles of conflicts of laws.
A-24
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by an authorized officer and its seal to be affixed thereto and
attested by its Secretary or Assistant Secretary.
Attest: SCUDDER PATHWAY SERIES
on behalf of Scudder Pathway Series:
_______________________________ Conservative Portfolio, Scudder
Secretary Pathway Series: Moderate Portfolio
and Scudder Pathway Series:
Growth Portfolio
------------------------------------
By:
---------------------------------
Its:
--------------------------------
Attest:
FARMERS INVESTMENT TRUST
on behalf of Farmers Income Portfolio,
_______________________________ Farmers Income with Growth Portfolio,
Secretary Farmers Balanced Portfolio, Farmers
Growth with Income Portfolio and
Farmers Growth Portfolio
------------------------------------
By:
---------------------------------
Its:
--------------------------------
AGREED TO AND ACKNOWLEDGED
ONLY WITH RESPECT TO
PARAGRAPH 10.2 HERETO
ZURICH SCUDDER INVESTMENTS, INC.
--------------------------------
By:
-----------------------------
Its:
----------------------------
A-25
<PAGE>
Schedule A
<TABLE>
<CAPTION>
Farmers Fund (Acquired Fund) Pathway Fund (Acquiring Fund)
<S> <C>
Farmers Income Portfolio Scudder Pathway Series: Conservative Portfolio
Farmers Income with Growth Portfolio Scudder Pathway Series: Moderate Portfolio
Farmers Balanced Portfolio Scudder Pathway Series: Moderate Portfolio
Farmers Growth with Income Portfolio Scudder Pathway Series: Moderate Portfolio
Farmers Growth Portfolio Scudder Pathway Series: Growth Portfolio
</TABLE>
A-26
<PAGE>
EXHIBIT B*
MANAGEMENT'S DISCUSSION OF ACQUIRING FUND'S PERFORMANCE
--------------------------------------------------------------------------------
Portfolio Management Discussion August 31, 2000
In the following interview, Donald E. Hall, portfolio manager of Scudder Pathway
Series, discusses the recent market environment and the portfolios' current
investment strategy during the twelve-month period ended August 31, 2000.
Q: During the past year, the stock market has been extremely
volatile. What has been the cause of this trend?
A: Many factors affect the performance of stock prices, but
earnings and interest rates are among the most important. And for
the past year, expectations regarding the direction of both have
been changing at an extremely quick pace, leading to rapid sector
rotations and high levels of market volatility. Although the past
five years have brought occasional inflation scares, the economy
has produced the greatest expansion in its history without
sparking significant price pressures. But in the first half of
the year, a number of factors -- such as higher energy prices, a
soaring stock market, and a tight job market -- prompted the U.S.
Federal Reserve to raise short-term interest rates from 5.25% a
year ago to 6.50% at the close of the reporting period. These
moves, in themselves, have not been a significant negative for
the markets. In all cases the moves were widely anticipated and,
in general, viewed by investors as being a necessity. But the
primary catalyst for volatility has been the changes taking place
in the longer-term outlook for rates. During the times when
prevailing wisdom has said that very few rate hikes would be
needed to cool the economy -- such as in the first two months of
2000, late May, and August -- stocks have generally gained
ground. On the other hand, the periods when investors have been
worried that an indefinite series of rate increases was in the
offing -- such as March-April, and again in July -- have
generally been accompanied by market corrections, some of them
severe.
An additional question that has been hanging over the markets has
been the issue of how corporate earnings would respond to a
slowing economy. One school of thought says that rising
productivity and the proliferation of technology will allow
corporate America to maintain
* Farmers Fund shareholders should be aware that the performance discussion and
data in Exhibit B has not been adjusted to reflect the impact of the sales
charges and distribution fees borne by Class A and Class B shares of the
Pathway Funds, which would reduce performance.
B-1
<PAGE>
--------------------------------------------------------------------------------
the strong earnings growth of the past several years, while
another feels that a slowdown in the economy -- as well as rising
energy prices -- will eventually take a bite out of the bottom
lines of most companies. While the resolution of this question
remains to be seen, the shifting expectations regarding its
outcome have been an important factor in the market's high levels
of volatility during the past year.
Q: How has this affected growth stocks, compared to value stocks?
A: Growth stocks, particularly those in the technology and
biotech sectors, suffered the brunt of the April-May market
correction. Stocks in these groups had risen extremely quickly
throughout the winter months, and had reached valuation levels
that left them very vulnerable to negative developments, such as
rising interest rates. Nevertheless, growth outperformed value by
a wide margin over the full period, due largely to the strength
of its winter run-up and subsequent summer rebound. In general,
investors have found a measure of safety in stocks with stronger
earnings growth, on the basis that such companies would be better
equipped to survive in a difficult economic environment.
On the other hand, the earnings of many stocks in traditional
value areas tend to be much more dependent on the direction of
the economy and interest rates. Although sectors such as energy,
financials, and basic materials showed signs of life during the
summer, value -- as an asset class -- underperformed over the
full period. However, it is important to note that past is not
necessarily prologue. We believe that value -- i.e., the lower
P/E spectrum of the market -- is poised for improved relative
returns from here.
Q: What factors have impacted the performance of stocks overseas?
A: The swings in the international markets have closely followed
those of the U.S., and the relationship between the growth and
value groups has been approximately the
B-2
<PAGE>
--------------------------------------------------------------------------------
same. While the 12-month returns from most overseas markets were
impressive, a variety of local factors have contributed to shaky
overall returns from international equities during the past
half-year. In Europe, the decline of the euro (the common
currency used by European Union members) has been a distinct
negative for dollar-based investors. Meanwhile, Japan's market
has been pressured by the lack of a strong economic recovery,
concerns surrounding the Bank of Japan's interest rate policy,
and fears about the health of the country's corporations. In the
emerging markets stocks have been pressured by rising interest
rates worldwide. Although international equities have produced
spotty performance of late, we believe that they remain an
essential part of a diversified portfolio.
Q: How have rising short-term interest rates affected the bond
market?
A: Despite the Fed's long series of rate hikes, bonds have
actually performed well over both the trailing six- and
twelve-month periods. Government bonds, in particular, have
produced exceptional performance in the wake of the Treasury's
buyback program, which has reduced the supply of outstanding
issues. Meanwhile, corporate bonds have been supported by sound
economic growth, robust corporate profits, positive sector
fundamentals, and attractive valuations. Bond market performance
was particularly impressive during the summer months, when
investors' fears of an indefinite series of interest rate hikes
began to dissipate. In a period of high volatility in the stock
market, bonds proved to be a valuable addition to investors'
portfolios by providing favorable returns and helping to reduce
overall volatility.
Q: What changes did you make in the portfolios during this
period?
A: As we have said in the past, our goal in managing the
portfolios is to establish positions in response to the long-term
trends, rather than attempting to adjust to short-term
developments by making rapid-fire changes.
B-3
<PAGE>
--------------------------------------------------------------------------------
The value of such an approach has been borne out by the rapid
sentiment shifts and numerous sector rotations of the past year,
which would have been nearly impossible to navigate using a
strategy that emphasized short-term trading. We did make two
important adjustments in each of the three portfolios, however.
First, we trimmed our position in international equities to
compensate for the deteriorating outlook for these areas,
especially Japan. While we will always seek to maintain a
position in overseas stocks -- since the sector is so critical
for effective diversification -- we took profits and cut the
portfolios' international exposure by a substantial amount.
The second important adjustment was our decision to boost our
weighting in funds that invest in value stocks and trim our
position in those that invest in growth. The portfolios have been
tilted toward growth during the past year -- which has helped
performance substantially -- but we believe that going forward,
the investment environment will be much less conducive to a
similar performance gap. As a consequence, the portfolios are now
more evenly weighted between growth and value.
Q: What is your outlook for the financial markets from here?
A: We believe that it is important for investors to realize that
the last five years have been an extraordinary time for the stock
market. Led by growth stocks, the S&P 500 Index produced returns
of over 20% annually from 1995-1999. Many investors have become
used to returns of this magnitude, but it is important to note
that this type of performance is far above the market's long-term
average. Similarly, it is unusual for growth to outperform other
sectors by as wide a margin as it has in recent years. Although
many of the pillars that have supported the bull market remain in
place -- such as improving productivity, the growing influence of
technology, and a growing economy -- it is likely that stock
market returns will be more subdued in the coming years. In
addition, it is likely that the performance of growth stocks in
relation to other
B-4
<PAGE>
--------------------------------------------------------------------------------
asset classes will ultimately return to a level closer to the
historical norm.
For this reason, we believe that now, more than ever, investors
should take a long-term view when assessing their investment
strategies. Volatility can be nerve-wracking, and it can lead
undisciplined investors to make ill-advised decisions during
times when the market is falling. However, we believe that those
who establish long-term goals, ensure that their investments are
appropriately diversified, and ignore the short-term movements of
the markets are creating the foundation for a sound financial
future. In managing the Pathway Series, we seek to help you
achieve these goals through our long-term approach and focus on
measured diversification among multiple asset classes. Even if
growth stocks slow from their torrid pace of the last 2-3 years,
we feel that the portfolios will be positioned to prosper by
virtue of their exposure to bonds, value stocks, and
international equities.
B-5
<PAGE>
--------------------------------------------------------------------------------
Portfolio Highlights August 31, 2000
Pathway Conservative Portfolio
Pathway Conservative Portfolio seeks current income and, secondarily, long-term
growth of capital by investing substantially in bond mutual funds, with moderate
exposure to equity funds.
Performance
In the twelve-month period ended August 31, 2000, the
Conservative Portfolio produced a total return of 7.39%, versus a
return of 9.98% for the portfolio's custom benchmark. Detailed
performance information is listed on page B-8.
During the past year, the portfolio gained favorable returns from
both its equity and fixed income components, but its focus on
value stocks -- which is consistent with its conservative
objective -- dampened performance in relation to the index. The
strongest performer among the portfolio's eight mutual fund
holdings was Classic Growth Fund, which is a growth-oriented
offering that was well positioned to prosper in an environment
that generally favored stocks with the best earnings prospects.
International Fund, which benefited from the rally in technology,
telecommunications, and media stocks during the first quarter of
2000, was also a strong contributor over the full period. On the
down side, our three holdings in the value area -- Growth and
Income Fund, Large Company Value Fund, and Small Company Value
Fund -- all underperformed the S&P 500, which is the equity
component of the portfolio's benchmark. Nevertheless, we are
pleased to report that a large value component helped mitigate
the volatility in growth stocks and overseas equities.
The bond component of the portfolio also contributed positive
returns and overall stability amid volatility in the stock
market. Through the three bond funds in the portfolio, we have
exposure to a wide range of sectors, including Treasuries,
corporate bonds, mortgage-backed securities, and high yield
issues. We believe that the structure of the portfolio's income
holdings provides the
B-6
<PAGE>
--------------------------------------------------------------------------------
ideal combination of strong yield potential and extensive
diversification. Although bonds have not received much attention
in recent years due to the run-up in the stock market, their
performance during the past year illustrates their ongoing value
to investors who place an emphasis on diversification.
Portfolio Strategy
As always, the changes we made to the portfolio's weightings
during the twelve-month period were relatively modest. The
overall weighting in bond funds has fallen from 65% to 59% over
the past year, but this is primarily a reflection of the growth
of the portfolio's holdings in equity funds rather than a
specific decision to trim our holdings in this area. The fixed
income position is diversified among Scudder GNMA Fund (5% of net
assets), Scudder Corporate Bond Fund (7%), and Scudder Income
Fund (47%), providing exposure to a variety of sectors within the
bond market. In the stock portion of the portfolio, we cut the
weighting in international funds, for two reasons: first, to
bring the composition of the portfolio more closely in line with
that of the benchmark; and second, to account for what we see as
a deterioration in the investment picture overseas. We also
increased the portfolio's weighting in value funds, to position
the fund for an environment which -- in our view -- will lend
itself to better relative performance from the value sector than
that which has existed over the past two years. Overall, we
believe that the portfolio's extensive diversification will help
position it for an environment of persistent market volatility.
B-7
<PAGE>
--------------------------------------------------------------------------------
Performance Update August 31, 2000
--------------------------------------------------------------------------------
Growth of a $10,000 Investment
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
LBAB Index (60%),
S&P 500 Index (25%),
Scudder Pathway MSCI All Country
Series: Conservative (ex U.S.) Index (5%),
Portfolio LBAB Index* 3-month T-Bill (10%)*
11/96** 10000 10000 10000
2/97 10236 9963 10110
8/97 11006 10402 10813
2/98 11768 10996 11716
8/98 11232 11499 11778
2/99 11871 11684 12845
8/99 12088 11588 13131
2/00 12188 11811 13569
8/00 12981 12463 14442
--------------------------------------------------------------------------------
Fund Index Comparison
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Return
Growth of Average
Period ended 8/31/2000 $10,000 Cumulative Annual
------------------------------------------------------------------------------------
Scudder Pathway Series: Conservative Portfolio
------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 10,739 7.39% 7.39%
------------------------------------------------------------------------------------
Life of Portfolio** $ 13,143 31.43% 7.47%
------------------------------------------------------------------------------------
</TABLE>
LBAB Index (60%), S&P 500 Index (25%), MSCI All Country (ex U.S.) Index (5%),
3-month T-Bill (10%)*
<TABLE>
------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 10,998 9.98% 9.98%
------------------------------------------------------------------------------------
Life of Portfolio** $ 14,442 44.42% 10.29%
------------------------------------------------------------------------------------
</TABLE>
* The Lehman Brothers Aggregate Bond (LBAB) Index is a market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage-backed securities. The Standard & Poor's 500
Index is a capitalization-weighted index of 500 stocks. The index is
designed to measure performance of the broad domestic economy through
changes in the aggregate market value of 500 stocks representing all
major industries. The MSCI All Country (ex U.S.) Index is a market
value-weighted measure of stocks of 46 countries. Index returns assume
reinvestment of dividends and, unlike Portfolio returns, do not reflect
any fees or expenses.
** The Portfolio commenced operations on November 15, 1996. Index
comparisons begin November 30, 1996.
Performance is historical, assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Total return and
principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. If the Adviser had not
maintained some of the Underlying Funds' expenses, the total return for
the Portfolio would have been lower.
B-8
<PAGE>
--------------------------------------------------------------------------------
Portfolio Highlights August 31, 2000
Pathway Balanced Portfolio*
Pathway Balanced Portfolio seeks a balance of growth and income by investing in
a mix of money market, bond, and equity mutual funds.
Performance
In the twelve-month period ended August 31, 2000, the Balanced
Portfolio produced a total return of 15.65%, versus a return of
12.55% for the portfolio's custom benchmark. The portfolio
finished in the top 28% of 467 balanced funds during the period,
according to Lipper Analytical Services. Detailed performance
information is listed on page B-11.
The key to the strong relative performance of the Balanced
Portfolio lies in the favorable returns produced by the growth
component of its equity fund holdings. The top performer was
Development Fund, which is an aggressive growth fund that focuses
on companies with three important characteristics: strong revenue
growth, products with the potential to be a hit in the
marketplace, and top-notch management teams. This focus led the
managers of the Development Fund to build a heavy weighting in
technology issues (over half its portfolio), the top-performing
sector over the past year. The portfolio also benefited from its
holdings in Classic Growth Fund, which is a growth-oriented
offering that was well positioned to prosper in an environment
that generally favored stocks with the best earnings prospects.
International Fund, which also was boosted by its holdings in the
technology, media, and telecommunications areas, was a positive
contributor. Our holdings in funds that invest in value stocks
(Growth and Income Fund, Small Company Value Fund) and stocks in
the developing countries (Emerging Markets Growth Fund) produced
single digit returns, but made important contributions by adding
diversification and helping reduce the overall volatility of the
portfolio.
* The name of Pathway Balanced Portfolio was changed to Pathway Moderate
Portfolio on December 29, 2000.
B-9
<PAGE>
--------------------------------------------------------------------------------
Our holdings in the fixed income area -- Scudder Income Fund and
Scudder Corporate Bond Fund -- also contributed to our goal of
achieving favorable risk-adjusted returns. Between the two funds,
we achieved diversified exposure to a wide range of subsectors
within the bond market, including Treasuries, corporate bonds,
high-yield issues, and mortgage-backed securities. Our holdings
in these areas provided income for the fund, and helped stabilize
its share price during periods when the stock market was falling.
Portfolio Strategy
Consistent with our long-term approach to investing, we made only
minor changes to the portfolio during the past twelve months. We
entered the period with 29% of net assets in Scudder Income Fund
and 8% in Scudder Corporate Bond Fund, and closed with weightings
of 28% and 8%, respectively. We believe that given the recent
volatility in the stock markets, bonds have proven to be
important as ever to maintaining effective diversification. On
the equity side of the portfolio, we made two significant shifts.
First, we trimmed our position in international stock funds in
order to 1) rebalance the outsized position, which had grown to
15% of the portfolio versus 12.15% in the benchmark; and 2) to
account for the deterioration in the investment picture overseas.
While we maintained a position in international stock funds, we
closed the period with 9% of net assets in this area, versus 15%
a year ago. A second, more recent, shift was our decision to
increase our weighting in domestic value funds, at the expense of
growth. The portfolio has been tilted heavily toward growth for
most of the year, which has helped performance significantly.
Going forward, however, we anticipate that the performance gap
between growth and value will narrow significantly, and we have
positioned the portfolio accordingly.
B-10
<PAGE>
--------------------------------------------------------------------------------
Performance Update August 31, 2000
--------------------------------------------------------------------------------
Growth of a $10,000 Investment
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
S&P 500 Index (50%),
LBAB Index (35%),
Scudder Pathway MSCI All Country
Series: Balanced (ex U.S.) Index (10%),
Portfolio S&P 500 Index* LBAB Index* 3-month T-Bill (5%)*
11/96** 10000 10000 10000 10000
2/97 10235 10496 9963 10232
8/97 11074 12048 10402 11229
2/98 11888 14172 10996 12516
8/98 10759 13026 11499 12098
2/99 12107 16969 11684 14129
8/99 12725 18212 11588 14810
2/00 14153 18962 11811 15484
8/00 14716 21187 12463 16670
--------------------------------------------------------------------------------
Fund Index Comparison
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Return
Growth of Average
Period ended 8/31/2000 $10,000 Cumulative Annual
------------------------------------------------------------------------------------
Scudder Pathway Series: Balanced Portfolio
------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 11,565 15.65% 15.65%
------------------------------------------------------------------------------------
Life of Portfolio** $ 14,875 48.75% 11.03%
------------------------------------------------------------------------------------
</TABLE>
S&P 500 Index (50%), LBAB Index (35%), MSCI All Country (ex U.S.) Index (10%),
3-month T-Bill (5%)*
<TABLE>
------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 11,255 12.55% 12.55%
------------------------------------------------------------------------------------
Life of Portfolio** $ 16,670 66.70% 14.58%
------------------------------------------------------------------------------------
</TABLE>
* The Standard & Poor's 500 Index is a capitalization-weighted index of
500 stocks. The index is designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries. The Lehman Brothers Aggregate
Bond (LBAB) Index is a market value-weighted measure of treasury
issues, agency issues, corporate bond issues and mortgage-backed
securities. The MSCI All Country (ex U.S.) Index is a market
value-weighted measure of stocks of 46 countries. Index returns assume
reinvestment of dividends and, unlike Portfolio returns, do not reflect
any fees or expenses.
** The Portfolio commenced operations on November 15, 1996. Index comparisons
begin November 30, 1996.
Performance is historical and assumes reinvestment of all dividends and capital
gains and is not indicative of future results. Total return and principal value
will fluctuate, so an investor's shares, when redeemed, may be worth more or
less than when purchased. If the Adviser had not maintained some of the
Underlying Funds' expenses, the total return for the Portfolio would have been
lower.
B-11
<PAGE>
--------------------------------------------------------------------------------
Portfolio Management Discussion August 31, 2000
Pathway Growth Portfolio
Pathway Growth Portfolio seeks long-term growth of capital by investing
primarily in equity mutual funds. The Portfolio also invests a portion of assets
in bond funds, which offer the potential for capital appreciation as well as
income.
Performance
In the twelve-month period ended August 31, 2000, the Growth
Portfolio produced a total return of 24.24%, versus a return of
13.85% for the portfolio's custom benchmark. We are pleased to
report that the portfolio finished in the top 8% of funds in its
peer group during the period, according to Lipper Analytical
Services. Detailed performance information is listed on page 27.
In a period in which growth stocks outperformed most other
sectors by a substantial margin, our emphasis on growth funds
(within the context of the diversified portfolio) was the most
important factor in our strong performance relative to our peer
group. The top-performing fund was 21st Century Growth Fund,
which emphasized small-cap growth stocks, particularly those in
aggressive areas such as technology. This positioning proved
ideal during a period in which technology was the best-performing
sector in the market. The portfolio also benefited from the
powerful returns of Large Company Growth Fund, which invests in
stocks that its management team believes to be best positioned to
sustain strong long-term earnings growth. International Fund,
which benefited from the rally in technology, telecommunications,
and media stocks during the first quarter of 2000, also was an
important contributor over the full period. In comparison, the
fund holds a relatively small weighting in funds that invest in
value stocks, which helped performance in a period characterized
by the weak performance of this area.
The fund holds 15% of net assets in bond funds, the same
percentage it held in this area when the reporting period began.
The strongest performer in this area was Emerging
B-12
<PAGE>
Markets Income Fund, which was boosted by the improving economic
outlook in the developing countries. Our other holdings -- Income
Fund and Corporate Bond Fund -- provided diversified exposure to
a variety of sectors within the domestic bond market. Although
the returns of these two funds paled in comparison to the
performance of our holdings in growth stocks, they contributed
positively to the portfolio's risk profile by providing ballast
during times when the stock market was falling.
Portfolio Strategy
Although the overall composition of the portfolio has not changed
substantially during the past year -- a fact that is consistent
with our focus on long-term investing -- we did make two
important shifts. First, we trimmed our position in International
Fund from 23% of net assets at the beginning of the period, to
15% by August 31, 2000. This decision, which brings the
portfolio's weighting in this sector closer to that of the
benchmark, reflects our view that although international stocks
remain critical to diversification, the outlook for the overseas
markets has dimmed in recent months. The second important change
was our decision to trim the portfolio's position in growth
stocks, and increase its weighting in value stocks through our
holdings in Large Company Value Fund. The portfolio has been
tilted heavily toward growth for most of the year, a positioning
that boosted performance significantly. Believing that the
performance gap between growth and value will narrow in the
months ahead, we have positioned the portfolio accordingly. On
the fixed income side, we closed the period with exactly the same
weightings as we held when the period began.
B-13
<PAGE>
--------------------------------------------------------------------------------
Performance Update August 31, 2000
--------------------------------------------------------------------------------
Growth of a $10,000 Investment
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
S&P 500 Index (60%),
MSCI All Country
Scudder Pathway (ex U.S.) Index (20%),
Series: Growth LBAB Index (15%),
Portfolio S&P 500 Index* 3-month T-Bill (5%)*
11/96** 10000 10000 10000
2/97 10336 10496 10278
8/97 11340 12048 11407
2/98 12294 14172 12841
8/98 10633 13026 12029
2/99 12660 16969 14580
8/99 14003 18212 15609
2/00 17144 18962 16559
8/00 17398 21187 17771
--------------------------------------------------------------------------------
Fund Index Comparison
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Return
Growth of Average
Period ended 8/31/2000 $10,000 Cumulative Annual
------------------------------------------------------------------------------------
Scudder Pathway Series: Growth Portfolio
------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 12,424 24.24% 24.24%
------------------------------------------------------------------------------------
Life of Portfolio** $ 17,600 76.00% 16.07%
------------------------------------------------------------------------------------
</TABLE>
S&P 500 Index (60%), MSCI All Country (ex U.S.) Index (20%), LBAB Index (15%),
3-month T-Bill (5%)*
<TABLE>
------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 11,385 13.85% 13.85%
------------------------------------------------------------------------------------
Life of Portfolio** $ 17,771 77.71% 16.56%
------------------------------------------------------------------------------------
</TABLE>
* The Standard & Poor's 500 Index is a capitalization-weighted index of
500 stocks. The index is designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries. The MSCI All Country (ex
U.S.) Index is a market value-weighted measure of stocks of 46
countries. The Lehman Brothers Aggregate Bond (LBAB) Index is a market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage-backed securities. Index returns assume
reinvestment of dividends and, unlike Portfolio returns, do not reflect
any fees or expenses.
** The Portfolio commenced operations on November 15, 1996. Index comparisons
begin November 30, 1996.
Performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Total return and
principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. If the Adviser had not
maintained some of the Underlying Funds' expenses, the total return for
the Portfolio would have been lower.
B-14
<PAGE>
APPENDIX
Beneficial Owners of More than 5% of the Funds' Classes of Shares(1)
Farmers Income Portfolio
As of November 30, 2000, 4,163 shares in the aggregate, or 13.89% of the
outstanding shares of Farmers Income Portfolio - Class A - were held in the name
of Betty Torrey, who may be deemed to be the beneficial owner of certain of
these shares.
As of November 30, 2000, 4,661 shares in the aggregate, or 15.55% of the
outstanding shares of Farmers Income Portfolio - Class A - were held in the name
of Pauline Lane, who may be deemed to be the beneficial owner of certain of
these shares.
As of November 30, 2000, 19,575 shares in the aggregate, or 65.32% of the
outstanding shares of Farmers Income Portfolio - Class A - were held in the name
of Clarence Rodriguez, Trustee for the benefit of East Valley Pulmonary Pension
Plan, 5801 E. Main Street, Mesa, AZ 85205, who may be deemed to be the
beneficial owner of certain of these shares.
As of November 30, 2000, 1,342 shares in the aggregate, or 40.83% of the
outstanding shares of Farmers Income Portfolio - Class B - were held in the name
of Lillian Beattie, who may be deemed to be the beneficial owner of certain of
these shares.
As of November 30, 2000, 1,342 shares in the aggregate, or 40.83% of the
outstanding shares of Farmers Income Portfolio - Class B - were held in the name
of Jolene Poole, who may be deemed to be the beneficial owner of certain of
these shares.
As of November 30, 2000, 701 shares in the aggregate, or 6.67% of the
outstanding shares of Farmers Income Portfolio - Class B - were held in the name
of Yazmin Castiel, who may be deemed to be the beneficial owner of certain of
these shares.
As of November 30, 2000, 701 shares in the aggregate, or 6.67% of the
outstanding shares of Farmers Income Portfolio - Class B - were held in the name
of Katilena Yusupova, who may be deemed to be the beneficial owner of certain of
these shares.
--------
(1) Unless otherwise indicated, the information in this appendix reflects
percentage ownership both of the Funds' classes of shares as of November
30, 2000 and of the corresponding classes of shares of the combined Funds
assuming the proposed reorganizations had been consummated on that date.
The percentages that appear in parentheses for the 5% owners of Farmers
Income with Growth Portfolio, Farmers Balanced Portfolio and Farmers Growth
with Income Portfolio reflect percentage ownership of the corresponding
classes of Scudder Pathway Series: Moderate Portfolio ("Moderate
Portfolio") assuming the proposed reorganizations of those Farmers Funds
into Moderate Portfolio had been consummated on November 30, 2000.
<PAGE>
Farmers Income with Growth Portfolio
As of November 30, 2000, 4,163 shares in the aggregate, or 7.12% (1.72%) of
the outstanding shares of Farmers Income with Growth Portfolio - Class A - were
held in the name of Scudder Trust Company, Custodian for IRA, Salem, NH 03079,
who may be deemed to be the beneficial owner of certain of these shares.
As of November 30, 2000, 12,266 shares in the aggregate, or 20.98% (5.06%)
of the outstanding shares of Farmers Income with Growth Portfolio - Class A -
were held in the name of Barbara Peebles, who may be deemed to be the beneficial
owner of certain of these shares.
As of November 30, 2000, 13,433 shares in the aggregate, or 22.98% (5.54%)
of the outstanding shares of Farmers Income with Growth Portfolio - Class A -
were held in the name of Scudder Trust Company, Custodian for IRA, Salem, NH
03079, who may be deemed to be the beneficial owner of certain of these shares.
As of November 30, 2000, 4,187 shares in the aggregate, or 7.16% (1.73%) of
the outstanding shares of Farmers Income with Growth Portfolio - Class A - were
held in the name of Scudder Trust Company, Custodian for IRA, Salem, NH 03079,
who may be deemed to be the beneficial owner of certain of these shares.
As of November 30, 2000, 6,720 shares in the aggregate, or 18.61% (2.50%)
of the outstanding shares of Farmers Income with Growth Portfolio - Class B -
were held in the name of Scudder Trust Company, Custodian for IRA, Salem, NH
03079, who may be deemed to be the beneficial owner of certain of these shares.
As of November 30, 2000, 1,951 shares in the aggregate, or 5.40% (0.72%) of
the outstanding shares of Farmers Income with Growth Portfolio - Class B - were
held in the name of William Wyrick, Trustee for the benefit of William Wyrick
Revocable Trust, who may be deemed to be the beneficial owner of certain of
these shares.
As of November 30, 2000, 2,009 shares in the aggregate, or 5.56% (0.75%) of
the outstanding shares of Farmers Income with Growth Portfolio - Class B - were
held in the names of Marcella and Floyd Edgington, who may be deemed to be the
beneficial owner of certain of these shares.
As of November 30, 2000, 1,956 shares in the aggregate, or 5.41% (0.73%) of
the outstanding shares of Farmers Income with Growth Portfolio - Class B - were
held in the name of Joanne Harrington, who may be deemed to be the beneficial
owner of certain of these shares.
2
<PAGE>
As of November 30, 2000, 4,327 shares in the aggregate, or 11.98% (1.61%)
of the outstanding shares of Farmers Income with Growth Portfolio - Class B -
were held in the name of Kareen Balch, who may be deemed to be the beneficial
owner of certain of these shares.
As of November 30, 2000, 10,618 shares in the aggregate, or 29.40% (3.94%)
of the outstanding shares of Farmers Income with Growth Portfolio - Class B -
were held in the name of Scudder Trust Company, Custodian for IRA, who may be
deemed to be the beneficial owner of certain of these shares.
Farmers Balanced Portfolio
As of November 30, 2000, 4,353 shares in the aggregate, or 5.76% (1.79%) of
the outstanding shares of Farmers Balanced Portfolio - Class A - were held in
the name of SSC Investment Corp., 345 Park Avenue, New York, NY 10154, who may
be deemed to be the beneficial owner of certain of these shares.
As of November 30, 2000, 6,149 shares in the aggregate, or 8.13% (2.53%) of
the outstanding shares of Farmers Balanced Portfolio - Class A - were held in
the name of Carol Boles, Trustee for the benefit of Jimmie and Carol Boles
Living Trust, who may be deemed to be the beneficial owner of certain of these
shares.
As of November 30, 2000, 4,363 shares in the aggregate, or 5.77% (1.80%) of
the outstanding shares of Farmers Balanced Portfolio - Class A - were held in
the name of Dennis Wayne Smith, who may be deemed to be the beneficial owner of
certain of these shares.
As of November 30, 2000, 4,476 shares in the aggregate, or 5.92% (1.85%) of
the outstanding shares of Farmers Balanced Portfolio - Class A - were held in
the name of Scudder Trust Company, Custodian for IRA, who may be deemed to be
the beneficial owner of certain of these shares.
As of November 30, 2000, 7,351 shares in the aggregate, or 9.72% (3.03%) of
the outstanding shares of Farmers Balanced Portfolio - Class A - were held in
the name of Scudder Trust Company, Custodian for IRA, who may be deemed to be
the beneficial owner of certain of these shares.
As of November 30, 2000, 7,952 shares in the aggregate, or 10.51% (3.28%)
of the outstanding shares of Farmers Balanced Portfolio - Class A - were held in
the name of Keith Heppner and Roy & Ben Letourneau, for the benefit of Rio
Grande Bible Institute, 4300 South Business Highway 281, Edinburg, TX 78539, who
may be deemed to be the beneficial owner of certain of these shares.
3
<PAGE>
As of November 30, 2000, 6,282 shares in the aggregate, or 6.05% (2.33%) of
the outstanding shares of Farmers Balanced Portfolio - Class B - were held in
the name of Scudder Trust Company, Custodian for IRA, who may be deemed to be
the beneficial owner of certain of these shares.
As of November 30, 2000, 11,739 shares in the aggregate, or 11.31% (4.36%)
of the outstanding shares of Farmers Balanced Portfolio - Class B - were held in
the name of Scudder Trust Company, Custodian for IRA, who may be deemed to be
the beneficial owner of certain of these shares.
As of November 30, 2000, 7,648 shares in the aggregate, or 7.36% (2.84%) of
the outstanding shares of Farmers Balanced Portfolio - Class B - were held in
the name of Alexander Construction Company, who may be deemed to be the
beneficial owner of certain of these shares.
Farmers Growth with Income Portfolio
As of November 30, 2000, 6,601 shares in the aggregate, or 6.08% (2.72%) of
the outstanding shares of Farmers Growth with Income Portfolio - Class A - were
held in the name of Scudder Trust Company, Custodian for IRA, who may be deemed
to be the beneficial owner of certain of these shares.
As of November 30, 2000, 6,997 shares in the aggregate, or 6.44% (2.88%) of
the outstanding shares of Farmers Growth with Income Portfolio - Class A - were
held in the name of Scudder Trust Company, Custodian for IRA, who may be deemed
to be the beneficial owner of certain of these shares.
As of November 30, 2000, 6,304 shares in the aggregate, or 5.80% (2.60%) of
the outstanding shares of Farmers Growth with Income Portfolio - Class A - were
held in the name of Scudder Trust Company, Custodian for IRA, who may be deemed
to be the beneficial owner of certain of these shares.
As of November 30, 2000, 9,671 shares in the aggregate, or 7.47% (3.59%) of
the outstanding shares of Farmers Growth with Income Portfolio - Class B - were
held in the name of Scudder Trust Company, Custodian for IRA, who may be deemed
to be the beneficial owner of certain of these shares.
Farmers Growth Portfolio
As of November 30, 2000, 15,760 shares in the aggregate, or 6.29% of the
outstanding shares of Farmers Growth Portfolio - Class A - were held in the
names of Daniel and Laurie Steflik, who may be deemed to be the beneficial owner
of certain of these shares.
4
<PAGE>
As of November 30, 2000, 14,858 shares in the aggregate, or 5.93% of the
outstanding shares of Farmers Growth Portfolio - Class A - were held in the name
of Scudder Trust Company, Custodian for IRA, who may be deemed to be the
beneficial owner of certain of these shares.
Scudder Pathway Series: Conservative Portfolio
As of November 30, 2000, 484,559 shares in the aggregate, or 15.43% of the
outstanding shares of Scudder Pathway Series: Conservative Portfolio, Class S
were held in the name of Union Bank, for the benefit of select omnibus, P.O. Box
85484, San Diego, CA 92186 who may deemed to be the beneficial owner of such
shares.
As of November 30, 2000, 696,055 shares in the aggregate, or 22.16% of the
outstanding shares of Scudder Pathway Series: Conservative Portfolio, Class S
were held in the name of IBEW Local #106 Annuity Plan, Scudder Kemper
Investments, Trustee, 322 James Avenue, Jamestown, NY 14701, who may deemed to
be the beneficial owner of such shares.
Scudder Pathway Series: Moderate Portfolio
As of November 30, 2000, 31,434 shares in the aggregate, or 14.02% of the
outstanding shares of Scudder Pathway Series: Moderate Portfolio, Class AARP
were held in the name of Scudder Trust Company, Trustee for the IRA of Arthur
Valla, who may deemed to be the beneficial owner of such shares.
As of November 30, 2000, 104,603 shares in the aggregate, or 46.66% of the
outstanding shares of Scudder Pathway Series: Moderate Portfolio, Class AARP
were held in the name of Scudder Trust Company, Trustee for the IRA of Wayne
Rambo, who may deemed to be the beneficial owner of such shares.
As of November 30, 2000, 14,196 shares in the aggregate, or 6.33% of the
outstanding shares of Scudder Pathway Series: Moderate Portfolio, Class AARP
were held in the names of Merle and Betty Wingo, who may be deemed to be the
beneficial owner of such shares.
5
<PAGE>
For more information, please contact Shareholder Cummunications Corporation,
your Fund's information agent at 1-888-676-7706.
FARMERS
<PAGE>
This Proxy Statement/Prospectus is accompanied by the Pathway Funds'
prospectus relating to Class A, Class B and Class C shares dated December 29,
2000, which was previously filed with the Securities and Exchange Commission
(the "Commission") via EDGAR on January 4, 2001 (File No. 811-08606), which is
incorporated by reference herein.
Pathway Funds' statement of additional information relating to Class A,
Class B and Class C shares dated December 29, 2000, which was previously filed
with the Commission via EDGAR on January 4, 2001 (File No. 811-08606), is
incorporated by reference herein.
Farmers Funds' prospectus dated September 1, 2000, which was previously
filed with the Commission via EDGAR on August 31, 2000 (File No. 333-66385), is
incorporated by reference herein.
<PAGE>
PART B
SCUDDER PATHWAY SERIES
-------------------------------------------------------------------------------
Statement of Additional Information
January 12, 2001
-------------------------------------------------------------------------------
Acquisition of the Assets By and in Exchange for shares of beneficial
of each portfolio series of interest of the series of
Farmers Investment Trust Scudder Pathway Series (the "Acquiring Trust")
222 South Riverside Plaza Two International Place
Chicago, IL 60606 Boston, MA 02110-4103
This Statement of Additional Information is available to the shareholders
of each series of Farmers Investment Trust (Farmers Income Portfolio, Farmers
Income with Growth Portfolio, Farmers Balanced Portfolio, Farmers Growth with
Income Portfolio and Farmers Growth Portfolio) (each, a "Farmers Fund" and
collectively, the "Farmers Funds") in connection with a proposed transaction
whereby three series of the Acquiring Trust (Scudder Pathway Series:
Conservative Portfolio; Scudder Pathway Series: Balanced Portfolio; and Scudder
Pathway Series: Growth Portfolio) (each a "Pathway Fund" and collectively, the
"Pathway Funds") will acquire all or substantially all of the assets and all of
the liabilities of its corresponding Farmers Fund in exchange for the Class A
and Class B shares of beneficial interest of the applicable Pathway Fund (each,
a "Reorganization" and collectively, the "Reorganizations").
This Statement of Additional Information of the Acquiring Trust contains
material which may be of interest to investors but which is not included in the
Proxy Statement/Prospectus of the Acquiring Trust relating to the
Reorganizations. This Statement of Additional Information consists of this cover
page and the following documents:
1. Pathway Funds' statement of additional information relating to Class A,
Class B and Class C shares dated December 29, 2000, which was previously
filed with the Securities and Exchange Commission (the "Commission") via EDGAR
on January 4, 2001 (File No. 811-08606) and is incorporated by reference herein.
2. Pathway Funds' annual report to shareholders for the fiscal year ended
August 31, 2000, which was previously filed with the Commission via EDGAR on
October 18, 2000 (File No. 811-08606) and is incorporated by reference herein.
3. Farmers Funds' prospectus dated September 1, 2000, which was previously
filed with the Commission via EDGAR on August 31, 2000 (File No. 333-66385)
and is incorporated by reference herein.
4. Farmers Funds' statement of additional information dated September 1, 2000,
which was previously filed with the Commission via EDGAR on August 31, 2000
(File No. 333-66385) and is incorporated by reference herein.
<PAGE>
5. Farmers Funds' annual report to shareholders for the fiscal year ended
April 30, 2000, which was previously filed with the Commission via EDGAR on
September 5, 2000 (File No. 811-09085) and is incorporated by reference herein.
Because the net asset value of each Farmers Fund did not exceed 10 percent
of the net asset value of its corresponding Pathway Fund, all measured as of
October 31, 2000, pro forma financial statements have not been included in this
Statement of Additional Information.
This Statement of Additional Information is not a prospectus. A Proxy
Statement/Prospectus dated January 12, 2001 relating to the Reorganizations may
be obtained by writing Farmers Funds at 222 South Riverside Drive, Chicago, IL
60606 or by calling Kemper Distributors, Inc. at 1-800-621-1048. This Statement
of Additional Information should be read in conjunction with the Proxy
Statement/Prospectus.
<PAGE>
<TABLE>
<S> <C>
[LOGO] For more information or to vote by phone
call toll-free 1-888-676-7706.
Or fax both sides of your signed card to
1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669 NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED Friday between the hours of
8:30 A.M. and 5:00 P.M. EST. Faxes will not
be accepted on holidays.
</TABLE>
Please fold and detach card at perforation before mailing
FUND NAME PRINTS HERE Special Meeting of Shareholders
March 14, 2001
I hereby appoint John Millette, Kathryn L. Quirk and Caroline Pearson each with
the full power of substitution, as proxies for the undersigned to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"), as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m., Eastern Time, at the offices of Zurich
Scudder Investments, Inc., 13th Floor, Two International Place, Boston,
Massachusetts 02110, and at any adjournments thereof.
I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.
This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent proxy card, by written notice to the Secretary of
the Trust or by voting in person at the Meeting.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY IN THE ENCLOSED ENVELOPE.
Date ___________________ 2001
Signature should be exactly as the name or names
appear on this proxy card. If the individual
signing the proxy card is a fiduciary (e.g.,
attorney, executor, trustee, guardian, etc.),
the individual's signature must be followed by
his full title.
------------------------------------------------
Signature(s) of Shareholder(s)
FARMER
<PAGE>
Your vote is important - Please vote today!
Please fold and detach card at perforation before mailing
This proxy, if properly executed, will be voted in the manner directed. IF NO
DIRECTION IS MADE ON A PROPERLY EXECUTED PROXY, THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE TRUST. THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.
<TABLE>
<S> <C>
FOR AGAINST ABSTAIN
1. To approve an Agreement and Plan of Reorganization as it relates to (i) the / / / / / /
transfer of all or substantially all of the assets and all of the liabilities
of Farmers Income Portfolio to Scudder Pathway Series: Conservative
Portfolio ("Pathway Conservative Portfolio"), (ii) the distribution to
each shareholder of Farmers Income Portfolio shares of Pathway Conservative
Portfolio of a corresponding class to those held by the shareholder in
Farmers Income Portfolio in an amount equal to the value of the shareholder's
holdings in Farmers Income Portfolio and (iii) the termination of Farmers
Income Portfolio.
</TABLE>
The proxies are authorized to vote in their discretion on any other business
that may properly come before the Meeting and any adjournments thereof.
Please be sure to sign and date this Proxy.
FARMERS 01
<PAGE>
<TABLE>
<S> <C>
[LOGO] For more information or to vote by phone
call toll-free 1-888-676-7706.
Or fax both sides of your signed card to
1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669 NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED Friday between the hours of
8:30 A.M. and 5:00 P.M. EST. Faxes will not
be accepted on holidays.
</TABLE>
Please fold and detach card at perforation before mailing
FUND NAME PRINTS HERE Special Meeting of Shareholders
March 14, 2001
I hereby appoint John Millette, Kathryn L. Quirk and Caroline Pearson each with
the full power of substitution, as proxies for the undersigned to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"), as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m., Eastern Time, at the offices of Zurich
Scudder Investments, Inc., 13th Floor, Two International Place, Boston,
Massachusetts 02110, and at any adjournments thereof.
I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.
This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent proxy card, by written notice to the Secretary of
the Trust or by voting in person at the Meeting.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY IN THE ENCLOSED ENVELOPE.
Date ___________________ 2001
Signature should be exactly as the name or names
appear on this proxy card. If the individual
signing the proxy card is a fiduciary (e.g.,
attorney, executor, trustee, guardian, etc.),
the individual's signature must be followed by
his full title.
------------------------------------------------
Signature(s) of Shareholder(s)
FARMER
<PAGE>
Your vote is important - Please vote today!
Please fold and detach card at perforation before mailing
This proxy, if properly executed, will be voted in the manner directed. IF NO
DIRECTION IS MADE ON A PROPERLY EXECUTED PROXY, THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE TRUST. THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.
<TABLE>
<S> <C>
FOR AGAINST ABSTAIN
2. To approve an Agreement and Plan of Reorganization as it relates to (i) the / / / / / /
transfer of all or substantially all of the assets and all of the liabilities
of Farmers Income with Growth Portfolio to Scudder Pathway Series: Moderate
Portfolio ("Pathway Moderate Portfolio"), (ii) the distribution to each
shareholder of Farmers Income with Growth Portfolio shares of Pathway
Moderate Portfolio of a corresponding class to those held by the shareholder
in Farmers Income with Growth Portfolio in an amount equal to the value of
the shareholder's holdings in Farmers Income with Growth Portfolio and (iii)
the termination of Farmers Income with Growth Portfolio.
</TABLE>
The proxies are authorized to vote in their discretion on any other business
that may properly come before the Meeting and any adjournments thereof.
Please be sure to sign and date this Proxy.
FARMER 02
<PAGE>
<TABLE>
<S> <C>
[LOGO] For more information or to vote by phone
call toll-free 1-888-676-7706.
Or fax both sides of your signed card to
1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669 NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED Friday between the hours of
8:30 A.M. and 5:00 P.M. EST. Faxes will not
be accepted on holidays.
</TABLE>
Please fold and detach card at perforation before mailing
FUND NAME PRINTS HERE Special Meeting of Shareholders
March 14, 2001
I hereby appoint John Millette, Kathryn L. Quirk and Caroline Pearson each with
the full power of substitution, as proxies for the undersigned to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"), as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m., Eastern Time, at the offices of Zurich
Scudder Investments, Inc., 13th Floor, Two International Place, Boston,
Massachusetts 02110, and at any adjournments thereof.
I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.
This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent proxy card, by written notice to the Secretary of
the Trust or by voting in person at the Meeting.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY IN THE ENCLOSED ENVELOPE.
Date ___________________ 2001
Signature should be exactly as the name or names
appear on this proxy card. If the individual
signing the proxy card is a fiduciary (e.g.,
attorney, executor, trustee, guardian, etc.),
the individual's signature must be followed by
his full title.
------------------------------------------------
Signature(s) of Shareholder(s)
FARMER
<PAGE>
Your vote is important - Please vote today!
Please fold and detach card at perforation before mailing
This proxy, if properly executed, will be voted in the manner directed. IF NO
DIRECTION IS MADE ON A PROPERLY EXECUTED PROXY, THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE TRUST. THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.
<TABLE>
<S> <C>
FOR AGAINST ABSTAIN
3. To approve an Agreement and Plan of Reorganization as it relates to (i) the / / / / / /
transfer of all or substantially all of the assets and all of the liabilities
of Farmers Balanced Portfolio to Scudder Pathway Series: Moderate Portfolio
("Pathway Moderate Portfolio"), (ii) the distribution to each shareholder of
Farmers Balanced Portfolio shares of Pathway Moderate Portfolio of a
corresponding class to those held by the shareholder in Farmers Balanced
Portfolio in an amount equal to the value of the shareholder's holdings in
Farmers Balanced Portfolio and (iii) the termination of Farmers Balanced
Portfolio.
</TABLE>
The proxies are authorized to vote in their discretion on any other business
that may properly come before the Meeting and any adjournments thereof.
Please be sure to sign and date this Proxy.
FARMER 03
<PAGE>
<TABLE>
<S> <C>
[LOGO] For more information or to vote by phone
call toll-free 1-888-676-7706.
Or fax both sides of your signed card to
1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669 NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED Friday between the hours of
8:30 A.M. and 5:00 P.M. EST. Faxes will not
be accepted on holidays.
</TABLE>
Please fold and detach card at perforation before mailing
FUND NAME PRINTS HERE Special Meeting of Shareholders
March 14, 2001
I hereby appoint John Millette, Kathryn L. Quirk and Caroline Pearson each with
the full power of substitution, as proxies for the undersigned to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"), as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m., Eastern Time, at the offices of Zurich
Scudder Investments, Inc., 13th Floor, Two International Place, Boston,
Massachusetts 02110, and at any adjournments thereof.
I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.
This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent proxy card, by written notice to the Secretary of
the Trust or by voting in person at the Meeting.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY IN THE ENCLOSED ENVELOPE.
Date ___________________ 2001
Signature should be exactly as the name or names
appear on this proxy card. If the individual
signing the proxy card is a fiduciary (e.g.,
attorney, executor, trustee, guardian, etc.),
the individual's signature must be followed by
his full title.
------------------------------------------------
Signature(s) of Shareholder(s)
FARMER
<PAGE>
Your vote is important - Please vote today!
Please fold and detach card at perforation before mailing
This proxy, if properly executed, will be voted in the manner directed. IF NO
DIRECTION IS MADE ON A PROPERLY EXECUTED PROXY, THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE TRUST. THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.
<TABLE>
<S> <C>
FOR AGAINST ABSTAIN
4. To approve an Agreement and Plan of Reorganization as it relates to (i) the / / / / / /
transfer of all or substantially all of the assets and all of the liabilities
of Farmers Growth with Income Portfolio to Scudder Pathway Series: Moderate
Portfolio ("Pathway Moderate Portfolio"), (ii) the distribution to each
shareholder of Farmers Growth with Income Portfolio shares of Pathway
Moderate Portfolio of a corresponding class to those held by the shareholder
in Farmers Growth with Income Portfolio in an amount equal to the value of
the shareholder's holdings in Farmers Growth with Income Portfolio and (iii)
the termination of Farmers Growth with Income Portfolio.
</TABLE>
The proxies are authorized to vote in their discretion on any other business
that may properly come before the Meeting and any adjournments thereof.
Please be sure to sign and date this Proxy.
FARMER 04
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[LOGO] For more information or to vote by phone
call toll-free 1-888-676-7706.
Or fax both sides of your signed card to
1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669 NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED Friday between the hours of
8:30 A.M. and 5:00 P.M. EST. Faxes will not
be accepted on holidays.
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Please fold and detach card at perforation before mailing
FUND NAME PRINTS HERE Special Meeting of Shareholders
March 14, 2001
I hereby appoint John Millette, Kathryn L. Quirk and Caroline Pearson each with
the full power of substitution, as proxies for the undersigned to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"), as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m., Eastern Time, at the offices of Zurich
Scudder Investments, Inc., 13th Floor, Two International Place, Boston,
Massachusetts 02110, and at any adjournments thereof.
I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.
This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent proxy card, by written notice to the Secretary of
the Trust or by voting in person at the Meeting.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY IN THE ENCLOSED ENVELOPE.
Date ___________________ 2001
Signature should be exactly as the name or names
appear on this proxy card. If the individual
signing the proxy card is a fiduciary (e.g.,
attorney, executor, trustee, guardian, etc.),
the individual's signature must be followed by
his full title.
------------------------------------------------
Signature(s) of Shareholder(s)
FARMER
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Your vote is important - Please vote today!
Please fold and detach card at perforation before mailing
This proxy, if properly executed, will be voted in the manner directed. IF NO
DIRECTION IS MADE ON A PROPERLY EXECUTED PROXY, THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE TRUST. THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.
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<S> <C>
FOR AGAINST ABSTAIN
5. To approve an Agreement and Plan of Reorganization as it relates to (i) the / / / / / /
transfer of all or substantially all of the assets and all of the liabilities
of Farmers Growth Portfolio to Scudder Pathway Series: Growth Portfolio
("Pathway Growth Portfolio"), (ii) the distribution to each shareholder of
Farmers Growth Portfolio shares of Pathway Growth Portfolio of a
corresponding class to those held by the shareholder in Farmers Growth
Portfolio in an amount equal to the value of the shareholder's holdings in
Farmers Growth Portfolio and (iii) the termination of Farmers Growth
Portfolio.
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The proxies are authorized to vote in their discretion on any other business
that may properly come before the Meeting and any adjournments thereof.
Please be sure to sign and date this Proxy.
FARMER 05
