SCUDDER PATHWAY SERIES
Two International Place
Boston, Massachusetts 02110
Scudder Pathway Series is a professionally managed, open-end
investment company which offers three investment portfolios.
CONSERVATIVE PORTFOLIO
MODERATE PORTFOLIO
GROWTH PORTFOLIO
CLASS AARP AND CLASS S
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STATEMENT OF ADDITIONAL INFORMATION
December 29, 2000
As revised January 10, 2001
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This combined Statement of Additional Information is not a prospectus. The
combined prospectus of Scudder Pathway Series Portfolios dated December 29,
2000, as amended from time to time, may be obtained without charge by writing to
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
The Annual Report to Shareholders of each Portfolio dated August 31, 2000 is
incorporated by reference and is hereby deemed to be part of this Statement of
Additional Information.
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TABLE OF CONTENTS
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SCUDDER PATHWAY SERIES' INVESTMENT OBJECTIVES AND POLICIES............................................................1
General Investment Objectives and Policies...................................................................1
Master/feeder structure......................................................................................2
Investment of Uninvested Cash Balances.......................................................................2
The Underlying Scudder Funds.................................................................................2
Risk Factors of Underlying Scudder Funds....................................................................23
Investment Restrictions of the Portfolios...................................................................23
PURCHASES............................................................................................................24
Additional Information About Opening An Account.............................................................24
Minimum Balances............................................................................................26
Additional Information About Making Subsequent Investments..................................................26
Additional Information About Making Subsequent Investments by QuickBuy......................................26
Checks......................................................................................................27
Wire Transfer of Federal Funds..............................................................................27
Share Price.................................................................................................27
Share Certificates..........................................................................................28
Other Information...........................................................................................28
EXCHANGES AND REDEMPTIONS............................................................................................28
Exchanges...................................................................................................28
Redemption by Telephone.....................................................................................29
Redemption by QuickSell.....................................................................................30
Redemption by Mail or Fax...................................................................................30
Redemption-in-Kind..........................................................................................31
Other Information...........................................................................................31
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................31
Internet access.............................................................................................32
Dividends and Capital Gains Distribution Options............................................................32
Reports to Shareholders.....................................................................................32
Transaction Summaries.......................................................................................33
THE SCUDDER FAMILY OF FUNDS..........................................................................................33
SPECIAL PLAN ACCOUNTS................................................................................................34
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals..............................................35
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........35
Scudder IRA: Individual Retirement Account..................................................................35
Scudder Roth IRA: Individual Retirement Account.............................................................36
The following paragraph applies to Class S shareholders only:...............................................36
Scudder 403(b) Plan.........................................................................................36
Automatic Withdrawal Plan...................................................................................36
Group or Salary Deduction Plan..............................................................................37
Automatic Investment Plan...................................................................................37
Uniform Transfers/Gifts to Minors Act.......................................................................37
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................38
PERFORMANCE INFORMATION..............................................................................................38
Average Annual Total Return.................................................................................38
Cumulative Total Return.....................................................................................39
Total Return................................................................................................40
TRUST ORGANIZATION...................................................................................................41
Investment Advisor..........................................................................................42
AMA InvestmentLink(SM) Program..............................................................................44
CODE OF ETHICS.......................................................................................................44
Management Fees of Underlying Scudder Funds.................................................................44
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TABLE OF CONTENTS (continued)
Page
SPECIAL SERVICING AGREEMENT..........................................................................................46
TRUSTEES AND OFFICERS................................................................................................47
REMUNERATION.........................................................................................................49
REMUNERATION.........................................................................................................49
DISTRIBUTOR..........................................................................................................50
TAXES................................................................................................................50
Taxation of the Portfolios and Their Shareholders...........................................................50
Taxation of the Underlying Scudder Funds....................................................................52
PORTFOLIO TRANSACTIONS...............................................................................................53
Portfolio Turnover..........................................................................................53
NET ASSET VALUE......................................................................................................54
ADDITIONAL INFORMATION...............................................................................................54
Experts.....................................................................................................54
Shareholder Indemnification.................................................................................54
Other Information...........................................................................................55
FINANCIAL STATEMENTS.................................................................................................56
GLOSSARY.............................................................................................................57
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SCUDDER PATHWAY SERIES' INVESTMENT OBJECTIVES AND POLICIES
General Investment Objectives and Policies
Scudder Pathway Series (the "Trust") is an open-end management investment
company composed of three separate diversified portfolios (the "Portfolios"),
which invest primarily in existing Scudder Funds (the "Underlying Scudder
Funds"), according to well-defined investment objectives. The Portfolios may
also invest in money market instruments to provide for redemptions and for
temporary or defensive purposes. It is impossible to accurately predict how long
such alternate strategies may be utilized. Each Portfolio offers a
professionally managed, long-term investment program that can serve as a
complete investment program or as a core part of a larger portfolio. Achievement
of each Portfolio's objective cannot be assured.
As of September 25, 2000 for Conservative Portfolio and Growth Portfolio and as
of October 2, 2000 for Moderate Portfolio, this Statement of Additional
Information offers two classes of shares to provide investors with different
purchase options. Only Class AARP and Class S are offered herein. Each Portfolio
has five classes: Class AARP, Class S, Class A, Class B and Class C. Each class
has its own important features and policies. In addition, as of the respective
dates noted above for each portfolio, all existing shares of Moderate Portfolio,
Conservative Portfolio and Growth Portfolio were redesignated Class S shares of
their respective portfolios. Shares of Class AARP will be especially designed
for members of AARP.
The Portfolios are professionally managed portfolios which allocate their
investments among select funds in the Scudder Family of Funds. Each Portfolio is
designed for investors seeking a distinct investment style: a conservative
investment approach ("Pathway Series: Conservative Portfolio"), a balance of
growth and income ("Pathway Series: Moderate Portfolio") or growth of capital
("Pathway Series: Growth Portfolio"). The Portfolios have been created in
response to increasing demand by mutual fund investors for a simple and
effective means of structuring a diversified mutual fund investment program
suited to their general needs. As has been well documented in the financial
press, the proliferation of mutual funds over the last several years has left
many investors confused and in search of a simpler means to manage their
investments. Many mutual fund investors realize the value of diversifying their
investments in a number of mutual funds (e.g., a money market fund for liquidity
and price stability, a growth fund for long-term appreciation, an income fund
for current income and relative safety of principal), but need professional
management to decide such questions as which mutual funds to select, how much of
their assets to commit to each fund and when to allocate their selections. The
Portfolios will allow investors to rely on Zurich Scudder Investments, Inc. (the
"Advisor") to determine (within clearly explained parameters) the amount to
invest in each of several Underlying Scudder Funds and the timing of such
investments. The Portfolios may each borrow money for temporary, emergency or
other purposes, including investment leverage purposes, as determined by the
Trustees. The Investment Company Act of 1940, as amended, (the "1940 Act")
requires borrowings to have 300% asset coverage. The Portfolios may each also
enter into reverse repurchase agreements.
Except as otherwise indicated, each Portfolio's investment objectives and
policies are not fundamental and may be changed without a vote of shareholders.
If there is a change in a Portfolio's investment objective, shareholders should
consider whether the Portfolio remains an appropriate investment in light of
their then current financial position and needs. There can be no assurance that
the Portfolio's objectives will be met.
The investment objectives of the Portfolios are as follows:
Conservative Portfolio
The Conservative Portfolio seeks current income and, as a secondary objective,
long-term growth of capital. This portfolio may be suitable for investors with
an investment time horizon of 3-5 years or more.
Moderate Portfolio
The Moderate Portfolio seeks a balance of current income and growth of capital.
This portfolio may be suitable for investors with an investment time horizon of
5-10 years.
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Growth Portfolio
The Growth Portfolio seeks long-term growth of capital. This portfolio may be
suitable for investors with an investment time horizon of 10 years or more.
Master/feeder structure
The Board of Trustees has the discretion to retain the current distribution
arrangement for each Portfolio while investing in a master fund in a
master/feeder structure fund as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Investment of Uninvested Cash Balances
The Fund may have cash balances that have not been invested in portfolio
securities ("Uninvested Cash"). Uninvested Cash may result from a variety of
sources, including dividends or interest received from portfolio securities,
unsettled securities transactions, reserves held for investment strategy
purposes, scheduled maturity of investments, liquidation of investment
securities to meet anticipated redemptions and dividend payments, and new cash
received from investors. Uninvested Cash may be invested directly in money
market instruments or other short-term debt obligations. Pursuant to an
Exemptive Order issued by the Securities and Exchange Commission (the "SEC"),
the Fund may use Uninvested Cash to purchase shares of affiliated funds
including money market funds, short-term bond funds and Scudder Cash Management
Investment Trust, or one or more future entities for which Zurich Scudder
Investments acts as trustee or investment advisor that operate as cash
management investment vehicles and that are excluded from the definition of
investment company pursuant to section 3(c)(1) or 3(c)(7) of the 1940 Act
(collectively, the "Central Funds") in excess of the limitations of Section
12(d)(1) of the Investment Company Act. Investment by the Fund in shares of the
Central Funds will be in accordance with the Fund's investment policies and
restrictions as set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
The Underlying Scudder Funds
Each Portfolio will purchase or sell securities to: (a) accommodate purchases
and sales of each Portfolio's shares, (b) change the percentages of each
Portfolio's assets invested in each of the Underlying Scudder Funds in response
to changing market conditions, and (c) maintain or modify the allocation of each
Portfolio's assets in accordance with the investment mixes described below. The
Portfolios invest in Class S shares of each fund except for Scudder Capital
Growth Fund, Scudder GNMA Fund and Scudder Small Company Stock Fund, which all
invest in Class AARP shares.
Portfolio managers will allocate Portfolio assets among the Underlying Scudder
Funds in accordance with predetermined percentage ranges, based on the Advisor's
outlook for the financial markets, the world's economies and the relative
performance potential of the Underlying Scudder Funds. The Underlying Scudder
Funds have been selected to represent a broad spectrum of investment options for
the Portfolios, subject to the following investment ranges: (Conservative)
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50-70% fixed income mutual funds, 30-50% equity mutual funds; (Moderate) 50-70%
equity mutual funds, 30-50% fixed income mutual funds; and (Growth) 75-95%
equity mutual funds, 5-25% fixed income mutual funds. The allowed range of
investment in international equity funds is (Conservative) 0-10%, with none in
emerging markets funds; (Moderate) 0-20%, with up to 5% in emerging markets
funds; (Growth) 0-30%, with up to 10% in emerging markets funds. The allowed
range of investment in small cap stock equity funds is (Conservative) 0-5%,
(Moderate) 0-10% and (Growth) 0-20%. None of the Portfolios may invest more than
75% of their equity allocation in either all growth or all value funds and none
of the Portfolios may invest more than 20% of their fixed income allocation in
high yield bond funds.
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Conservative Portfolio Moderate Portfolio Growth Portfolio
Underlying Scudder Funds Underlying Scudder Funds Underlying Scudder Funds
------------------------ ------------------------ ------------------------
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Bond Mutual Funds Equity Mutual Funds Equity Mutual Funds
----------------- ------------------- -------------------
Scudder Emerging Markets Income Fund Classic Growth Fund-Scudder Shares Classic Growth Fund-Scudder Shares
Scudder Global Bond Fund Global Discovery Fund-Scudder Shares Global Discovery Fund-Scudder Shares
Scudder GNMA Fund Scudder Balanced Fund Scudder Balanced Fund
Scudder High Yield Bond Fund Scudder Capital Growth Fund Scudder Capital Growth Fund
Scudder Income Fund Scudder Development Fund Scudder Development Fund
Scudder Short Term Bond Fund Scudder Dividend & Growth Fund Scudder Dividend & Growth Fund
Scudder Emerging Markets Growth Fund Scudder Emerging Markets Growth Fund
Equity Mutual Funds Scudder Global Fund Scudder Global Fund
------------------- Scudder Gold Fund Scudder Gold Fund
Classic Growth Fund-Scudder Shares Scudder Greater Europe Growth Fund Scudder Greater Europe Growth Fund
Global Discovery Fund-Scudder Shares Scudder Growth and Income Fund Scudder Growth and Income Fund
Scudder Balanced Fund Scudder Health Care Fund Scudder Health Care Fund
Scudder Capital Growth Fund Scudder International Fund Scudder International Fund
Scudder Development Fund Scudder Large Company Growth Fund Scudder Large Company Growth Fund
Scudder Dividend & Growth Fund Scudder Large Company Value Fund Scudder Large Company Value Fund
Scudder Emerging Markets Growth Fund Scudder Latin America Fund Scudder Latin America Fund
Scudder Global Fund Scudder Pacific Opportunities Fund Scudder Pacific Opportunities Fund
Scudder Gold Fund Scudder Select 500 Fund Scudder Select 500 Fund
Scudder Greater Europe Growth Fund Scudder Select 1000 Growth Fund Scudder Select 1000 Growth Fund
Scudder Growth and Income Fund Scudder S&P 500 Index Fund Scudder S&P 500 Index Fund
Scudder Health Care Fund Scudder Small Company Stock Fund Scudder Small Company Stock Fund
Scudder International Fund Scudder Small Company Value Fund Scudder Small Company Value Fund
Scudder Large Company Growth Fund Scudder Technology Innovation Fund Scudder Technology Innovation Fund
Scudder Large Company Value Fund Scudder 21st Century Growth Fund Scudder 21st Century Growth Fund
Scudder Latin America Fund The Japan Fund The Japan Fund
Scudder Pacific Opportunities Fund Value Fund-Scudder Shares Value Fund-Scudder Shares
Scudder Select 500 Fund
Scudder Select 1000 Growth Fund
Scudder S&P 500 Index Fund Bond Mutual Funds Bond Mutual Funds
Scudder Small Company Stock Fund ----------------- -----------------
Scudder Small Company Value Fund Scudder Emerging Markets Income Fund Scudder Emerging Markets Income Fund
Scudder Technology Innovation Fund Scudder Global Bond Fund Scudder Global Bond Fund
Scudder 21st Century Growth Fund Scudder GNMA Fund Scudder GNMA Fund
The Japan Fund Scudder High Yield Bond Fund Scudder High Yield Bond Fund
Value Fund-Scudder Shares Scudder Income Fund Scudder Income Fund
Scudder Short Term Bond Fund Scudder Short Term Bond Fund
Money Market Funds Money Market Funds Money Market Funds
------------------ ------------------ ------------------
Scudder Cash Investment Trust Scudder Cash Investment Trust Scudder Cash Investment Trust
Scudder Money Market Series -- Scudder Money Market Series -- Scudder Scudder Money Market Series -- Scudder
Scudder Premium Money Market Premium Money Market Shares Premium Money Market Shares
Shares
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The following Underlying Scudder Funds are the money market funds in which the
Portfolios may invest and will likely serve as the primary cash reserve portion
of each Portfolio.
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Scudder Cash Investment Trust (SCIT) seeks to maintain stability of capital and,
consistent therewith, to maintain liquidity of capital and to provide current
income. The Fund seeks to achieve its objectives by investing in money market
securities. The Fund seeks to maintain a constant net asset value of $1.00 per
share and declares dividends daily. There can be no assurance that the stable
net asset value will be maintained and shares of the Fund are not insured or
guaranteed by the U.S. Government. The Fund purchases domestic and foreign U.S.
dollar-denominated money market securities. All of the Fund's portfolio
securities must meet certain quality criteria at the time of purchase.
Generally, the Fund may purchase only securities which are rated, or issued by a
company with comparable securities rated, within the two highest quality rating
categories of one or more of the following rating agencies: Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Services, a division of
McGraw Hill Companies, Inc. ("S&P") and Fitch Investors Service, Inc. ("Fitch").
The maturity of each investment in the Fund's portfolio is 397 calendar days or
less, except in the case of U.S. Government securities which may have maturities
of up to 762 calendar days or less. The dollar-weighted average maturity of the
Fund's portfolio investments varies with money market conditions, but is always
90 days or less. As a money market fund with a short-term maturity, the Fund's
income fluctuates with changes in interest rates but its price is expected to
remain fixed at $1.00 per share.
SCIT may invest in short-term securities consisting of: obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
obligations of supranational organizations such as the International Bank for
Reconstruction and Development (the World Bank); obligations of domestic banks
and foreign branches of domestic banks, including bankers' acceptances,
certificates of deposit ("CD's"), deposit notes and time deposits; and
obligations of savings and loan institutions.
SCIT may also invest in: instruments whose credit has been enhanced by banks
(letters of credit), insurance companies (surety bonds) or other corporate
entities (corporate guarantees); corporate obligations, including commercial
paper, notes, bonds, loans and loan participations; securities with variable or
floating interest rates; when-issued securities, asset-backed securities,
including certificates, participations and notes; municipal securities,
including notes, bonds and participation interests, either taxable or tax free;
and illiquid securities. SCIT has adopted 144a procedures for the valuation of
illiquid securities.
In addition, SCIT may invest in repurchase agreement and securities with put
features. SCIT may also hold cash.
Scudder Money Market Series - Scudder Premium Money Market Shares seeks to
provide investors with as high a level of current income as is consistent with
its investment policies and with preservation of capital and liquidity. The Fund
invests exclusively in a broad range of short-term money market instruments that
have remaining maturities of not more than 397 calendar days and certain
repurchase agreements. These money market securities consist of obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, taxable and tax-exempt municipal obligations, corporate and
bank obligations, CD's, bankers' acceptances and variable amount master demand
notes. The fund will maintain a dollar-weighted average maturity of 90 days or
less in an effort to maintain a constant net asset value of $1.00 per share, but
there is no assurance that it will be able to do so.
The bank obligations in which the Fund may invest include negotiable CD's,
bankers' acceptances, fixed time deposits or other short-term bank obligations.
Generally, the Fund may not invest less than 25% of the current value of its
total assets in bank obligations (including bank obligations subject to
repurchase agreements). The Fund limits its investments in U.S. bank obligations
to banks (including foreign branches, the obligations of which are guaranteed by
the U.S. parent) that have at least $1 billion in total assets at the time of
investment. "U.S. banks" include commercial banks that are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. In
addition, the Fund may invest in obligations of savings banks and savings and
loan associations insured by the Federal Deposit Insurance Corporation that have
total assets in excess of $1 billion at the time of the investment. The Fund may
invest in U.S. dollar-denominated obligations of foreign banks subject to the
following conditions: the foreign banks (based upon their most recent annual
financial statements) at the time of investment (i) have more than U.S. $10
billion, or the equivalent in other currencies, in total assets; (ii) are among
the 100 largest banks in the world as determined on the basis of assets; and
(iii) have branches or agencies in the U.S.; and (iv) are obligations which, in
the opinion of the Advisor, are of an investment quality comparable to
obligations of U.S. banks in which the Fund may invest. Such investments may
involve greater risks than those affecting U.S. bank or Canadian affiliates of
U.S. banks. In addition, foreign banks are not subject to examination by any
U.S. government agency or instrumentality.
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The Fund may invest in U.S. dollar-denominated CD's and promissory notes issued
by Canadian affiliates of U.S. banks under circumstances where the instruments
are guaranteed as to principal and interest by the U.S. bank. While foreign
obligations generally involve greater risks than those of domestic obligations,
such as risks relating to liquidity, marketability, foreign taxation,
nationalization and exchange controls, generally the Advisor believes that these
risks are substantially less in the case of instruments issued by Canadian
affiliates that are guaranteed by U.S. banks than in the case of other foreign
money market instruments.
There is no limitation on the amount of the Fund's assets that may be invested
in obligations of foreign banks that meet the conditions set forth above. Such
investments may involve greater risks than those affecting U.S. banks or
Canadian affiliates of U.S. banks. In addition, foreign banks are not subject to
examination by any U.S. Governmental agency or instrumentality.
Except for obligations of foreign banks and foreign branches of U.S. banks, the
Fund will not invest in the securities of foreign issuers. Generally, the Fund
may not invest less than 25% of the current value of its total assets in bank
obligations (including bank obligations subject to repurchase agreements).
Generally, the commercial paper purchased by the Fund is limited to direct
obligations of domestic corporate issuers, including bank holding companies,
which obligations, at the time of investment, are (i) rated "P-1" by Moody's,
"A-1" or better by S&P or "F-1" by Fitch, (ii) issued or guaranteed as to
principal and interest by issuers having an existing debt security rating of
"Aa" or better by Moody's or "AA" or better by S&P or Fitch, or (iii) securities
that, if not rated, are of comparable investment quality as determined by the
Advisor in accordance with procedures adopted by the Corporation's Board of
Directors.
All of the securities in which the Fund will invest must meet credit standards
applied by the Advisor pursuant to procedures established by the Board of
Directors. Should an issue of securities cease to be rated or if its rating is
reduced below the minimum required for purchase by the Fund, the Advisor will
dispose of any such security, as soon as practicable, unless the Directors of
the Corporation determine that such disposal would not be in the best interests
of the Fund.
In addition, the Fund may invest in variable or floating rate obligations,
obligations backed by bank letters of credit, when-issued securities and
securities with put features. The Fund has adopted 144a procedures for the
valuation of illiquid securities.
The following Underlying Scudder Funds are bond mutual funds, which seek to
provide current income.
Scudder Emerging Markets Income Fund is a non-diversified investment company
which seeks to provide high current income. As a secondary objective, the Fund
seeks long-term capital appreciation. In pursuing these goals, the Fund invests
at least 50% of its total assets in high-yielding, high-risk debt securities
issued by governments and corporations in emerging markets. The Fund considers
"emerging markets" to include any country that is defined as an emerging or
developing economy by any one of the following: International Bank for
Reconstruction and Development (i.e., the World Bank), the International Finance
Corporation or the United Nations or its authorities. To reduce currency risk,
the Fund will invest at least 65% of its assets in U.S. dollar-denominated debt
securities. Therefore, no more than 35% of the Fund's assets may be invested in
debt securities denominated in foreign currencies. By focusing on fixed-income
instruments issued in emerging markets, the Fund invests predominantly in debt
securities that are rated below investment-grade. The Fund may invest up to 5%
of its net assets in non-performing securities whose quality is comparable to
securities rated as low as D by S&P or C by Moody's. The Fund involves
above-average bond fund risk and can invest entirely in high yield/high risk
bonds. Investments in emerging markets can be volatile. The Fund's share price
and yield can fluctuate daily in response to political events, changes in the
perceived creditworthiness of emerging nations, fluctuations in interest rates
and, to a certain extent, movements in foreign currencies.
In addition, Scudder Emerging Markets Income Fund may invest up to 35% of its
total assets in securities other than debt obligations issued in emerging
markets. These holdings include debt securities and money market instruments
issued by corporations and governments based in developed markets, including up
to 20% of total assets in U.S. fixed income-instruments. The Fund has adopted
144a procedures for the valuation of illiquid securities.
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<PAGE>
The Fund may for temporary, defensive or emergency purposes invest without limit
in U.S. debt securities including short-term money market securities. It is
impossible to accurately predict how long such alternative strategies may be
utilized. In addition, the Fund may invest in shares of closed end investment
companies, warrants, reverse repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
Scudder Global Bond Fund is a non-diversified investment company which seeks to
provide total return with an emphasis on current income by investing primarily
in high-grade bonds denominated in foreign currencies and the U.S. dollar. As a
secondary objective, the Fund seeks capital appreciation. The Fund invests
principally in a managed portfolio of high-grade intermediate- and long-term
bonds denominated in the U.S. dollar and foreign currencies, including bonds
denominated in the European Currency Unit (ECU). (Intermediate-term bonds
generally have maturities between three and eight years and long-term bonds
generally have maturities of greater than eight years.) Portfolio investments
are selected on the basis of, among other things, yields, credit quality, and
the fundamental outlooks for currency and interest rate trends in different
parts of the globe, taking into account the ability to hedge a degree of
currency or local bond price risk. At least 65% of the Fund's investments will
consist of high-grade debt securities, which are those rated in one of the three
highest rating categories of one of the major U.S. rating services or, if
unrated, considered to be of equivalent quality in local currency terms as
determined by the Advisor. The Fund may also invest up to 15% of its net assets
in debt securities rated BBB or BB by S&P or Baa or Ba by Moody's, or unrated
securities considered to be of equivalent quality by the Advisor. The Fund does
not invest in any securities rated B or lower. Under normal market conditions,
the Fund will invest at least 15% of its total assets in U.S. dollar-denominated
securities, issued domestically or abroad. The Fund may invest in debt
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities; obligations issued or guaranteed by foreign national
governments, their agencies, instrumentalities or political subdivisions; and
debt securities issued or guaranteed by supranational organizations such as the
European Investment Bank, Inter-American Development Bank and The World Bank.
The Fund may also invest in non-government securities including corporate debt
securities, bank or bank holding company obligations (e.g., CD's and bankers
acceptances), and mortgage and other asset-backed issues.
Scudder Global Bond Fund may for temporary defensive purposes invest without
limit in U.S. Government debt securities including short-term money market
securities. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in warrants, zero
coupon securities mortgage and asset-backed securities, illiquid securities,
reverse repurchase agreements, repurchase agreements and may engage in
securities lending, strategic transactions including derivatives.
Scudder GNMA Fund is designed to produce a high level of current income but with
less risk of loss to the Fund's portfolio than other GNMA mutual funds measured
by the frequency and amount by which total return fluctuates downward. The Fund
is designed for investors who are seeking high current income from high quality
securities and who wish to receive a degree of protection from bond market price
risk. The Fund's investment objective is to produce a high level of current
income while actively seeking to reduce downside risk compared with other GNMA
mutual funds. It does this by investing at least 65% of net assets in "Ginnie
Maes": mortgage-backed securities that are issued or guaranteed by the
Government National Mortgage Association ("GNMA"). The Fund also invests in U.S.
Treasury securities. With both types of securities, the timely payment of
interest and principal is guaranteed by the full faith and credit of the U.S.
government. In addition, the Fund does not invest in securities issued by
tobacco-producing companies. The Fund has been designed with the conservative,
safety-conscious investor in mind. Although past performance is no guarantee of
future performance, historically, this Fund offers higher yields than such
short-term investments as insured savings accounts, insured six-month CD's, and
fixed-price money market funds.
The Fund invests in U.S. Treasury bills, notes and bonds; other securities
issued or backed by the full faith and credit of the U.S. Government as to
principal and interest, including, but not limited to, GNMA mortgage-backed
securities, Merchant Marine Bonds guaranteed by the Maritime Administration and
obligations of the Export-Import Bank; financial futures contracts with respect
to such securities; options on either such securities or such financial futures
contracts; and bank repurchase agreements. At least 65% of the Fund's net assets
will be directly invested in GNMAs. The Fund may also utilize hedging techniques
involving limited use of financial futures contracts and the purchase and
writing (selling) of put and call options on such contracts. Under certain
market conditions, these strategies may reduce current income. At any time, the
Fund may have a substantial portion of its assets in securities of a particular
type or maturity. The Fund may also write covered call options on portfolio
securities and purchase "when-issued" securities.
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GNMAs. GNMAs are mortgage-backed securities representing part ownership of a
pool of mortgage loans. These loans, issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations, are either insured by the
Federal Housing Administration (FHA) or guaranteed by the Veterans
Administration (VA). A "pool" or group of such mortgages is assembled and, after
being approved by GNMA, is offered to investors through securities dealers. Once
approved by GNMA, a Government corporation within the U.S. Department of Housing
and Urban Development, the timely payment of interest and principal is
guaranteed by the full faith and credit of the United States Government. This is
not, however, a guarantee related to the Fund's yield or the value of your
investment principal.
As mortgage-backed securities, GNMAs differ from bonds in that principal is paid
back by the borrower over the length of the loan rather than returned in a lump
sum at maturity. GNMAs are called "pass-through" securities because both
interest and principal payments including prepayments are passed through to the
holder of the security (in this case, the Fund).
Mortgage-backed securities are interests in pools of mortgage loans, including
mortgage loans made by savings and loan institutions, mortgage bankers,
commercial banks and others. Pools of mortgage loans are assembled as securities
for sale to investors by various governmental, government-related and private
organizations as further described below.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and may expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities. Mortgage-backed securities are subject to the risk or prepayment and
the risk that the underlying loans will not be repaid. Because principal may be
prepaid at any time, mortgage-backed securities may involve significantly
greater price and yield volatility than traditional debt securities.
When interest rates rise, mortgage prepayment rates tend to decline, thus
lengthening the life of a mortgage-related security and increasing the price
volatility of that security, affecting the price volatility of the Fund's
shares.
Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying property, refinancing or foreclosure, net of fees or costs which may
be incurred. Because principal may be prepaid at any time, mortgage-backed
securities may involve significantly greater price and yield volatility than
traditional debt securities. Some mortgage-related securities (such as
securities issued by GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is GNMA.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Fund shares. Also, GNMA securities often are purchased at a premium
over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and credit of
the U.S. Government) include Fannie Mae and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Fannie Mae is a government-sponsored corporation owned
entirely by private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. Fannie Mae purchases conventional
(i.e., not insured or guaranteed by any governmental agency) mortgages from a
list of approved seller/servicers which include state and federally-chartered
savings and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. Pass-through securities
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issued by Fannie Mae are guaranteed as to timely payment of principal and
interest by Fannie Mae but are not backed by the full faith and credit of the
U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal Home
Loan Banks. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages from FHLMC's national portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection of principal,
but PCs are not backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Advisor determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
The payment of principal on the underlying mortgages may exceed the minimum
required by the schedule of payments for the mortgages. Such prepayments are
made at the option of the mortgagors for a wide variety of reasons reflecting
their individual circumstances and may involve capital losses if the mortgages
were purchased at a premium. For example, mortgagors may speed up the rate at
which they prepay their mortgages when interest rates decline sufficiently to
encourage refinancing. The Fund, when such prepayments are passed through to it,
may be able to reinvest them only at a lower rate of interest. The Advisor, in
determining the attractiveness of GNMAs relative to alternative fixed-income
securities, and in choosing specific GNMA issues, will have made assumptions as
to the likely speed of prepayment. Actual experience may vary from this
assumption resulting in a higher or lower investment return than anticipated.
When interest rates rise, mortgage prepayment rates tend to decline, thus
lengthening the life of a mortgage-related security and increasing the price
volatility of that security, affecting the price volatility of the Fund's
shares.
Some investors may view the Fund as an alternative to a bank certificate of
deposit. While an investment in the Fund is not federally insured, and there is
no guarantee of price stability, an investment in the Fund--unlike a certificate
of deposit -- is not locked away for any period, may be redeemed at any time
without incurring early withdrawal penalties, and may provide a higher yield.
The Fund may also invest in dollar roll transactions, mortgage-backed and
mortgage pass-though securities, securities purchased on a "forward delivery" or
"when-issued" basis, and covered call options.
For temporary defensive purposes, the fund may temporarily invest up to 100% of
assets in cash or cash equivalents.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities. In pursuit of its investment
objectives, the Fund, under normal market conditions, invests at least 65% of
its total assets in high yield, below investment-grade domestic debt securities.
The Fund defines "domestic debt securities" as securities of companies domiciled
in the U.S. or organized under the laws of the U.S. or for which the U.S.
trading market is a primary market. The Fund may invest in a variety of other
securities including convertible and preferred securities, U.S. Treasury and
Agency bonds, Brady bonds, mortgage-backed and asset-backed securities, common
stocks and warrants, securities issued by REITs, trust preferred securities,
bank loans, loan participations, dollar rolls, indexed securities and restricted
securities, such as those acquired through private placements. The Fund may
invest up to 25% of its total assets in foreign securities. The Fund considers
"emerging markets" to include any country that is defined as an emerging or
developing economy by any one of the
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International Bank for Reconstruction and Development (i.e., the World Bank),
the International Finance Corporation or the United Nations or its authorities.
Scudder High Yield Bond Fund may for temporary defensive purposes invest without
limit in cash or money market instruments or high quality domestic debt
securities. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in warrants,
securities lending, illiquid securities, reverse repurchase agreements,
repurchase agreements, may purchase securities on a when-issued or forward
delivery basis and may engage in strategic transactions including derivatives.
The Fund has adopted 144a procedures for the valuation of illiquid securities.
Scudder Income Fund seeks a high level of income, consistent with the prudent
investment of capital, through a flexible investment program emphasizing
high-grade bonds. The Fund invests primarily in a broad range of high-grade,
income-producing securities such as corporate bonds and government securities.
Under normal market conditions, the Fund will invest at least 65% of its assets
in securities rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or if unrated, in bonds judged
by the Advisor, to be of comparable quality at the time of purchase. The Fund
may invest up to 20% of its assets in debt securities rated lower than Baa 3 or
BBB or, if unrated, of equivalent quality as determined by the Advisor, but will
not purchase bonds rated below B by Moody's or S&P or their equivalent.
Scudder Income Fund may invest in bonds, notes, zero coupon securities,
adjustable rate bonds, convertible bonds, preferred and convertible preferred
securities, U.S. Government securities, commercial paper, debt securities issued
by REITs, mortgage and asset-backed securities and other money market
instruments and illiquid securities such as certain securities issued in private
placements, foreign securities and CD's issued by foreign and domestic branches
of U.S. banks. It may also invest in warrants, when-issued or forward delivery
securities, indexed securities, repurchase agreements, reverse repurchase
agreements, and may engage in dollar-roll transactions, securities lending and
strategic transactions including derivatives.
Scudder Short Term Bond Fund seeks to provide a high level of income consistent
with a high degree of principal stability by investing primarily in high
quality, short-term bonds. The dollar-weighted average effective maturity of the
Fund's portfolio may not exceed three years. Within this limitation, the Fund
may purchase individual securities with remaining stated maturities of greater
than three years. The net asset value of the Fund is expected to fluctuate with
changes in interest rates and bond market conditions, although this fluctuation
should be more moderate than that of a fund with a longer average maturity. The
Advisor, however, will attempt to minimize principal fluctuation through, among
other things, diversification, credit analysis and security selection, and
adjustment of the Fund's average portfolio maturity. When, in the opinion of the
Advisor, economic or other conditions warrant, for temporary defensive purposes
the Fund may invest more than 35% of its assets in money market instruments. The
Fund emphasizes high quality investments. At least 65% of the Fund's net assets
will be invested in (1) obligations of the U.S. Government, its agencies or
instrumentalities, and (2) debt securities rated, at the time of purchase, in
one of the two highest categories of S&P or Moody's or, if unrated, judged to be
of comparable quality by the Advisor. In addition, the Fund will not invest in
any debt security rated at the time of purchase below investment-grade.
Scudder Short Term Bond Fund may for temporary defensive purposes invest without
limit in money market assets. It is impossible to accurately predict how long
such alternative strategies may be utilized. In addition, the Fund may invest in
warrants, indexed securities, zero coupon securities, trust preferred
securities, illiquid securities, reverse repurchase agreements, repurchase
agreements, dollar roll transactions, may purchase securities on a when-issued
or forward delivery basis and may engage in securities lending and strategic
transactions including derivatives.
The following Underlying Scudder Funds are equity mutual funds, which seek a
combination of income and growth.
Scudder Balanced Fund seeks a balance of growth and income from a diversified
portfolio of equity and fixed-income securities.
The Fund is intended to provide -- through a single investment -- access to a
wide variety of seasoned stock and investment-grade bond investments. Common
stocks and other equity investments provide long-term growth potential
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<PAGE>
to help offset the effects of inflation on an investor's purchasing power. Bonds
and other fixed-income investments provide current income and may, over time,
help reduce fluctuations in the Fund's share price.
In seeking its objectives of a balance of growth and income as well as long-term
preservation of capital, the Fund invests in a diversified portfolio of equity
and fixed-income securities. The Fund invests, under normal circumstances, 50%
to 75% of its net assets in common stocks and other equity investments. The
Fund's remaining assets are allocated to investment-grade bonds and other
fixed-income securities, including cash reserves. For liquidity and temporary
defensive purposes, the Fund may invest without limit in cash and in other money
market and short-term instruments. It is impossible to predict for how long such
alternate strategies may be utilized. The Fund will, on occasion, adjust its mix
of investments among equity securities, bonds, and cash reserves.
While the Fund emphasizes U.S. equity and debt securities, it may invest a
portion of its assets in foreign securities, including depositary receipts. The
Fund's foreign holdings will meet the criteria applicable to its domestic
investments. The international component of the Fund's investment program is
intended to increase diversification, thus reducing risk, while providing the
opportunity for higher returns. In addition, the Fund may invest in securities
on a when-issued or forward delivery basis and may utilize various other
strategic transactions.
Scudder Dividend & Growth Fund seeks high current income and long-term growth of
capital through investment in income paying equity securities. The Fund's
Advisor expects that the average gross income yield of the Fund will be higher
than the yield of the Standard & Poor's Composite Stock Price Index (the "S&P
500 Index"), a commonly accepted benchmark for U.S. stock market performance.
The Fund invests primarily in dividend paying common stocks, preferred stocks,
securities convertible into common stock, and REITs.
Under normal market conditions, the Fund will invest at least 80% of net assets
in income-paying equity securities, which the Advisor, believes offer a high
level of current income and potential for long-term capital appreciation. The
Advisor believes that an actively managed portfolio of dividend paying stocks,
convertible securities, and REITs offers the potential for a higher level of
income and lower average share price volatility than the S&P 500 Index. Under
normal circumstances, the Fund will invest between 40% and 80% of its net assets
in dividend paying common stocks. The Fund may also purchase such securities
which do not pay current dividends but which offer prospects for growth of
capital and future income.
Under normal circumstances, the Fund will invest between 40% and 80% of its net
assets in dividend paying common stocks. The Advisor applies a disciplined
investment approach to selecting these stocks of primarily medium-to-large sized
U.S. companies. The Fund's portfolio may include stocks which are out of favor
in the market, but which, in the opinion of the Advisor, offer compelling
valuations and potential for long-term appreciation in price and dividends. In
investing the Fund's portfolio among different industry sectors, the Advisor
evaluates how each sector reacts to economic factors such as interest rates,
inflation, Gross Domestic Product, and consumer spending. The Fund's portfolio
is constructed by attaining a proper balance of stocks in these sectors based on
the Advisor's economic forecasts. In summary, the Advisor applies disciplined
buy and sell criteria, fundamental company and industry analysis, and economic
forecasts in managing the Fund to pursue long-term price appreciation and income
with lower overall volatility than the market.
Scudder Growth and Income Fund seeks long-term growth of capital, current income
and growth of income. The Fund attempts to achieve its investment objective by
investing primarily in dividend-paying common stocks, preferred stocks and
securities convertible into common stocks of companies with long-standing
records of earnings growth. The Fund may also purchase securities which do not
pay current dividends but which offer prospects for growth of capital and future
income. Convertible securities (which may be current coupon or zero coupon
securities) are bonds, notes, debentures, preferred stocks and other securities
which may be converted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. The Fund may also invest in
nonconvertible preferred stocks consistent with its objective.
Scudder Growth and Income Fund may for temporary defensive purposes invest
without limit in cash and cash equivalents. It is impossible to accurately
predict how long such alternative strategies may be utilized. In addition, the
Fund may invest in warrants, foreign securities, REITs, illiquid securities,
reverse repurchase agreements, repurchase agreements and may engage in
securities lending and strategic transactions including derivatives.
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Scudder International Fund seeks long-term growth of capital mainly through a
diversified portfolio of marketable foreign equity securities. The Fund invests
in companies, wherever organized, which do business primarily outside the United
States. The Fund intends to diversify investments among several countries and to
have represented in the portfolio, in substantial proportions, business
activities in not less than three different countries other than the U.S. The
Fund does not intend to concentrate investments in any particular industry. The
Fund's investments are generally denominated in foreign currencies. The strength
or weakness of the U.S. dollar against these currencies is responsible for part
of the Fund's investment performance. The Fund may invest up to 20% of its total
assets in investment-grade debt securities except that the Fund may invest up to
5% of its total assets in debt securities which are rated below
investment-grade.
Scudder International Fund may for temporary defensive purposes invest without
limits in Canadian or U.S. Government obligations or currencies, or securities
of companies incorporated in and having their principal activities in Canada or
the U.S. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in warrants, trust
preferred securities, fixed-income securities, illiquid securities, reverse
repurchase agreements, repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
Scudder S&P 500 Index Fund seeks to match as closely as possible (before the
deduction of expenses) the total return of the S&P 500 Index, which emphasizes
the stocks of large U.S. companies. The Fund seeks to achieve its investment
objective by investing substantially all of its investable assets in an open-end
management investment company having the same investment objective as the Fund.
The investment company in which the Fund invests is the Equity 500 Index
Portfolio (the "Portfolio"), advised by Bankers Trust Company ("Bankers Trust").
The Portfolio may invest in equity securities listed on any domestic or foreign
securities exchange or traded in the over-the-counter market as well as certain
restricted or unlisted securities. As used herein, "equity securities" are
defined as common stock, preferred stock, trust or limited partnership
interests, rights and warrants to subscribe to or purchase such securities,
sponsored or unsponsored ADRs, EDRs, GDRs, and convertible securities,
consisting of debt securities or preferred stock that may be converted into
common stock or that carry the right to purchase common stock. Common stocks,
the most familiar type, represent an equity (ownership) interest in a
corporation. They may or may not pay dividends or carry voting rights. Common
stock occupies the most junior position in a company's capital structure.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company's financial condition and on
overall market and economic conditions. Smaller companies are especially
sensitive to these factors.
When the Portfolio experiences large cash inflows through the sale of securities
and desirable equity securities, that are consistent with the Portfolio's
investment objective, which are unavailable in sufficient quantities or at
attractive prices, the Portfolio may hold short-term investments (or shares of
money market mutual funds) for a limited time pending availability of such
equity securities. Short-term instruments consist of foreign and domestic: (i)
short-term obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other short-term
debt securities rated AA or higher by S&P or Aa or higher by Moody's or, if
unrated, of comparable quality in the opinion of Bankers Trust; (iii) commercial
paper; (iv) bank obligations, including negotiable CD's, time deposits and
banker's acceptances; and (v) repurchase agreements. At the time the Portfolio
invests in commercial paper, bank obligations or repurchase agreements, the
issuer of the issuer's parent must have outstanding debt rated AA or higher by
S&P or Aa or higher by Moody's or outstanding commercial paper or bank
obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such ratings are
available, the instrument must be of comparable quality in the opinion of
Bankers Trust.
Scudder Select 500 Fund is a diversified fund which seeks long-term growth and
income through investment in selected stocks of companies in the S&P 500(R)
Index, a commonly recognized unmanaged measure of 500 widely held U.S. common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
the Nasdaq National Market System. The Fund pursues its objective by investing
at least 80% of its total assets in the stocks of companies in the index. Under
normal circumstances, the Fund invests primarily in common stocks.
The Fund's portfolio management team will apply a multi-step investment process
to select certain of the composite stocks in the Fund's benchmark index for its
portfolio. This process includes the following steps:
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o Ranking - using a proprietary computer model, the stocks of
companies in the particular benchmark index are evaluated and
ranked based on their growth prospects, relative valuation,
and history of rising prices.
o Selection - the 20% lowest ranking stocks in the index are
generally excluded from the portfolio.
o Portfolio Construction - From the remaining 80% of stocks, a
subset is selected and weighted to ensure portfolio
diversification and attempts to create a portfolio that is
similar to the benchmark index. Factors to be considered in
the allocation of the remaining stocks include level of
exposure to specific industries, company specific financial
data, price volatility, and market capitalization.
o Ongoing Active Management - the fund's portfolio is rebalanced
on an ongoing basis as the rankings of the stocks in the
benchmark indices change over time.
The Fund may, but is not required to, invest up to 20% of its total assets in
investment grade debt securities. The Fund can purchase other types of equity
securities including preferred stocks (convertible securities), rights,
warrants, and illiquid securities. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may, but is not required to,
utilize other investments and investment techniques that may impact fund
performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).
The Fund manages risk by diversifying widely among industries and companies, and
using disciplined security selection. The Fund may, but is not required to, use
derivatives in an attempt to manage risk. The use of derivatives could magnify
losses. For temporary defensive purposes, the Fund may invest, without limit, in
cash and cash equivalents, U.S. government securities, money market instruments
and high quality debt securities without equity features.
The following Underlying Scudder Funds are equity mutual funds, which seek
long-term growth or capital appreciation.
Classic Growth Fund -- Scudder Shares seeks to provide long-term growth of
capital and to keep the value of its shares more stable than other capital
growth mutual funds. Under normal market conditions, the Fund invests primarily
in a diversified portfolio of common stocks which the Advisor believes offers
above-average appreciation potential yet, as a portfolio, offers the potential
for less share price volatility than other growth mutual funds. In seeking such
investments, the Advisor focuses its investment in high quality, medium-to-large
sized U. S. companies with leading competitive positions. The Fund allocates its
investments among different industries and companies, and adjusts its portfolio
securities based on long-term investment considerations as opposed to short-term
trading. While the Fund emphasizes U.S. investments, it can commit a portion of
assets to the equity securities of foreign growth companies that meet the
criteria applicable to the Fund's domestic investments. The Fund can purchase
other types of equity securities including securities convertible into common
stocks, preferred stocks, rights and warrants. The Fund may invest up to 20% of
its net assets in debt securities when the Advisor anticipates that the capital
appreciation on debt securities is likely to equal or exceed the capital
appreciation on common stocks over a selected time, such as during periods of
unusually high interest rates.
Classic Growth Fund -- Scudder Shares may for temporary defensive purposes
invest without limit in high quality money market securities, including U.S.
Treasury bill, repurchase agreements, commercial paper, CD's issued by domestic
and foreign branches of U.S. banks, bankers' acceptances, and other debt
securities, such as U.S. Government obligations and corporate debt instruments.
It is impossible to accurately predict how long such alternative strategies may
be utilized. In addition, the Fund may invest in illiquid securities, reverse
repurchase agreements, repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
Global Discovery Fund -- Scudder Shares seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world. In pursuit of its objective, the Fund
generally invests in small, rapidly growing companies which offer the potential
for above-average returns relative to larger companies, yet are frequently
overlooked and thus undervalued by the market. The Fund has the flexibility to
invest in any region of the world. Under normal circumstances, the Fund invests
at least 65% of its total assets in the equity securities of small companies.
While the Advisor believes that smaller, lesser-known companies can offer
greater growth potential than larger, more established firms, the former also
involves greater risk and price volatility. To help reduce risk, the Fund
expects, under normal market conditions, to diversify its portfolio widely by
company, industry
12
<PAGE>
and country. The Fund intends to allocate investments among at least three
countries at all times, one of which may be the United States. The Fund invests
primarily in companies whose individual equity market capitalization would place
them in the same size range as companies in approximately the lowest 20% of
world market capitalization as represented by the Salomon Brothers Broad Market
Index, an index comprised of equity securities of more than 6,500 small-,
medium- and large-sized companies based in 22 markets around the globe. Based on
this policy, the companies held by the Fund typically will have individual
equity market capitalizations of between approximately $50 million and $2
billion (although the Fund will be free to invest in smaller capitalization
issues that satisfy the Fund's size standard). Furthermore, the median market
capitalization of the companies in which the Fund invests will not exceed $750
million. The Fund may invest up to 35% of its total assets in equity securities
of larger companies located throughout the world and in investment-grade debt
securities if the Advisor determines that the capital appreciation of debt
securities is likely to exceed the capital appreciation of equity securities.
The Fund may invest up to 5% of its net assets in debt securities rated below
investment-grade.
Global Discovery Fund -- Scudder Shares may for temporary defensive purposes
invest without limit in cash and cash equivalents. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in common stocks, preferred stocks (either
convertible or non-convertible), rights and warrants, closed end investment
companies, bonds, notes, debentures, government securities, zero coupon bonds
(any of which may be convertible or nonconvertible), foreign securities,
American Depositary Receipts, purchase securities on a when-issued or forward
delivery basis, and enter into reverse repurchase agreements, repurchase
agreements and may engage in securities lending and strategic transactions
including derivatives.
Scudder Capital Growth Fund is designed to provide long-term capital growth
while actively seeking to reduce downside risk compared with other growth mutual
funds. The Fund pursues this investment objective by investing at least 65% of
total assets in equities, mainly common stocks of established medium- and
large-sized companies. Through a broadly diversified portfolio consisting
primarily of the securities of high quality, medium- to large-sized companies
with strong competitive positions in their industries and reasonable stock
market valuation the Fund seeks to offer less share price volatility than many
growth funds. Unlike many other diversified growth funds that typically may
invest up to 5% in any one company, the fund adheres to a more restrictive
policy that limits the amount it invests in any one company to no more than 3.5%
of its total assets. It may also invest in rights to purchase common stocks, the
growth prospects of which are greater than most stocks but which may also have
above-average market risk. The Fund may also invest in preferred stocks
consistent with the Fund's objective. While most of the fund's investments are
common stocks, some may be other types of equities, such as convertible
securities and preferred stocks. The fund does not invest in securities issued
by tobacco-producing companies.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and companies of all sizes. In addition, since 1945, the overall
performance of common stocks has exceeded the rate of inflation. It is a
fundamental policy of the Fund, which may not be changed without approval of a
majority of the Fund's outstanding shares (see "Investment Restrictions",
herein, for majority voting requirements), that the Fund will not concentrate
its investments in any particular industry.
The Fund may invest up to 100% of its assets in high-quality money market
instruments (including U.S. Treasury bills, commercial paper, CD's, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions.
The Fund may also invest in REITs, futures contracts, covered call options,
options on stock indices, foreign securities, and foreign currency exchange
contracts.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in U.S. companies with the potential for above-average growth. The
Fund generally invests in equity securities, including common stocks and
convertible securities, of companies that the Advisor believes have the
potential for above-average revenue, earnings, business value and/ or cash flow
growth. To help reduce risk, the Fund allocates its investments among many
companies. In selecting industries and companies for investment, the Advisor may
consider many factors, including overall growth prospects, financial condition,
competitive position, technology, research and development, productivity, labor
costs, raw material costs and sources, profit margins, return on investment,
structural changes in local economies,
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capital resources, the degree of governmental regulation or deregulation,
management and other factors. While the Fund generally emphasizes investments in
companies domiciled in the U.S., it may invest in listed and unlisted foreign
securities that meet the same criteria as the Fund's domestic holdings when the
anticipated performance of foreign securities is believed by the Advisor to
offer more potential than domestic alternatives in keeping with the investment
objective of the Fund. However, the Fund has no current intention of investing
more than 20% of its net assets in foreign securities.
Scudder Development Fund may for temporary defensive purposes invest without
limit in cash and may invest in high quality debt securities without equity
features, U.S. Government securities and money market instruments which are
rated in the two highest categories by Moody's or S&P, or, if unrated, are
deemed by the Advisor to be of equivalent quality. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in warrants, convertible bonds, preferred stocks,
illiquid securities, reverse repurchase agreements, repurchase agreements and
may engage in securities lending and strategic transactions including
derivatives.
Scudder Emerging Markets Growth Fund is a non-diversified investment company
which seeks long-term growth of capital primarily through equity investment in
emerging markets around the globe. The Fund will invest in the Asia-Pacific
region, Latin America, less developed nations in Europe, the Middle East and
Africa, focusing investments in countries and regions where there appear to be
the best value and appreciation potential, subject to considerations of
portfolio diversification and liquidity. At least 65% of the Fund's total assets
will be invested in the equity securities of emerging market issuers. The Fund
considers "emerging markets" to include any country that is defined as an
emerging or developing economy by any one of the International Bank for
Reconstruction and Development (i.e., the World Bank), the International Finance
Corporation or the United Nations or its authorities. The Fund intends to
allocate its investments among at least three countries at all times, and does
not expect to concentrate in any particular industry. The Fund deems an issuer
to be located in an emerging market if:
o the issuer is organized under the laws of an emerging market
country;
o the issuer's principal securities trading market is in an
emerging market; or
o at least 50% of the issuer's non-current assets,
capitalization, gross revenue or profit in any one of the two
most recent fiscal years is derived (directly or indirectly
through subsidiaries) from assets or activities located in
emerging markets.
The Fund may invest up to 35% of its total assets in emerging market and
domestic debt securities if the Advisor determines that the capital appreciation
of debt securities is likely to equal or exceed the capital appreciation of
equity securities. Under normal market conditions, the Fund may invest up to 35%
of its assets in equity securities of issuers in the U.S. and other developed
markets.
Scudder Emerging Markets Growth Fund may for temporary defensive purposes invest
without limit in debt instruments, cash and cash equivalents, including foreign
and domestic money market instruments, short-term government and corporate
obligations, and repurchase agreements. It is impossible to accurately predict
how long such alternative strategies may be utilized. In addition, the Fund may
invest in debt instruments such as warrants, bonds, notes, bills, debentures,
convertible securities, bank obligations, short-term paper, loan participations,
loan assignments and trust interests. The Fund may also invest in closed end
investment companies investing primarily in emerging markets, illiquid
securities, purchase securities on a when-issued or forward delivery basis,
enter into reverse repurchase agreements, repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.
The Fund has adopted 144a procedures for the valuation of illiquid securities.
Scudder Global Fund seeks long-term growth of capital through a diversified
portfolio of marketable securities, primarily equity securities, including
common stocks, preferred stocks and debt securities convertible into common
stocks. The Fund invests on a worldwide basis in equity securities of companies
which are incorporated in the U.S. or in foreign countries. It also may invest
in the debt securities of U.S. and foreign issuers. The Fund will be invested
usually in securities of issuers located in at least three countries, one of
which may be the U.S. It is expected that investments will include companies of
varying size as measured by assets, sales or capitalization. The Fund generally
invests in
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equity securities of established companies listed on U.S. or foreign securities
exchanges, but also may invest in securities traded over-the-counter. It also
may invest in debt securities convertible into common stock, convertible and
non-convertible preferred stock, and fixed-income securities of governments,
government agencies, supranational agencies and companies when the Advisor
believes the potential for appreciation will equal or exceed that available from
investments in equity securities. These debt and fixed-income securities will be
investment-grade, except that the Fund may invest up to 5% of its total assets
in debt securities rated below investment-grade.
Scudder Global Fund may for temporary defensive purposes invest without limit in
cash and cash equivalents. It is impossible to accurately predict how long such
alternative strategies may be utilized. In addition, the Fund may invest in
warrants, zero-coupon securities, illiquid securities, reverse repurchase
agreements, repurchase agreements and may engage in securities lending and
strategic transactions including derivatives.
Scudder Gold Fund is a non-diversified investment company which seeks maximum
return (principal change and income) consistent with investing in a portfolio of
gold-related equity securities and gold. The Fund pursues its objective
primarily through a portfolio of gold-related investments. Under normal market
conditions, at least 65% of the Fund's total assets will be invested in (1)
equity securities (defined as common stock, investment-grade preferred stock,
warrants and debt securities that are convertible into or exchangeable for
common stock) of U.S. and foreign companies primarily engaged in the
exploration, mining, fabrication, processing or distribution of gold, (2) gold
bullion, and (3) gold coins. A company will be considered "primarily engaged" in
a business or an activity if it devotes or derives at least 50% of its assets,
revenues and/or operating earnings from that business or activity. The remaining
35% of the Fund's assets may be invested in any precious metals other than gold;
in equity securities of companies engaged in activities primarily relating to
precious metals and minerals other than gold; in investment-grade debt
securities, including warrants, zero coupon bonds, of companies engaged in
activities relating to gold or other precious metals and minerals; in certain
debt securities, a portion of the return on which is indexed to the price of
precious metals; and, for hedging purposes, in precious metals; and utilize
various other strategic transactions. Consistent with applicable state
securities laws, up to 10% of the Fund's total assets may be invested directly
in gold, silver, platinum and palladium bullion and in gold and silver coins. In
addition, the Fund's assets may be invested in wholly owned subsidiaries of
Scudder Mutual Funds, Inc., of which the Fund is a series, that invest in gold,
silver, platinum and palladium bullion and in gold and silver coins.
Scudder Gold Fund may hold cash, high quality cash equivalents (including
foreign money market instruments) such as bankers' acceptances, CD's, commercial
paper, short-term government and corporate obligations, and repurchase
agreements, obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities without limit for temporary defensive purposes and
up to 30% to maintain liquidity. In addition, the Fund may invest in warrants,
foreign currencies in the form of bank deposits, short sales against the box,
illiquid securities, reverse repurchase agreements, repurchase agreements and
may engage in securities lending and strategic transactions including
derivatives.
Scudder Greater Europe Growth Fund is a non-diversified investment company which
seeks long-term growth of capital through investments primarily in the equity
securities of European companies. Although its focus is on long-term growth, the
Fund may provide current income principally through holdings in dividend-paying
securities. The Fund will invest, under normal market conditions, at least 80%
of its total assets in the equity securities of European companies.
The Fund defines a European company as follows:
o A company organized under the laws of a European country or
for which the principal securities trading market is in
Europe; or
o A company, wherever organized, where at least 50% of the
company's non-current assets, capitalization, gross revenue or
profit in its most recent fiscal year represents (directly or
indirectly through subsidiaries) assets or activities located
in Europe.
The Fund may invest, under normal market conditions, up to 20% of its total
assets in European debt securities. Within this 20% limit, the Fund may invest
in debt securities which are unrated, rated, or the equivalent of those rated
below investment-grade.
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Scudder Greater Europe Growth Fund may hold foreign or U.S. debt instruments as
well as cash or cash equivalents, including foreign and domestic money market
instruments, short-term government and corporate obligations, and repurchase
agreements without limit for temporary defensive purposes and up to 20% to
maintain liquidity. It is impossible to accurately predict how long such
alternative strategies may be utilized. In addition, the Fund may invest in
closed end investment companies, warrants, when-issued securities, illiquid
securities, reverse repurchase agreements, repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.
Scudder Health Care Fund is a non-diversified fund which seeks long-term growth
of capital primarily through investment in common stocks of companies that are
engaged primarily in the development, production or distribution of products or
services related to the treatment or prevention of diseases and other medical
problems. These include companies that operate hospitals and other health care
facilities; companies that design, manufacture or sell medical supplies,
equipment and support services; and pharmaceutical firms. The Fund may also
invest in companies engaged in medical, diagnostic, biochemical and
biotechnological research and development. The Fund "concentrates," for purposes
of the 1940 Act, its assets in securities related to a particular industry,
which means that at least 25% of its net assets will be invested in these assets
at all times. As a result, the Fund may be subject to greater market fluctuation
than a fund which has securities representing a broader range of investment
alternatives.
The Fund invests in the equity securities of health care companies located
throughout the world. In the opinion of the Advisor, investments in the health
care industry offer potential for significant growth due to favorable
demographic trends, technological advances in the industry, and innovations by
companies in the diagnosis and treatment of illnesses.
Under normal circumstances, the Fund will invest at least 80% of its total
assets in common stocks of companies in a group of related industries as
described below. The Fund will invest in securities of U.S. companies, but may
invest in foreign companies as well. A security will be considered appropriate
for the Fund if at least 50% of its total assets, revenues, or net income is
related to or derived from the industry or industries designated for the Fund.
The industries in the health care sector are pharmaceuticals, biotechnology,
medical products and supplies, and health care services. Common stock is issued
by companies to raise cash for business purposes and represents a proportionate
interest in the issuing companies. Therefore, the Fund participates in the
success or failure of any company in which it holds stock. The market values of
common stock can fluctuate significantly, reflecting the business performance of
the issuing company, investor perception and general economic or financial
market movements. Smaller companies are especially sensitive to these factors
and may even become valueless. Despite the risk of price volatility, however,
common stock also offers greater potential for long-term gain on investment,
compared to other classes of financial assets such as bonds or cash equivalents.
While the Fund invests predominantly in common stocks, the Fund may purchase
convertible securities, rights, warrants and illiquid securities. The Fund may
enter into repurchase agreements and reverse repurchase agreements, and may
engage in strategic transactions, using such derivatives contracts as index
options and futures, to increase stock market participation, enhance liquidity
and manage transaction costs. Securities may be listed on national exchanges or
traded over-the-counter. The Fund may invest up to 20% of its total assets in
U.S. Treasury securities, and agency and instrumentality obligations. For
temporary defensive purposes, the Fund may invest without limit in cash and cash
equivalents when the Advisor deems such a position advisable in light of
economic or market conditions. It is impossible to predict accurately how long
such alternative strategies may be utilized.
Scudder Large Company Growth Fund seeks to provide long-term growth of capital
through investment primarily in the equity securities of seasoned, large-sized
financially-strong U.S. growth companies. The Fund's equity investments consist
of common stocks, preferred stocks and securities convertible into common
stocks, rights and warrants of companies which are of above-average financial
quality and offer the prospect for above-average growth in earnings, cash flow
or assets relative to the overall market as defined by the S&P 500 Index. The
Fund invests at least 65% of its total assets in the equity securities of
seasoned, financially-strong U.S. growth companies which are considered to be of
above-average financial quality. The common stocks issued by these companies
qualify, at the time of purchase, for one of the three highest equity ranking
categories (A+, A or A-) of S&P or, if not ranked by S&P, are judged to be of
comparable quality by the Advisor. Rankings by S&P are not an appraisal of a
company's creditworthiness, as is true for S&P's debt security ratings, nor are
these rankings intended as a forecast of future stock market performance. In
addition to using S&P rankings of earnings and dividends of common stocks, the
Advisor conducts its own analysis of a company's history, current financial
position, and earnings prospects. The Fund allocates its investments among
different industries and companies, and adjusts its portfolio securities based
on long-term investment considerations as
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opposed to short-term trading. While the Fund emphasizes U.S. investments, it
can commit a portion of assets to the equity securities of foreign growth
companies which meet the criteria applicable to domestic investments. The Fund
may invest in convertible securities which must be investment-grade.
Scudder Large Company Growth Fund may for temporary defensive purposes invest
without limit in cash and cash equivalents. It is impossible to accurately
predict how long such alternative strategies may be utilized. In addition, the
Fund may invest in warrants, foreign securities, illiquid securities, reverse
repurchase agreements, repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
Scudder Large Company Value Fund seeks to maximize long-term capital growth
through a value-orientated investment approach. The Fund invests in marketable
securities, principally common stocks and, consistent with its objective of
long-term capital growth, preferred stocks. The Fund is free to invest in a wide
range of marketable securities which the Advisor believes offer the potential
for long-term, above-average growth. The Fund will normally invest at least 65%
of its assets in the equity securities of large U.S. companies. The Fund looks
for companies whose securities appear to present a favorable relationship
between market price and opportunity. These may include securities of companies
whose fundamentals or products may be of only average promise. The Fund may
invest up to 20% of its net assets in debt securities when management
anticipates that the capital appreciation on debt securities is likely to equal
or exceed the capital appreciation on common stocks over a selected time, such
as during periods of unusually high interest rates. Such debt securities may be
rated below investment-grade, or of equivalent quality as determined by the
Advisor. However, the Fund will invest no more than 20% of its net assets in
securities rated B or lower.
Scudder Large Company Value Fund may for temporary defensive purposes invest
without limit in debt securities, short-term indebtedness, cash and cash
equivalents. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in rights,
warrants, convertible securities, illiquid securities, reverse repurchase
agreements, repurchase agreements and may engage in securities lending and
strategic transactions including derivatives.
Scudder Latin America Fund is a non-diversified investment company which seeks
to provide long-term capital appreciation through investment primarily in the
securities of Latin American issuers. The Fund involves above-average investment
risk. The Fund seeks to benefit from economic and political trends emerging
throughout Latin America. These trends are supported by governmental initiatives
designed to promote freer trade and market-oriented economies. The Advisor
believes that efforts by Latin American countries to, among other things, reduce
government spending and deficits, control inflation, lower trade barriers,
stabilize currency exchange rates, increase foreign and domestic investment and
privatize state-owned companies, will set the stage for attractive investment
returns over time. At least 65% of the Fund's total assets will be invested in
the securities of Latin American issuers, and 50% of the Fund's total assets
will be invested in Latin American equity securities. To meet its objective to
provide long-term capital appreciation, the Fund normally invests at least 65%
of its total assets in equity securities. The Fund considers Latin American
countries to include Mexico, Central America, South America and the
Spanish-speaking islands of the Caribbean. The Fund defines securities of Latin
American issuers as follows:
o Securities of companies organized under the laws of a Latin
American country or for which the principal securities trading
market is in Latin America;
o Securities issued or guaranteed by the government of a country
in Latin America, its agencies or instrumentalities, political
subdivisions or the central bank of such country;
o Securities of companies, wherever organized, when at least 50%
of an issuer's non-current assets, capitalization, gross
revenue or profit in any one of the two most recent fiscal
years represents (directly or indirectly through subsidiaries)
assets or activities located in Latin America; or
o Securities of Latin American issuers, as defined above, in the
form of depositary shares.
The Fund may invest in debt securities which are unrated, rated or the
equivalent of those rated below investment-grade although the Fund will not
invest more than 10% of its net assets in securities rated B or lower by Moody's
or S&P and may invest in securities rated C by Moody's or D by S&P.
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Scudder Latin America Fund may for temporary defensive purposes invest without
limit in cash and cash equivalents and money market instruments, or in
securities of U.S. or other non-Latin American issuers. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in closed end investment companies primarily in
Latin America, warrants, loan participations and assignments, when-issued
securities, convertible securities, illiquid securities, reverse repurchase
agreements, repurchase agreements and may engage in securities lending and
strategic transactions including derivatives.
Scudder Pacific Opportunities Fund is a non-diversified investment company which
seeks long-term growth of capital through investment primarily in the equity
securities of Pacific Basin companies, excluding Japan. The Fund invests, under
normal market conditions, at least 65% of its assets in the equity securities of
Pacific Basin companies. Pacific Basin countries include Australia, the Peoples
Republic of China, India, Indonesia, Malaysia, New Zealand, the Philippines, Sri
Lanka, Pakistan and Thailand, as well as Hong Kong, Singapore, South Korea and
Taiwan -- the so-called "four tigers." The Fund may invest in other countries in
the Pacific Basin when their markets become sufficiently developed. The Fund
will not, however, invest in Japanese securities. The Fund intends to allocate
investments among at least three countries at all times and does not expect to
concentrate investments in any particular industry. The Fund defines securities
of Pacific Basin companies as follows:
o Securities of companies organized under the laws of a Pacific
Basin country or for which the principal securities trading
market is in the Pacific Basin; or
o Securities of companies, wherever organized, when at least 50%
of a company's non-current assets, capitalization, gross
revenue or profit in any one of the two most recent fiscal
years represents (directly or indirectly through subsidiaries)
assets or activities located in the Pacific Basin.
Under normal market conditions, the Fund may invest up to 35% of its assets in
equity securities of U.S. and other non-Pacific Basin issuers (excluding Japan).
The Fund may invest up to 35% of its total assets in foreign and domestic
high-grade debt securities if the Advisor determines that the capital
appreciation of debt securities is likely to equal or exceed the capital
appreciation of equity securities.
Scudder Pacific Opportunities Fund may for temporary defensive purposes invest
without limit in debt instruments as well as cash and cash equivalents,
including foreign and domestic money market instruments, short-term government
and corporate obligations, and repurchase agreements. It is impossible to
accurately predict how long such alternative strategies may be utilized. In
addition, the Fund may invest in common stock, preferred stock (either
convertible or non-convertible), depository receipts, rights, warrants, illiquid
securities, when-issued securities, reverse repurchase agreements, repurchase
agreements and may engage in securities lending and strategic transactions
including derivatives.
Scudder Select 1000 Growth Fund is a non-diversified fund which seeks long-term
growth of capital through investment in selected stocks of companies in the
Russell 1000(R) Growth Index, an unmanaged index of growth-oriented mid-sized
and large company stocks. The Fund pursues its objective by investing at least
80% of its total assets in the stocks of companies in the index. Under normal
circumstances, the Fund invests primarily in common stocks.
The Fund's portfolio management team will apply a multi-step investment process
to select certain of the composite stocks in the Fund's benchmark index for its
portfolio. This process includes the following steps:
o Ranking - using a proprietary computer model, the stocks of
companies in the particular benchmark index are evaluated and
ranked based on their growth prospects, relative valuation,
and history of rising prices.
o Selection - the 20% lowest ranking stocks in the index are
generally excluded from the portfolio.
o Portfolio Construction - From the remaining 80% of stocks, a
subset is selected and weighted to ensure portfolio
diversification and attempts to create a portfolio that is
similar to the benchmark index. Factors to be considered in
the allocation of the remaining stocks include level of
exposure to specific industries, company specific financial
data, price volatility, and market capitalization.
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o Ongoing Active Management - the fund's portfolio is rebalanced
on an ongoing basis as the rankings of the stocks in the
benchmark indices change over time.
The Fund may, but is not required to, invest up to 20% of its total assets in
investment grade debt securities. The Fund can purchase other types of equity
securities including preferred stocks (convertible securities), rights,
warrants, and illiquid securities. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may, but is not required to,
utilize other investments and investment techniques that may impact fund
performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).
The Fund manages risk by diversifying widely among industries and companies, and
using disciplined security selection. The Fund may, but is not required to, use
derivatives in an attempt to manage risk. The use of derivatives could magnify
losses. For temporary defensive purposes, the Fund may invest, without limit, in
cash and cash equivalents, U.S. government securities, money market instruments
and high quality debt securities without equity features.
Scudder Small Company Stock Fund is designed to provide long-term capital growth
while actively seeking to reduce downside risk compared with other small company
stock funds. The Fund pursues this investment objective by investing at least
65% of total assets in common stocks of small U.S. companies with above-average
long-term capital growth. The fund does not invest in securities issued by
tobacco-producing companies.
Under normal circumstances, the Fund may invest up to 5% of its assets in
certain short-term fixed income securities including high-quality money market
securities such as U.S. Treasury bills, repurchase agreements, commercial paper,
CD's issued by domestic and foreign branches of U.S. banks and bankers'
acceptances, although cash or cash equivalents are normally expected to
represent less than 1% of the Fund's assets. The Fund may invest up to 20% of
its assets in stock futures contracts and options in order to invest uncommitted
cash balances, to maintain liquidity to meet shareholder redemptions, or to
minimize trading costs.
The Fund may also invest in Standard & Poor's Depositary Receipts ("SPDRs").
SPDRs typically trade like a share of common stock and provide investment
results that generally correspond to the price and yield performance of the
component common stocks of S&P 500 Index. There can be no assurance that this
can be accomplished as it may not be possible for the trust to replicate and
maintain exactly the composition and relative weightings of the component
securities of the S&P 500 Index. SPDRs are subject to the risks of an investment
in a broadly based portfolio of common stocks, including the risk that the
general level of stock prices may decline, thereby adversely affecting the value
of such investment. SPDRs are also subject to risks other than those associated
with an investment in a broadly based portfolio of common stocks in that the
selection of the stocks included in the trust may affect trading in SPDRs, as
compared with trading in a broadly based portfolio of common stocks.
The Fund is neither sponsored by nor affiliated with Standard & Poor's.
In pursuing its objective of long-term capital growth, the Fund normally remains
substantially invested in the common stocks of small U.S. companies. Using a
quantitative investment approach developed by the Fund Manager, the Fund focuses
on equity securities of companies with market capitalization below $2 billion
and that the Fund Manager believes are undervalued relative to the stocks in
Russell 2000 Index(R). The Russell 2000 Index(R) is a widely used measure of
small stock performance. The Fund will sell securities of companies that have
grown in market capitalization above this level as necessary to keep the Fund
focused on small companies.
The Fund takes a diversified approach to investing. It generally invests no more
than 2% of its assets in the securities of any one company and typically invests
in over 150 securities, representing a variety of U.S. industries.
While the Fund invests predominantly in common stocks, it can purchase other
types of equity securities including preferred stocks (either convertible or
non-convertible), rights and warrants. Securities may be listed on national
exchanges or traded over-the-counter. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and may make use of financial futures contracts and
related options. The Fund may purchase and sell options or futures on stock
indices for hedging purposes as a temporary investment to accommodate cash
flows. The Fund may also invest in REITs, covered call options, foreign
securities, and foreign currency exchange contracts.
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For temporary defensive purposes, the Fund may invest without limit in high
quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, CD's issued by domestic and foreign branches of
U.S. banks, bankers' acceptances, and other debt securities, such as U.S.
government obligations and corporate debt instruments when the Fund Manager
deems such a position advisable in light of economic or market conditions.
Scudder Small Company Value Fund pursues long-term growth of capital by
investing in undervalued stocks of small U.S. companies. The fund normally
invests at least 90% of its assets in common stocks of companies that are
similar in size to those included in the Russell 2000 index--a widely used
benchmark of small stock performance. Typically, these companies have a stock
market value of less than $1.5 billion. Companies represented in the portfolio
of the Fund typically have the following characteristics:
o Attractive valuations relative to the Russell 2000 Index -- a
widely used benchmark of small stock performance -- based on
measures such as price to earnings, price to book value and
price to cash flow ratios.
o Favorable trends in earnings growth rates and stock price
momentum.
While the Fund invests predominately in common stocks, it can purchase other
types of equity securities including preferred stocks (convertible securities),
rights, warrants and illiquid securities. The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality obligations, may enter into
repurchase agreements and reverse repurchase agreements and may engage in
strategic transactions, using such derivatives contracts as index options and
futures, to increase stock market participation, enhance liquidity and manage
transaction costs.
Scudder Small Company Value Fund may for temporary defensive purposes invest
without limit in cash and cash equivalents. It is impossible to accurately
predict how long such alternative strategies may be utilized.
Scudder Technology Innovation Fund is a non-diversified fund, which seeks
long-term growth of capital primarily through investment in common stocks of
companies engaged in the development, production or distribution of
technology-related products or services. These types of products and services
currently include computer hardware and software, semi-conductors, office
equipment and automation, and Internet-related products and services. The Fund
"concentrates," for purposes of the 1940 Act, its assets in securities related
to a particular industry, which means that at least 25% of its net assets will
be invested in these assets at all times. As a result, each Fund may be subject
to greater market fluctuation than a fund which has securities representing a
broader range of investment alternatives.
Under normal circumstances, the Fund will invest at least 80% of its total
assets in common stocks of companies in a group of related industries as
described below. The Fund will invest in securities of U.S. companies, but may
invest in foreign companies as well. A security will be considered appropriate
for the Fund if at least 50% of its total assets, revenues, or net income is
related to or derived from the industry or industries designated for the Fund.
The industries in the technology sector are computers (including software,
hardware and internet-related businesses), computer services, telecommunications
and semi-conductors. Common stock is issued by companies to raise cash for
business purposes and represents a proportionate interest in the issuing
companies. Therefore, a Fund participates in the success or failure of any
company in which it holds stock. The market values of common stock can fluctuate
significantly, reflecting the business performance of the issuing company,
investor perception and general economic or financial market movements. Smaller
companies are especially sensitive to these factors and may even become
valueless. Despite the risk of price volatility, however, common stock also
offers greater potential for long-term gain on investment, compared to other
classes of financial assets such as bonds or cash equivalents.
While the Fund invests predominantly in common stocks, the Fund may purchase
convertible securities, rights, warrants and illiquid securities. The Fund may
enter into repurchase agreements and reverse repurchase agreements, and may
engage in strategic transactions, using such derivatives contracts as index
options and futures, to increase stock market participation, enhance liquidity
and manage transaction costs. Securities may be listed on national exchanges or
traded over-the-counter. The Fund may invest up to 20% of its total assets in
U.S. Treasury securities, and agency and instrumentality obligations. For
temporary defensive purposes, the Fund may invest without limit in cash and cash
equivalents when the Advisor deems such a position advisable in light of
economic or market conditions. It is impossible to predict accurately how long
such alternative strategies may be utilized.
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Securities issued through an initial public offering ("IPO") can experience an
immediate drop in value if the demand for the securities does not continue to
support the offering price. Information about the issuers of IPO securities is
also difficult to acquire since they are new to the market and may not have
lengthy operating histories. The Fund may engage in short-term trading in
connection with its IPO investments, which could produce higher trading costs
and adverse tax consequences. The number of securities issued in an IPO is
limited, so it is likely that IPO securities will represent a smaller component
of the Fund's portfolio as the Fund's assets increase (and thus have a more
limited effect on the Fund's performance).
The Japan Fund is a diversified mutual fund which seeks to achieve long-term
capital appreciation by investing primarily in equity securities (including
American Depositary Receipts) of Japanese companies. Equity securities are
defined as common and preferred stock, debt securities convertible into common
stock (sometimes referred to as "convertible debentures") and common stock
purchase warrants. Under normal conditions, the Fund will invest at least 80% of
its assets in Japanese securities, that is, securities issued by entities that
are organized under the laws of Japan ("Japanese companies"), securities of
affiliates of Japanese companies, wherever organized or traded, and securities
of issuers not organized under the laws of Japan but deriving 50% or more of
their revenues from Japan. These securities may include debt securities
(Japanese government debt securities and debt securities of Japanese companies)
when the Advisor believes that the potential for capital appreciation from
investment in debt securities equals or exceeds that available from investment
in equity securities. The Fund may also invest up to 30% of its net assets in
equity securities of Japanese companies which are traded in an over-the-counter
market. These are generally securities of relatively small or little-known
companies that the Advisor believes have above-average earnings growth
potential. The Fund may invest up to 20% of its assets in cash or short-term
government or other short-term prime obligations in order to have funds readily
available for general corporate purposes, including the payment of operating
expenses, dividends and redemptions, or the investment in securities through
exercise of rights or otherwise, or in repurchase agreements. Where the Advisor
determines that market or economic conditions so warrant, the Fund may, for
temporary defensive purposes, invest more than 20% of its assets in cash or such
securities. It is impossible to predict for how long such alternate strategies
may be utilized. In addition, the Fund may invest in illiquid securities,
options, futures contracts, warrants, reverse repurchase agreements and may
engage in securities lending and strategic transactions.
Scudder 21st Century Growth Fund pursues long-term growth of capital by
investing in emerging growth companies that have the potential to be leaders in
the next century. Emerging growth companies tend to be small or little-known
companies that have strong prospects for growth because they may offer such
things as cutting edge products, unique services, innovative distribution
channels or technological advances. The fund normally invests at least 80% of
its assets in common stocks of companies that are similar in size to those
included in the Russell 2000 index -- a widely used benchmark of small stock
performance. Typically, these companies have a stock market value of less than
$1.5 billion. The Advisor believes these companies are well-positioned for
above-average earnings growth and/or greater market recognition. Such favorable
prospects may be a result of new or innovative products or services a given
company is developing or provides, products or services that have the potential
to impact significantly the industry in which the company competes or to change
dramatically customer behavior in the 21st century. To help reduce risk in its
search for high quality, emerging growth companies, the Advisor allocates the
Fund's investments among many companies and different industries in the U.S.
and, where opportunity warrants, abroad as well. Emerging growth companies are
those with the ability, in the Advisor's opinion, to expand earnings per share
by at least 15% per annum over the next three to five years at a minimum.
The Fund may for temporary, defensive or emergency purposes invest without limit
in cash and high quality debt securities without equity features, which are
rated Aaa, Aa or A by Moody's or AAA, AA or A by S&P, or, if unrated, are deemed
by the Advisor to be of equivalent quality, U.S. Government securities and
invest in money market instruments which are rated in the two highest categories
by Moody's or S&P or, if unrated, are deemed by the Advisor to be of equivalent
quality. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in shares of
preferred stocks, convertible securities, rights, warrants, reverse repurchase
agreements and may engage in securities lending and strategic transactions
including derivatives.
The Fund has adopted 144a procedures for the valuation of illiquid securities.
Value Fund -- Scudder Shares seeks long-term growth of capital through
investment in undervalued equity securities. The Fund invests primarily in
common stock of larger, established domestic companies with market
capitalization of at least $1 billion that the Fund's portfolio management team
believes are undervalued in the marketplace. The Fund
21
<PAGE>
invests at least 80% of its assets in equity securities, which consist of common
stocks, preferred stocks, securities convertible into common stocks, rights and
warrants. The Fund may invest up to 20% of its total assets in debt obligations,
including zero coupon securities, may enter into repurchase agreements, reverse
repurchase agreements and may also engage in strategic transactions including
derivatives for hedging purposes and to seek to increase gain. The debt
securities in which the Fund may be invested may be rated below
investment-grade, although the Fund will invest no more than 10% of its net
assets in securities rated B or lower by S&P or Moody's, and may not invest more
than 5% of its net assets in securities rated C by Moody's or D by S&P.
Value Fund -- Scudder Shares may for temporary defensive purposes invest without
limit in cash and cash equivalents. It is impossible to accurately predict how
long such alternative strategies may be utilized. In addition, the Fund may
invest in illiquid securities and may engage in securities lending.
If you require more detailed information about an Underlying Scudder Fund call
Scudder Investor Relations at 1-800-SCUDDER to obtain the complete prospectus
and statement of additional information for that fund.
The following chart shows the Average Annual Total Returns for each of the
Underlying Scudder Funds for their most recent one-, five-, ten-year periods
ended October 31, 2000 or the life of fund if shorter.
<TABLE>
<CAPTION>
Average Annual Total Returns
---------------------------------------------------------------------------------------------------------------------------------
Inception Assets One Five Ten Life of
Date as of Year Years Years Fund
---------- 10/31/00 ---- ----- ----- ----
(in millions)
-------------
---------------------------------------------------------------------------------------------------------------------------------
Money Market Fund
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Scudder Cash Investment Trust 7/23/76 1,300 5.45 4.87 4.57 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Money Market Series - Scudder 7/7/97 1,085 6.28 -- -- 5.61
Premium Money Market Shares
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Bond Mutual Funds
---------------------------------------------------------------------------------------------------------------------------------
Scudder Emerging Markets Income Fund 12/31/93 140 15.32 8.88 -- 6.39
---------------------------------------------------------------------------------------------------------------------------------
Scudder Global Bond Fund 3/1/91 143 -.84 2.27 -- 3.92
---------------------------------------------------------------------------------------------------------------------------------
Scudder GNMA Fund*** 7/5/85 3,977 6.52 5.79 6.74 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder High Yield Bond Fund 6/28/96 123 -3.32 -- -- 5.73
---------------------------------------------------------------------------------------------------------------------------------
Scudder Income Fund 5/10/28 795 5.96 5.20 7.58 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Short Term Bond Fund 4/2/84 988 5.72 4.61 5.84 --
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Equity Mutual Funds
---------------------------------------------------------------------------------------------------------------------------------
Classic Growth Fund-Scudder Shares 9/9/96 195 25.60 -- -- 25.20
---------------------------------------------------------------------------------------------------------------------------------
Scudder Balanced Fund 1/4/93 1,084 6.57 14.51 -- 12.07
---------------------------------------------------------------------------------------------------------------------------------
Scudder Capital Growth Fund** 11/30/84 2,442 16.11 23.28 20.26 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Development Fund 1/18/71 790 24.48 13.42 18.59 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Dividend & Growth Fund 7/17/98 32 20.95 -- -- 10.36
---------------------------------------------------------------------------------------------------------------------------------
Scudder Emerging Markets Growth Fund 5/8/96 72 -5.61 -- -- -1.52
---------------------------------------------------------------------------------------------------------------------------------
Global Discovery Fund-Scudder Shares 9/10/91 576 48.67 21.70 -- 17.12
---------------------------------------------------------------------------------------------------------------------------------
Scudder Global Fund 7/23/86 1,572 8.80 12.67 12.41 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Gold Fund 8/22/88 82 -20.08 -9.06 -1.75 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Greater Europe Growth Fund 10/10/94 1,403 11.31 20.25 -- 19.46
---------------------------------------------------------------------------------------------------------------------------------
Scudder Growth and Income Fund 3/15/29 11,252 6.68 15.10 15.92 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Health Care Fund 3/2/98 246 87.76 -- -- 31.41
---------------------------------------------------------------------------------------------------------------------------------
Scudder International Fund 6/15/54 4,507 .63 13.84 11.26 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Large Company Growth Fund 5/15/91 1,410 10.86 22.69 -- 17.89
---------------------------------------------------------------------------------------------------------------------------------
Scudder Large Company Value Fund 6/6/56 2,354 12.18 16.79 17.74 --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Latin America Fund 12/08/92 423 14.15 9.83 -- 10.87
---------------------------------------------------------------------------------------------------------------------------------
22
<PAGE>
Average Annual Total Returns
---------------------------------------------------------------------------------------------------------------------------------
Scudder Pacific Opportunities Fund 12/08/92 105 -14.14 -7.64 -- -1.56
---------------------------------------------------------------------------------------------------------------------------------
Scudder S&P 500 Index Fund 8/29/97 1,120 5.63 -- -- 16.79
---------------------------------------------------------------------------------------------------------------------------------
Scudder Select 500 Fund 5/17/99 38 12.16 -- -- 10.17
---------------------------------------------------------------------------------------------------------------------------------
Scudder Select 1000 Growth Fund 5/17/99 32 11.47 -- -- 13.26
---------------------------------------------------------------------------------------------------------------------------------
Scudder Small Company Stock Fund** 2/1/97 88 3.48 -- -- 4.94
---------------------------------------------------------------------------------------------------------------------------------
Scudder Small Company Value Fund 10/6/95 166 4.05 9.30 -- 8.69
---------------------------------------------------------------------------------------------------------------------------------
Scudder Technology Innovation Fund 3/2/98 816 66.44 -- -- 64.78
---------------------------------------------------------------------------------------------------------------------------------
Scudder 21st Century Growth Fund 9/9/96 373 33.93 -- -- 23.12
---------------------------------------------------------------------------------------------------------------------------------
Value Fund-Scudder Shares 12/31/92 350 17.63 17.34 -- 15.84
---------------------------------------------------------------------------------------------------------------------------------
The Japan Fund 4/19/62* 708 -5.07 12.50 4.69 --
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* From April 19, 1962 until August 14, 1987, the Fund operated
as a closed-end diversified management investment company.
** On July 17, 2000, the funds were reorganized from AARP Growth
Trust into two newly created series of Investment Trust. The
performance above reflects the performance of Class AARP
shares for the period ended March 31, 2000 from when the funds
were AARP Capital Growth Fund and AARP Small Company Stock
Fund. If the Advisor had not maintained expenses, the total
returns would have been lower.
*** On July 17, 2000, the fund was reorganized from AARP GNMA and
U.S. Treasury Fund into Scudder GNMA Fund. The performance
reflects the performance of Class AARP shares for the period
ended March 31, 2000 from AARP GNMA and U.S. Treasury Fund.
All total return calculations assume that dividends and capital gains
distributions, if any, were reinvested. Performance figures are historical and
are not intended to indicate future investment performance.
Risk Factors of Underlying Scudder Funds
In pursuing their investment objectives, each of the Underlying Scudder Funds is
permitted to engage in a wide range of investment policies. The Underlying
Scudder Funds' risks are determined by the nature of the securities held and the
portfolio management strategies used by the Advisor. Certain of these policies
are described in the "Glossary" and further information about the Underlying
Scudder Funds is contained in the prospectuses of such funds. Because each
Portfolio invests in certain of the Underlying Scudder Funds, shareholders of
each Portfolio will be affected by these investment policies in direct
proportion to the amount of assets each Portfolio allocates to the Underlying
Scudder Funds pursuing such policies.
Investment Restrictions of the Portfolios
The policies set forth below are fundamental policies of each Portfolio and may
not be changed with respect to each of the Portfolios without the approval of a
majority of such Portfolio's outstanding shares. As used in this combined
Statement of Additional Information, a "majority of the outstanding voting
securities of a Portfolio" means the lesser of (1) 67% or more of the voting
securities present at such meeting, if the holders of more than 50% of the
outstanding voting securities of such Portfolio are present or represented by
proxy; or (2) more than 50% of the outstanding voting securities of such
Portfolio.
Each Portfolio has elected to be classified as a diversified series of an
open-end investment company. In addition, as a matter of fundamental policy,
each Portfolio will not:
(1) borrow money, except as permitted under the 1940 Act, as
interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(3) engage in the business of underwriting securities issued by
others, except to the extent that a Portfolio may be deemed to
be an underwriter in connection with the disposition of
portfolio securities;
23
<PAGE>
(4) concentrate its investments in investment companies, as the
term "concentrate" is used in the 1940 Act, interpreted by
regulatory authority having jurisdiction from time to time;
except that each Portfolio may concentrate in an underlying
Fund. However, each Underlying Scudder Fund in which each
Portfolio will invest may concentrate its investments in a
particular industry;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Portfolio reserves freedom of action to hold
and to sell real estate acquired as a result of the
Portfolio's ownership of securities;
(6) purchase physical commodities or contracts relating to
physical commodities; or
(7) make loans except as permitted under the 1940 Act, as
interpreted or modified by regulatory authority having
jurisdiction, from time to time.
Nonfundamental policies may be changed by the Trustees of the Trust without
shareholder approval. As a matter of nonfundamental policy, each Portfolio does
not currently intend to:
(a) invest in companies for the purpose of exercising management
or control.
(b) (i) borrow money in an amount greater than 5% of its total
assets, except for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, entering into
dollar rolls, or making other investments or engaging in other
transactions which may be deemed to be borrowings but are
consistent with each Portfolio's investment objective.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Portfolios.
The Trust's Board of Trustees has approved the filing of an application for
exemptive relief with the SEC which would permit the Portfolios to participate
in an interfund lending program among certain investment companies advised by
the Advisor. If the Portfolios receive the requested relief, the interfund
lending program would allow the participating funds to borrow money from and
loan money to each other for temporary or emergency purposes. The program would
be subject to a number of conditions designed to ensure fair and equitable
treatment of all participating funds, including the following: (1) no fund may
borrow money through the program unless it receives a more favorable interest
rate than a rate approximating the lowest interest rate at which bank loans
would be available to any of the participating funds under a loan agreement; and
(2) no fund may lend money through the program unless it receives a more
favorable return than that available from an investment in repurchase agreements
and, to the extent applicable, money market cash sweep arrangements. In
addition, a fund would participate in the program only if and to the extent that
such participation is consistent with the fund's investment objectives and
policies (for instance, money market funds would normally participate only as
lenders and tax exempt funds only as borrowers). Interfund loans and borrowings
would extend overnight, but could have a maximum duration of seven days. Loans
could be called on one day's notice. A fund may have to borrow from a bank at a
higher interest rate if an interfund loan is called or not renewed. Any delay in
repayment to a lending fund could result in a lost investment opportunity or
additional costs. The program is subject to the oversight and periodic review of
the Boards of the participating funds. To the extent the Portfolios are actually
engaged in borrowing through the interfund lending program, the Portfolios, as a
matter of non-fundamental policy, may not borrow for other than temporary or
emergency purposes (and not for leveraging).
PURCHASES
Additional Information About Opening An Account
All new investors in Class AARP of the Funds are required to provide an
AARP membership number on their account application.
In addition, Class S shares of the Funds will generally not be
available to new investors.
24
<PAGE>
The following investors may continue to purchase Class S shares of
Scudder Funds:
1. Existing shareholders of Class S shares of any Scudder Fund as of
December 29, 2000, and household members residing at the same address.
2. Investors may purchase Class S shares of any Scudder Fund through any
broker-dealer or service agent account until June 30, 2001. After June
30, 2001, only investors who owned Class S shares as of June 30, 2001
and household members residing at the same address may open new
accounts in Class S of any Scudder Fund.
3. Any retirement, employee stock, bonus pension or profit-sharing plans.
4. Any participant who owns Class S shares of any Scudder Fund through an
employee sponsored retirement, employee stock, bonus, pension or profit
sharing plan as of December 29, 2000 may, at a later date, open a new
individual account in Class S of any Scudder Fund.
5. Any participant who owns Class S shares of any Scudder Fund through a
retirement, employee stock, bonus, pension or profit sharing plan may
complete a direct rollover to an IRA account that will hold Class S
shares. This applies for individuals who begin their retirement plan
investments with a Scudder Fund at any time, including after December
29, 2000.
6. Officers, Fund Trustees and Directors, and full-time employees and
their family members, of Zurich Financial Services and its affiliates.
7. Class S shares are available to any accounts managed by Zurich Scudder
Investments, Inc., any advisory products offered by Zurich Scudder
Investments, Inc. or Scudder Investor Services, Inc., and to the
Portfolios of Scudder Pathway Series.
8. Registered investment advisors ("RIAs") may continue to purchase Class
S shares of Scudder Funds for all clients until June 30, 2001. After
June 30, 2001, RIAs may purchase Class S shares for any client that has
an existing position in Class S shares of any Scudder Funds as of June
30, 2001.
9. Broker-dealers and RIAs who have clients participating in comprehensive
fee programs may continue to purchase Class S shares of Scudder Funds
until June 30, 2001. After June 30, 2001, broker dealers and RIAs may
purchase Class S shares in comprehensive fee programs for any client
that has an existing position in Class S shares of a Scudder Fund as of
June 30, 2001.
Scudder Investors Services, Inc. may, at its discretion, require appropriate
documentation that shows an investor is eligible to purchase Class S shares.
Clients having a regular investment counsel account with the Advisor or its
affiliates and members of their immediate families, officers and employees of
the Advisor or of any affiliated organization and members of their immediate
families, members of the National Association of Securities Dealers, Inc.
("NASD") and banks may, if they prefer, subscribe initially for at least $2,500
for Class S and $1,000 for Class AARP through Scudder Investor Services, Inc.
(the "Distributor") by letter, fax, or telephone.
Shareholders of other Scudder funds who have submitted an account application
and have a certified Tax Identification Number, clients having a regular
investment counsel account with the Advisor or its affiliates and members of
their immediate families, officers and employees of the Advisor or of any
affiliated organization and their immediate families, members of the NASD, and
banks may open an account by wire. Investors interested in investing in Class S
must call 1-800-225-5163 to get an account number. During the call, the investor
will be asked to indicate the Portfolio name, class name, amount to be wired
($2,500 minimum for Class S and $1,000 for Class AARP), name of bank or trust
company from which the wire will be sent, the exact registration of the new
account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, Boston, MA 02101, ABA Number 011000028, DDA
Account Number: 9903-5552. The investor must give the Scudder fund name, class
name, account name and the new account number. Finally, the investor must send
the completed and signed application to the Portfolio promptly. Investors
interested in investing in Class AARP should call 1-800-253-2277 for further
instructions.
The minimum initial purchase amount is less than $2,500 for Class S under
certain special plan accounts and is $1,000 for Class AARP.
25
<PAGE>
Minimum Balances
Shareholders should maintain a share balance worth at least $2,500 for Class S
for $1,000 for Class AARP. For fiduciary accounts such as IRAs, and custodial
accounts such as Uniform Gifts to Minors Act and Uniform Transfers to Minors Act
accounts, the minimum balance is $1,000 for Class S and $500 for Class AARP.
These amounts may be changed by the Portfolio's Board of Trustees. A shareholder
may open an account with at least $1,000 ($500 for fiduciary/custodial
accounts), if an automatic investment plan (AIP) of $100/month ($50/month for
Class AARP and fiduciary/custodial accounts) is established. Scudder group
retirement plans and certain other accounts have similar or lower minimum share
balance requirements.
The Portfolio reserves the right, following 60 days' written notice to
applicable shareholders, to:
o for Class S, assess an annual $10 per Fund charge (with the fee to be
paid to the Portfolio) for any non-fiduciary/non-custodial account
without an automatic investment plan (AIP) in place and a balance of
less than $2,500; and
o redeem all shares in Portfolio accounts below $1,000 where a reduction
in value has occurred due to a redemption, exchange or transfer out of
the account. The Portfolio will mail the proceeds of the redeemed
account to the shareholder at the address of record.
Reductions in value that result solely from market activity will not trigger an
involuntary redemption. Shareholders with a combined household account balance
in any of the Scudder Funds of $100,000 or more, as well as group retirement and
certain other accounts will not be subject to a fee or automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or UTMA)
with balances below $100 are subject to automatic redemption following 60 days'
written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not greater
than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account ("IRA"), Scudder Horizon Plan, Scudder Profit Sharing and
Money Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders),
members of the NASD, and banks. Contact the Distributor at 1-800-SCUDDER for
additional information. A confirmation of the purchase will be mailed out
promptly following receipt of a request to buy. Federal regulations require that
payment be received within three business days. If payment is not received
within that time, the order is subject to cancellation. In the event of such
cancellation or cancellation at the purchaser's request, the purchaser will be
responsible for any loss incurred by the Portfolio or the principal underwriter
by reason of such cancellation. If the purchaser is a shareholder, the Trust
shall have the authority, as agent of the shareholder, to redeem shares in the
account in order to reimburse the Portfolio or the principal underwriter for the
loss incurred. Net losses on such transactions which are not recovered from the
purchaser will be absorbed by the principal underwriter. Any net profit on the
liquidation of unpaid shares will accrue to the Portfolio.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of the
Automated Clearing House Network (ACH) and who have elected to participate in
the QuickBuy program, may purchase shares of the Portfolio by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange (the "Exchange"), normally 4 p.m. eastern time. Proceeds
in the amount of your purchase will be transferred from your bank checking
account two or three business days following your call. For requests received by
the close of regular trading on the Exchange, shares will be purchased at the
net asset value per share calculated at the close of trading on the day of your
call. QuickBuy requests received after the close of regular trading on the
Exchange will begin their processing and be purchased at the net asset value
calculated the following business day. If you purchase shares by QuickBuy and
redeem them within seven days of the purchase, the Portfolio may hold the
redemption proceeds for a period of up to seven business days. If you purchase
shares and there are insufficient funds in your bank account the purchase will
be canceled and you will be subject to any
26
<PAGE>
losses or fees incurred in the transaction. QuickBuy transactions are not
available for most retirement plan accounts. However, QuickBuy transactions are
available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have completed and
returned to the Transfer Agent the application, including the designation of a
bank account from which the purchase payment will be debited. New investors
wishing to establish QuickBuy may so indicate on the application. Existing
shareholders who wish to add QuickBuy to their account may do so by completing a
QuickBuy Enrollment Form. After sending in an enrollment form, shareholders
should allow 15 days for this service to be available.
Each Portfolio employs procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Portfolio
does not follow such procedures, it may be liable for losses due to unauthorized
or fraudulent telephone instructions. The Portfolios will not be liable for
acting upon instructions communicated by telephone that they reasonably believe
to be genuine.
Investors interested in making subsequent investments in Class AARP of the
Portfolio should call 1-800-253-2277 for further instruction.
Checks
A certified check is not necessary, but checks are only accepted subject to
collection at full face value in U.S. funds and must be drawn on, or payable
through, a U.S. bank.
If shares of a Portfolio are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser may be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Portfolio or the
principal underwriter for the loss incurred. Investors whose orders have been
canceled may be prohibited from, or restricted in, placing future orders in any
of the Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular trading on
the Exchange on a selected day, your bank must forward federal funds by wire
transfer and provide the required account information so as to be available to
the Portfolio prior to the close of regular trading on the Exchange (normally 4
p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge for the
service. Presently, the Distributor pays a fee for receipt by State Street Bank
and Trust Company (the "Custodian") of "wired funds," but the right to charge
investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may be open.
These holidays include Columbus Day (the 2nd Monday in October) and Veterans Day
(November 11). Investors are not able to purchase shares by wiring federal funds
on such holidays because the Custodian is not open to receive such federal funds
on behalf of a Portfolio.
Share Price
Purchases will be filled without sales charge at the net asset value per share
next computed after receipt of the application in good order. Net asset value
normally will be computed for each class as of the close of regular trading on
each day during which the Exchange is open for trading. Orders received after
the close of regular trading on the Exchange will receive the next business
day's net asset value. If the order has been placed by a member of the NASD,
other than the Distributor, it is the responsibility of that member broker,
rather than the Portfolio, to forward the purchase order to Scudder Service
Corporation (the "Transfer Agent") in Kansas City by the close of regular
trading on the Exchange.
27
<PAGE>
Share Certificates
Due to the desire of the Portfolios' management to afford ease of redemption,
certificates will not be issued to indicate ownership in a Portfolio. Share
certificates now in a shareholder's possession may be sent to the Portfolios'
Transfer Agent for cancellation and credit to such shareholder's account.
Shareholders who prefer may hold the certificates in their possession until they
wish to exchange or redeem such shares.
All issued and outstanding shares of what were formerly AARP Funds that were
subsequently reorganized into existing Scudder Funds were simultaneously
cancelled on the books of the AARP Funds. Share certificates representing
interests in shares of the relevant AARP Fund will represent a number of shares
of Class AARP of the relevant Scudder Fund into which the AARP Fund was
reorganized. Class AARP shares of each portfolio will not issue certificates
representing shares in connection with the reorganization.
Other Information
Each Portfolio has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for its shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on the Portfolios' behalf. Orders for purchase or redemption will be
deemed to have been received by a Portfolio when such brokers or their
authorized designees accept the orders. Subject to the terms of the contract
between a Portfolio and the broker, ordinarily orders will be priced at the
class' net asset value next computed after acceptance by such brokers or their
authorized designees. Further, if purchases or redemptions of a Portfolio's
shares are arranged and settlement is made at an investor's election through any
other authorized NASD member, that member may, at its discretion, charge a fee
for that service. The Board of Trustees and the Distributor, also the
Portfolios' principal underwriter, each has the right to limit the amount of
purchases by, and to refuse to sell to, any person. The Trustees and the
Distributor may suspend or terminate the offering of Portfolio shares at any
time for any reason.
The "Tax Identification Number" section of the application must be completed
when opening an account. Applications and purchase orders without a certified
tax identification number and certain other certified information (e.g., from
exempt organizations, certification of exempt status) will be returned to the
investor. The Portfolios reserve the right, following 30 days' notice, to redeem
all shares in accounts without a correct certified Social Security or tax
identification number. A shareholder may avoid involuntary redemption by
providing the Portfolios with a tax identification number during the 30-day
notice period.
The Trust may issue shares at net asset value in connection with any merger or
consolidation with, or acquisition of the assets of, any investment company or
personal holding company, subject to the requirements of the 1940 Act.
EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder Fund and purchase into
another Scudder Fund. The purchase side of the exchange may be either an
additional investment into an existing account or may involve opening a new
account in the other Fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges into a new fund account must be for a minimum of $2,500 for Class S
and $1,000 for Class AARP. When an exchange represents an additional investment
into an existing account, the account receiving the exchange proceeds must have
identical registration, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more for Class S.
If the account receiving the exchange proceeds is to be different in any
respect, the exchange request must be in writing and must contain an original
signature guarantee.
Exchange orders received before the close of regular trading on the Exchange on
any business day ordinarily will be executed at the respective net asset values
determined on that day. Exchange orders received after the close of regular
trading on the Exchange will be executed on the following business day.
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Investors may also request, at no extra charge, to have exchanges automatically
executed on a predetermined schedule from one Scudder Fund to an existing
account in another Scudder Fund, at current net asset value, through Scudder's
Automatic Exchange Program. Exchanges must be for a minimum of $50. Shareholders
may add this free feature over the telephone or in writing. Automatic exchanges
will continue until the shareholder requests by telephone or in writing to have
the feature removed, or until the originating account is depleted. The Trust and
the Transfer Agent each reserves the right to suspend or terminate the privilege
of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above (except
for exchanges from funds which impose a redemption fee on shares held less than
a year). An exchange into another Scudder Fund is a redemption of shares, and
therefore may result in tax consequences (gain or loss) to the shareholder and
the proceeds of such exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange by
telephone, automatically without having to elect it. Each Portfolio employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Portfolios do not follow such
procedures, they may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Portfolio will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Portfolios and the Transfer Agent each reserves the right to
suspend or terminate the privilege of exchanging by telephone or fax at any
time.
The Scudder Funds into which investors may make an exchange are listed under
"THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange, shareholders
should obtain from Scudder Investor Services, Inc. a prospectus of the Scudder
Fund into which the exchange is being contemplated. The exchange privilege may
not be available for certain Scudder Funds or classes of Scudder Funds. For more
information, please call 1-800-SCUDDER (Class S) or 1-800-253-2277 (Class AARP).
Scudder retirement plans may have different exchange requirements. Please refer
to appropriate plan literature.
Redemption by Telephone
Shareholders currently receive the right, automatically without having to elect
it, to redeem by telephone up to $100,000 and have the proceeds mailed to their
address of record. Shareholders may also request to have the proceeds mailed or
wired to their predesignated bank account. In order to request wire redemptions
by telephone, shareholders must have completed and returned to the Transfer
Agent the application, including the designation of a bank account to which the
redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish the telephone redemption
privilege must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder pension and profit-sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form
(available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for a redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay
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receipt by the shareholder's account, it is suggested that investors wishing to
use a savings bank discuss wire procedures with their bank and submit any
special wire transfer information with the telephone redemption authorization.
If appropriate wire information is not supplied, redemption proceeds will be
mailed to the designated bank.
The Portfolios employ procedures, including recording telephone calls, testing a
caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the
Portfolios do not follow such procedures, they may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Portfolios will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
Redemption requests by telephone (technically a repurchase by agreement between
a Portfolio and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of the
Automated Clearing House Network (ACH) and have elected to participate in the
QuickSell program may sell shares of the Portfolio by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have completed
and returned to the Transfer Agent the application, including the designation of
a bank account. New investors wishing to establish QuickSell may so indicate on
the application. Existing shareholders who wish to add QuickSell to their
account may do so by completing a QuickSell Enrollment Form. After sending in an
enrollment form, shareholders should allow 15 days for this service to be
available.
The Portfolios employ procedures, including recording telephone calls, testing a
caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the
Portfolios do not follow such procedures, they may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Portfolios will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the Transfer
Agent may request additional documents such as, but not restricted to, stock
powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).
It is suggested that shareholders holding shares registered in other than
individual names contact the Transfer Agent prior to any redemptions to ensure
that all necessary documents accompany the request. When shares are held in the
name of a corporation, trust, fiduciary agent, attorney or partnership, the
Transfer Agent requires, in addition to the stock power, certified evidence of
authority to sign. These procedures are for the protection of shareholders and
should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays of more
than seven (7) days of payment for shares tendered for repurchase or redemption
may result, but only until the purchase check has cleared.
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The requirements for IRA redemptions are different from those for regular
accounts. For more information call 1-800-SCUDDER.
Redemption-in-Kind
The Trust reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order by making
payment in whole or in part in readily marketable securities chosen by the Trust
and valued as they are for purposes of computing a Portfolio's net asset value
(a redemption-in-kind). If payment is made in securities, a shareholder may
incur transaction expenses in converting these securities into cash. The Trust
has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which each Portfolio is generally obligated to redeem shares, with
respect to any one shareholder during any 90-day period, solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the relevant Portfolio at
the beginning of the period.
Other Information
Clients, officers or employees of the Advisor or of an affiliated organization,
and members of such clients', officers' or employees' immediate families, banks
and members of the NASD may direct repurchase requests to a Portfolio through
Scudder Investor Services, Inc. at Two International Place, Boston,
Massachusetts 02110-4103 by letter, telegram, or telephone. A two-part
confirmation will be mailed out promptly after receipt of the repurchase
request. A written request in good order and any certificates with proper
original signature guarantee, as described in each Portfolios' combined
prospectus under "Transaction information - Signature guarantees", should be
sent with a copy of the invoice to Scudder Funds, c/o Scudder Confirmed
Processing, Two International Place, Boston, Massachusetts 02110-4103. Failure
to deliver shares or required documents (see above) by the settlement date may
result in cancellation of the trade and the shareholder will be responsible for
any loss incurred by a Portfolio or the principal underwriter by reason of such
cancellation. Net losses on such transactions which are not recovered from the
shareholder will be absorbed by the principal underwriter. Any net gains so
resulting will accrue to the Portfolio. For this group, repurchases will be
carried out at the net asset value next computed after such repurchase requests
have been received. The arrangements described in this paragraph for
repurchasing shares are discretionary and may be discontinued at any time.
If a shareholder redeems all shares in the account after the record date of a
dividend, the shareholder receives in addition to the net asset value thereof,
all declared but unpaid dividends thereon. The value of shares redeemed or
repurchased may be more or less than the shareholder's cost depending on the net
asset value at the time of redemption or repurchase. The Trust does not impose a
redemption or repurchase charge, although a wire charge may be applicable for
redemption proceeds wired to an investor's bank account. Redemption of shares,
including redemptions undertaken to effect an exchange for shares of another
Portfolio or Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts should contact
the employer, trustee or custodian of the Plan for the requirements.
The determination of net asset value and a shareholder's right to redeem shares
and to receive payment may be suspended at times (a) during which the Exchange
is closed, other than customary weekend and holiday closings, (b) during which
trading on the Exchange is restricted for any reason, (c) during which an
emergency exists as a result of which disposal by the Portfolio of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Portfolio fairly to determine the value of its net assets, or (d) during
which the SEC by order permits a suspension of the right of redemption or a
postponement of the date of payment or of redemption; provided that applicable
rules and regulations of the SEC (or any succeeding governmental authority)
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
FEATURES AND SERVICES OFFERED BY THE FUND
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Internet access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for Class AARP shares is aarp.scudder.com. These sites offer
guidance on global investing and developing strategies to help meet financial
goals and provide access to the Scudder investor relations department via
e-mail. The sites also enable users to access or view Fund prospectuses and
profiles with links between summary information in Fund Summaries and details in
the Prospectus. Users can fill out new account forms on-line, order free
software, and request literature on Funds.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Advisor's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions for an
account, with trade dates, type and amount of transaction, share price and
number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest any
dividends from net investment income or distributions from realized capital
gains in additional shares of a Portfolio. A change of instructions for the
method of payment must be received by the Transfer Agent at least five days
prior to a dividend record date. Shareholders also may change their dividend
option either by calling 1-800-SCUDDER for Class S and 1-800-253-2277 for Class
AARP or by sending written instructions to the Transfer Agent. Please include
your account number with your written request.
Reinvestment is usually made at the closing net asset value of the class
determined on the business day following the record date. Investors may leave
standing instructions with the Transfer Agent designating their option for
either reinvestment or cash distribution of any income dividends or capital
gains distributions. If no election is made, dividends and distributions will be
invested in additional class shares of a Portfolio.
Investors may also have dividends and distributions automatically deposited in
their predesignated bank account through Scudder's Direct Distributions Program.
Shareholders who elect to participate in the Direct Distributions Program, and
whose predesignated checking account of record is with a member bank of the
Automated Clearing House Network (ACH) can have income and capital gain
distributions automatically deposited to their personal bank account usually
within three business days after a Portfolio pays its distribution. A Direct
Distributions request form can be obtained by calling 1-800-SCUDDER for Class S
and 1-800-253-2277 for Class AARP. Confirmation Statements will be mailed to
shareholders as notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal Plan must
reinvest any dividends or capital gains. For most retirement plan accounts, the
reinvestment of dividends and capital gains is also required.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements and
annual financial statements audited by independent accountants, including a list
of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Portfolios.
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Transaction Summaries
Annual summaries of all transactions in each Fund account are available to
shareholders. The summaries may be obtained by calling 1-800-SCUDDER.
THE SCUDDER FAMILY OF FUNDS
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
TAX FREE
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund**
Scudder California Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Moderate Portfolio
Scudder Pathway Series: Growth Portfolio
U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund**
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
----------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
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U.S. GROWTH
Value
Scudder Large Company Value Fund
Value Fund-Scudder Shares**
Scudder Small Company Stock Fund
Scudder Small Company Value Fund
Growth
Classic Growth Fund-Scudder Shares**
Scudder Capital Growth Fund
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Fund***
Global Discovery Fund-Scudder Shares**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Innovation Fund
The net asset values of most Scudder funds can be found daily in the "Mutual
Funds" section of The Wall Street Journal under "Scudder Funds," and in other
leading newspapers throughout the country. Investors will notice the net asset
value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
Certain Scudder funds or classes thereof may not be available for purchase or
exchange. For more information, please call 1-800-SCUDDER.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the applicable
charges, minimum investment requirements and disclosures made pursuant to
Internal Revenue Service (the "IRS") requirements, may be obtained by contacting
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103 or by calling toll free, 1-800-SCUDDER. The discussions of the plans
below describe only certain aspects of the federal income tax treatment of the
plan. The state tax treatment may be different and may vary from state to state.
It is advisable for an
----------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
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investor considering the funding of the investment plans described below to
consult with an attorney or other investment or tax advisor with respect to the
suitability requirements and tax aspects thereof.
Shares of the Portfolios may also be a permitted investment under profit sharing
and pension plans and IRAs other than those offered by the Portfolios'
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for
Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a plan in the
form of a Scudder Profit-Sharing Plan (including a version of the Plan which
includes a cash-or-deferred feature) or a Scudder Money Purchase Pension Plan
(jointly referred to as the Scudder Retirement Plans) adopted by a corporation,
a self-employed individual or a group of self-employed individuals (including
sole proprietorships and partnerships), or other qualifying organization. Each
of these forms was approved by the IRS as a prototype. The IRS's approval of an
employer's plan under Section 401(a) of the Internal Revenue Code will be
greatly facilitated if it is in such approved form. Under certain circumstances,
the IRS will assume that a plan, adopted in this form, after special notice to
any employees, meets the requirements of Section 401(a) of the Internal Revenue
Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and
Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a plan in the
form of a Scudder 401(k) Plan adopted by a corporation, a self-employed
individual or a group of self-employed individuals (including sole proprietors
and partnerships), or other qualifying organization. This plan has been approved
as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an IRA
which meets the requirements of Section 408(a) of the Internal Revenue Code.
A single individual who is not an active participant in an employer-maintained
retirement plan, such as a pension or profit sharing plan, a governmental plan,
a simplified employee pension plan, a simple retirement account, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. If an individual is an active participant, the deductibility of his or
her IRA contributions in 2000 is phased out if the individual has gross income
between $32,000 and $42,000 and is single, if the individual has gross income
between $52,000 and $62,000 and is married filing jointly, or if the individual
has gross income between $0 and $10,000 and is married filing separately; the
phase-out ranges for individuals who are single or married filing jointly are
subject to annual adjustment through 2005 and 2007, respectively. If an
individual is married filing jointly and the individual's spouse is an active
participant but the individual is not, the deductibility of his or her IRA
contributions is phased out if their combined gross income is between $150,000
and $160,000. Whenever the adjusted gross income limitation prohibits an
individual from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions. There are
special rules for determining how withdrawals are to be taxed if an IRA contains
both deductible and nondeductible amounts. In general, a proportionate amount of
each withdrawal will be deemed to be made from nondeductible contributions;
amounts treated as a return of nondeductible contributions will not be taxable.
An eligible individual may contribute as much as $2,000 of qualified income
(earned income or, under certain circumstances, alimony) to an IRA each year (up
to $2,000 per individual for married couples, even if only one spouse has earned
income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
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Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a Roth IRA
which meets the requirements of Section 408A of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000 per year
to a Roth IRA. The maximum contribution amount diminishes and gradually falls to
zero for single filers with adjusted gross incomes ranging from $95,000 to
$110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a Roth IRA
as long as the total contribution to all IRAs does not exceed $2,000. No tax
deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are reinvested
and compounded tax-free. Such tax-free compounding can lead to substantial
retirement savings. No distributions are required to be taken prior to the death
of the original account holder. If a Roth IRA has been established for a minimum
of five years, distributions can be taken tax-free after reaching age 59 1/2,
for a first-time home purchase ($10,000 maximum, one-time use) or upon death or
disability. All other distributions of earnings from a Roth IRA are taxable and
subject to a 10% tax penalty unless an exception applies. Exceptions to the 10%
penalty include: disability, certain medical expenses, the purchase of health
insurance for an unemployed individual and qualified higher education expenses.
An individual with an income of $100,000 or less (who is not married filing
separately) can roll his or her existing IRA into a Roth IRA. However, the
individual must pay taxes on the taxable amount in his or her traditional IRA.
Individuals who complete the rollover in 1998 will be allowed to spread the tax
payments over a four-year period. After 1998, all taxes on such a rollover will
have to be paid in the tax year in which the rollover is made.
The following paragraph applies to Class S shareholders only:
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment for tax
sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal Plan to
receive monthly, quarterly or periodic redemptions from his or her account for
any designated amount of $50 or more. Shareholders may designate which day they
want the automatic withdrawal to be processed. The check amounts may be based on
the redemption of a fixed dollar amount, fixed share amount, percent of account
value or declining balance. The Plan provides for income dividends and capital
gains distributions, if any, to be reinvested in additional shares. Shares are
then liquidated as necessary to provide for withdrawal payments. Since the
withdrawals are in amounts selected by the investor and have no relationship to
yield or income, payments received cannot be considered as yield or income on
the investment and the resulting liquidations may deplete or possibly extinguish
the initial investment and any reinvested dividends and capital gains
distributions. Requests for increases in withdrawal amounts or to change the
payee must be submitted in writing, signed exactly as the account is registered,
and contain signature guarantee(s). Any such requests must be received by the
Portfolios' transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the Trust or its agent on written notice, and will be terminated
when all shares of the Portfolio under the Plan have been liquidated or upon
receipt by the Trust of notice of death of the shareholder.
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An Automatic Withdrawal Plan request form can be obtained by calling
1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where satisfactory
arrangements have been made with Scudder Investor Services, Inc. for forwarding
regular investments through a single source. The minimum annual investment is
$240 per investor which may be made in monthly, quarterly, semiannual or annual
payments. The minimum monthly deposit per investor is $20. Except for trustees
or custodian fees for certain retirement plans, at present there is no separate
charge for maintaining group or salary deduction plans; however, the Trust and
its agents reserve the right to establish a maintenance charge in the future
depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the shareholder, to
redeem and close a shareholder's account in the event that the shareholder
ceases participating in the group plan prior to investment of $1,000 per
individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments in Class S shares through
automatic deductions from checking accounts by completing the appropriate form
and providing the necessary documentation to establish this service. The minimum
investment is $50 for Class S shares.
Shareholders may arrange to make periodic investments in Class AARP of the
Portfolio through automatic deductions from checking accounts. The minimum
pre-authorized investment amount is $50. New shareholders who open a Gift to
Minors Account pursuant to the Uniform Gift to Minors Act (UGMA) and the Uniform
Transfer to Minors Act (UTMA) and who sign up for the Automatic Investment Plan
will be able to open the Portfolio account for less than $500 if they agree to
increase their investment to $500 within a 10 month period. Investors may also
invest in any Class AARP for $500 if they establish a plan with a minimum
automatic investment of at least $100 per month. This feature is only available
to Gifts to Minors Account investors. The Automatic Investment Plan may be
discontinued at any time without prior notice to a shareholder if any debit from
their bank is not paid, or by written notice to the shareholder at least thirty
days prior to the next scheduled payment to the Automatic Investment Plan.
The Automatic Investment Plan involves an investment strategy called dollar cost
averaging. Dollar cost averaging is a method of investing whereby a specific
dollar amount is invested at regular intervals. By investing the same dollar
amount each period, when shares are priced low the investor will purchase more
shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for minors.
The minimum initial investment is $1,000 unless the donor agrees to continue to
make regular share purchases for the account through Scudder's Automatic
Investment Plan (AIP). In this case, the minimum initial investment is $500.
The Trust reserves the right, after notice has been given to the shareholder and
custodian, to redeem and close a shareholder's account in the event that regular
investments to the account cease before the $1,000 minimum is reached.
37
<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each Portfolio intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. Each
Portfolio may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, a Portfolio may retain all or part of such gain for reinvestment after
paying the related federal income taxes for which the shareholders may then be
asked to claim a credit against their federal income tax liability. (See
"TAXES.")
If a Portfolio does not distribute the amount of capital gain and/or ordinary
income required to be distributed by an excise tax provision of the Code, a
Portfolio may be subject to that excise tax. (See "TAXES.") In certain
circumstances, a Portfolio may determine that it is in the interest of
shareholders to distribute less than the required amount.
Earnings and profits distributed to shareholders on redemptions of Portfolio
shares may be utilized by a Portfolio, to the extent permissible, as part of the
Portfolios' dividends paid deduction on its federal tax return.
The Conservative Portfolio and the Moderate Portfolio each intend to distribute
investment company taxable income, exclusive of net short-term capital gains in
excess of net long-term capital losses, on a quarterly basis, and distributions
of net capital gains realized during the fiscal year will be made in November or
December to avoid federal excise tax, although an additional distribution may be
made within three months of its fiscal year end, if necessary. The Growth
Portfolio intends to distribute its investment company taxable income and any
net realized capital gains in November or December to avoid federal excise tax,
although an additional distribution may be made within three months of the
Portfolios' fiscal year end, if necessary.
Both types of distributions will be made in Portfolio shares and confirmations
will be mailed to each shareholder unless a shareholder has elected to receive
cash, in which case a check will be sent. Distributions of investment company
taxable income and net realized capital gains are taxable (See "TAXES"), whether
made in shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year each Portfolio issues to each shareholder a statement of
the federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
From time to time, quotations of a Portfolios' performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures will be calculated in the following manner:
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of return for
the periods of one year, five years, ten years or for the life of the Portfolio,
all ended on the last day of a recent calendar quarter. Average annual total
return quotations reflect changes in the price of a Portfolio's shares and
assume that all dividends and capital gains distributions during the respective
periods were reinvested in Portfolio shares. Average annual total return is
calculated by finding the average annual compound rates of return of a
hypothetical investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)1/n - 1
Where:
38
<PAGE>
P = a hypothetical initial payment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the
value, at the end of the applicable
period, of a hypothetical $1,000
investment made at the beginning of
the applicable period.
Average Annual Total Return for the periods ended August 31, 2000 ^(1)
<TABLE>
<CAPTION>
One Year Life of Portfolio^(2)
-------- -----------------
<S> <C> <C>
Conservative Portfolio - Class S 7.39 7.47
Moderate Portfolio - Class S 15.65 11.03
Growth Portfolio - Class S 24.24 16.07
</TABLE>
(1) Performance information provided is for the Fund's Class S. As Class
AARP shares are a new class for the Fund, they have no past performance
data available.
(2) For the period November 15, 1996 (commencement of operations) to August
31, 2000.
Cumulative Total Return
Cumulative Total Return is the compound rate of return on a hypothetical initial
investment of $1,000 for a specified period. Cumulative Total Return quotations
reflect changes in the price of a Portfolio's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Portfolio shares. Cumulative Total Return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (Cumulative Total Return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Cumulative Total Return for the periods ended August 31, 2000 ^(1)
<TABLE>
<CAPTION>
One Year Life of Portfolio^(2)
-------- -----------------
<S> <C> <C>
Conservative Portfolio - Class S 7.39 31.43
Moderate Portfolio - Class S 15.65 48.75
Growth Portfolio - Class S 24.24 76.00
</TABLE>
(1) Performance information provided is for the Fund's Class S. As Class
AARP shares are a new class for the Fund, they have no past performance
data available.
(2) For the period November 15, 1996 (commencement of operations) to August
31, 2000.
Quotations of each Portfolio's performance are based on historical earnings and
are not intended to indicate future performance. An investor's shares when
redeemed may be worth more or less than their original cost. Performance of a
Fund will vary based on changes in market conditions and the level of the
Portfolio's expenses. There may be quarterly periods following the periods
reflected in the performance bar chart in the Portfolio's prospectus which may
be higher or lower than those included in the bar chart.
39
<PAGE>
Total Return
Total Return is the rate of return on an investment for a specified period of
time calculated in the same manner as Cumulative Total Return.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Portfolio with performance quoted with respect to other
investment companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, a Portfolio also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Examples include, but are not limited to the Dow Jones Industrial Average, the
Consumer Price Index, S & P 500 Index, the Nasdaq OTC Composite Index, the
Nasdaq Industrials Index, the Russell 2000 Index, the Wilshire Real Estate
Securities Index and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, a Portfolio's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Portfolio will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Portfolio literature, Trustees and
officers of the Trust, the Portfolios' portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Portfolios. In addition, the amount of assets that the Advisor has
under management in various geographical areas may be quoted in advertising and
marketing materials.
The Portfolios may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Portfolio literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Portfolios
to other Scudder funds or broad categories of funds, such as money market, bond
or equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as CD's. Unlike mutual funds, CD's are
insured up to $100,000 by the U.S. government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and money
market funds seek stability of principal, these investments are considered to be
less risky than investments in either bond or equity funds, which may involve
the loss of principal. However, all long-term investments, including investments
in bank products, may be subject to inflation risk, which is the risk of erosion
of the value of an investment as prices increase over a long time
40
<PAGE>
period. The risks/returns associated with an investment in bond or equity funds
depend upon many factors. For bond funds these factors include, but are not
limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment categories
in the following order: bank products, money market funds, bond funds and equity
funds. Shorter-term bond funds generally are considered less risky and offer the
potential for less return than longer-term bond funds. The same is true of
domestic bond funds relative to international bond funds, and bond funds that
purchase higher quality securities relative to bond funds that purchase lower
quality securities. Growth and income equity funds are generally considered to
be less risky and offer the potential for less return than growth funds. In
addition, international equity funds usually are considered more risky than
domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both domestic and
foreign securities or a combination of bond and equity securities.
Evaluation of Portfolio performance or other relevant statistical information
made by independent sources may also be used in advertisements concerning the
Portfolios, including reprints of, or selections from, editorials or articles
about these Funds.
TRUST ORGANIZATION
The Portfolios are portfolios of Scudder Pathway Series (the "Trust"), a
Massachusetts business trust established under a Declaration of Trust dated July
1, 1994. The Trust's authorized capital consists of an unlimited number of
shares of beneficial interest of $0.01 par value, all of which are of one class
and have equal rights as to voting, dividends and liquidation. The Trust is
comprised of three separate portfolios: Conservative Portfolio, Moderate
Portfolio (formerly Balanced Portfolio), and Growth Portfolio, all of which were
organized on July 1, 1994. Each portfolio consists of an unlimited number of
shares. Each Portfolio is further divided into five classes of shares, Class
AARP, Class S, Class A, Class B and Class C. The Trustees have the authority to
issue additional portfolios to the Trust. To the extent that the Funds offer
additional share classes, these classes will be offered in a separate prospectus
and have different fees, requirements and services.
The Fund's activities are supervised by the Trust's Board of Trustees. The Trust
adopted a plan pursuant to Rule 18f-3 under the 1940 Act (the "Plan") to permit
the Trust to establish a multiple class distribution system for the Funds.
Each class of shares will represent interests in the same portfolio of
investments of the Series, and be identical in all respects to each other class,
except as set forth below. The only differences among the various classes of
shares of the Series will relate solely to: (a) different distribution fee
payments or service fee payments associated with any Rule 12b-1 Plan for a
particular class of shares and any other costs relating to implementing or
amending such Rule 12b-1 Plan (including obtaining shareholder approval of such
Rule 12b-1 Plan or any amendment thereto) which will be borne solely by
shareholders of such class; (b) different service fees; (c) different account
minimums; (d) the bearing by each class of its Class Expenses, as defined in
Section 2(b) below; (e) the voting rights related to any Rule 12b-1 Plan
affecting a specific class of shares; (f) separate exchange privileges; (g)
different conversion features and (h) different class names and designations.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class, and certain securities registration fees.
The Trustees, in their discretion, may authorize the division of shares of a
Portfolio into different classes permitting shares of different classes to be
distributed by different methods. Although shareholders of different classes of
a Portfolio would have interest in the same portfolio of assets, shareholders of
different classes may bear different expenses in connection with different
methods of distribution. The Trust will vote its shares in each Underlying
Scudder Fund in proportion to the vote of all other shareholders of each
respective Underlying Scudder Fund.
41
<PAGE>
The Declaration of Trust (the "Declaration") provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust, that the Trustees and officers will not be liable for errors of
judgment or mistakes of fact or law, and that the Trust, will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner provided in the Declaration that
they have not acted in good faith in the reasonable belief that their actions
were in the best interests of the Trust. However, nothing in the Declaration
protects or indemnifies a Trustee or officer against any liability to which he
or she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, of reckless disregard of duties involved in the conduct of his
or her office.
Investment Advisor
Zurich Scudder Investments, Inc., an investment counsel firm, acts as investment
advisor to the Portfolios. This organization, the predecessor of which is
Scudder, Stevens & Clark, Inc., is one of the most experienced investment
counsel firms in the U. S. It was established as a partnership in 1919 and
pioneered the practice of providing investment counsel to individual clients on
a fee basis. In 1928 it introduced the first no-load mutual fund to the public.
In 1953 the Advisor introduced Scudder International Fund, Inc., the first
mutual fund available in the U.S. investing internationally in securities of
issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On December 31, 1997, Zurich
Insurance Company ("Zurich") acquired a majority interest in the Advisor, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Advisor. The Advisor's name changed to Scudder Kemper Investments, Inc. On
September 7, 1998, the businesses of Zurich (including Zurich's 70% interest in
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. By way of a dual holding
company structure, former Zurich shareholders initially owned approximately 57%
of Zurich Financial Services Group, with the balance initially owned by former
B.A.T shareholders. On October 17, 2000, the dual holding company structure of
Zurich Financial Services Group, comprised of Allied Zurich p.l.c. in the United
Kingdom and Zurich Allied A.G. in Switzerland, was unified into a single Swiss
holding company, Zurich Financial Services. The Advisor changed its name from
Scudder Kemper Investments, Inc. to Zurich Scudder Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Advisor's income is professional fees received from
providing continuous investment advice. Today, it provides investment counsel
for many individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations as well as
providing investment advice to over 280 open and closed-end mutual funds.
The Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor receives published reports and
statistical compilations from issuers and other sources, as well as analyses
from brokers and dealers who may execute portfolio transactions for the
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which the Portfolios may invest, the conclusions
and investment decisions of the Advisor with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for a portfolio and also for other
clients advised by the Advisor. Investment decisions for a fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated
42
<PAGE>
among the clients in a manner believed by the Advisor to be equitable to each.
In some cases, this procedure could have an adverse effect on the price or
amount of the securities purchased or sold by a fund. Purchase and sale orders
for a fund may be combined with those of other clients of the Advisor in the
interest of achieving the most favorable net results to that fund.
In certain cases, the investments for a portfolio are managed by the same
individuals who manage one or more other mutual funds advised by the Advisor,
that have similar names, objectives and investment styles. You should be aware
that the Portfolios are likely to differ from these other mutual funds in size,
cash flow pattern and tax matters. Accordingly, the holdings and performance of
the Portfolios can be expected to vary from those of these other mutual funds.
The present investment management agreement (the "Agreement") was approved by
the Trustees on August 10, 1998, became effective September 7, 1998, and was
approved at a shareholder meeting held on December 15, 1998. The Agreement will
continue in effect until September 30, 2001 and from year to year thereafter
only if its continuance is approved annually by the vote of a majority of those
Trustees who are not parties to such Agreement or interested persons of the
Advisor or the Trust, cast in person at a meeting called for the purpose of
voting on such approval, and either by a vote of the Trust's Trustees or of a
majority of the outstanding voting securities of the respective Portfolio. The
Agreement may be terminated at any time without payment of penalty by either
party on sixty days' written notice and automatically terminates in the event of
its assignment. The continuance of the Agreement was last approved by the
Trustees on July 10, 2000.
Each Portfolio expects to operate at a zero expense level. Shareholders of the
Trust will still indirectly bear their fair and proportionate share of the cost
of operating the Underlying Scudder Funds in which the Trust invests because,
the Trust, as a shareholder of the Underlying Scudder Funds, will bear its
proportionate share of any fees and expense paid by the Underlying Scudder
Funds.
AARP and its affiliates do not receive any fees from the portfolios, but do
receive fees from the investment advisor for each underlying fund.
Administrative Services Agreement
Scudder Pathway Series has entered into an administrative services agreement
with the Advisor (the "Administration Agreement"), pursuant to which the Advisor
will provide or pay others to provide substantially all of the administrative
services required by each Portfolio (other than those provided by the Advisor
under its investment management agreement with each Portfolio, as described
above). There is no fee currently payable by a Portfolio under the
Administration Agreement. The Administration Agreement became effective on
September 25, 2000 for Conservative Portfolio and Growth Portfolio and October
2, 2000 for Moderate Portfolio.
Various third-party service providers (the "Service Providers"), some of which
are affiliated with the Advisor , provide certain services to each Portfolio
pursuant to separate agreements with each Portfolio. Scudder Fund Accounting
Corporation, a subsidiary of the Advisor , computes net asset value for each
Portfolio and maintains their accounting records. Scudder Service Corporation,
also a subsidiary of Zurich Scudder, is the transfer, shareholder servicing and
dividend-paying agent for the shares of each Portfolio. Scudder Trust Company,
an affiliate of Zurich Scudder, provides subaccounting and recordkeeping
services for shareholders in certain retirement and employee benefit plans. As
custodian, State Street Bank and Trust Company holds the portfolio securities of
each Portfolio, pursuant to a custodian agreement. PricewaterhouseCoopers LLP
audits the financial statements of each Portfolio and provides other audit, tax,
and related services. Dechert acts as general counsel for each Portfolio.
The Advisor will pay the Service Providers for the provision of their services
to each Portfolio and will pay other Portfolio expenses, including insurance,
registration, printing and postage fees. The Administration Agreement has an
initial term of three years, subject to earlier termination by each Portfolio's
Board.
Certain expenses of each Portfolio will not be borne by the Advisor under the
Administration Agreements, such as taxes, brokerage, interest and extraordinary
expenses; and the fees and expenses of the Independent Trustees (including the
43
<PAGE>
fees and expenses of their independent counsel). In addition, each Portfolio
will continue to pay any fees required by its investment management agreement
with the Advisor.
The term Scudder Investments is the designation given to the services provided
by Zurich Scudder Investments, Inc. and its affiliates to the Scudder Family of
Funds.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
CODE OF ETHICS
The Portfolios, the Advisor and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Portfolios and employees of the Advisor and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Portfolios, subject to
requirements and restrictions set forth in the applicable Code of Ethics. The
Advisor's Code of Ethics contains provisions and requirements designed to
identify and address certain conflicts of interest between personal investment
activities and the interests of the Portfolios. Among other things, the
Advisor's Code of Ethics prohibits certain types of transactions absent prior
approval, imposes time periods during which personal transactions may not be
made in certain securities, and requires the submission of duplicate broker
confirmations and quarterly reporting of securities transactions. Additional
restrictions apply to portfolio managers, traders, research analysts and others
involved in the investment advisory process. Exceptions to these and other
provisions of the Advisor's Code of Ethics may be granted in particular
circumstances after review by appropriate personnel.
Management Fees of Underlying Scudder Funds
The Advisor has agreed not to be paid a management fee for performing its
services. However, the Advisor will receive management fees from managing the
Underlying Scudder Funds in which each Portfolio invests.
Each Underlying Scudder Fund pays the Advisor a management fee as determined by
the Investment Management Agreement between each Underlying Scudder Fund and the
Advisor. As manager of the assets of each Underlying Scudder Fund, the Advisor
directs the investments of an Underlying Scudder Fund in accordance with each
Underlying Scudder Fund's investment objective, policies and restrictions. The
Advisor determines the securities, instruments and other contracts relating to
investments to be purchased, sold or entered into by an Underlying Scudder Fund.
If an Underlying Scudder Fund's expenses, exclusive of taxes, interest and
extraordinary expenses, exceed specified limits, such excess up to the amount of
the management fee, will be paid by the Advisor.
The management fees and total operating expenses of the Underlying Scudder Funds
are as follows:
<TABLE>
<CAPTION>
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Fiscal Year Total Management Total Management
Name of Fund End Expenses Fee (%) Expenses (%) Fee (%) after
------------ --------------- -------- --------------- ------------- ---------------
after waiver
----- ------
reimbursementand/or
-------------------
waiver
------
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Scudder Cash Investment Trust 5/31 0.81 0.41
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
44
<PAGE>
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Fiscal Year Total Management Total Management
Name of Fund End Expenses Fee (%) Expenses (%) Fee (%) after
------------ --------------- -------- --------------- ------------- ---------------
after waiver
----- ------
reimbursementand/or
-------------------
waiver
------
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Money Market Series - Scudder 5/31 0.50 0.25 0.35
Premium Money Market Shares
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Emerging Markets Income Fund 10/31 1.65 1.00
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Global Bond Fund 10/31 1.13 0.75
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder GNMA Fund 9/30 0.70 0.40
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder High Yield Bond Fund 1/31 0.90 0.60
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Income Fund 1/31 0.89 0.59
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Short Term Bond Fund 12/31 0.75 0.45
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Balanced Fund 12/31 0.77 0.47
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Capital Growth Fund 9/30 0.88 0.58
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Classic Growth Fund 10/31 1.84 0.70 1.59 0.45
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Development Fund 7/31 1.30 0.85
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Dividend & Growth Fund 12/31 1.07 0.75 1.05
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Emerging Markets Growth Fund 10/31 1.91 1.25
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Global Fund 8/31 1.32 0.94
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Global Discovery Fund 10/31 1.68 1.10
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Gold Fund 10/31 1.66 1.00
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Greater Europe Growth Fund 10/31 1.35 0.97
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Growth and Income Fund 12/31 0.75 0.45
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Health Care Fund 5/31 1.21 0.85
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder International Fund 8/31 1.05 0.67
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Large Company Growth Fund 7/31 1.00 0.70
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Large Company Value Fund 7/31 0.89 0.59
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Latin America Fund 10/31 1.90 1.25
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Pacific Opportunities Fund 10/31 1.75 1.10
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder S&P 500 Index Fund 12/31 0.40 0.05
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Select 500 Fund 2/29 0.76 0.50 0.75
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Select 1000 Growth Fund 2/29 0.76 0.50 0.75
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Small Company Stock Fund 9/30 1.20 0.75
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Small Company Value Fund 7/31 1.20 0.75
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Technology Innovation Fund 5/31 1.20 0.85
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder 21st Century Growth Fund 7/31 1.44 0.75 1.20
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Value Fund 9/30 1.39 0.70
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
The Japan Fund, Inc. 12/31 1.00 0.73
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
</TABLE>
Officers and employees of the Advisor from time to time may have transactions
with various banks, including the Portfolios' custodian bank. It is the
Advisor's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Trust
relationships.
The Advisor may serve as advisor to other funds with investment objectives and
policies similar to those of the Portfolios that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees may have dealings with the Trust as principals
in the purchase or sale of securities, except as individual subscribers to or
holders of shares of the Trust.
45
<PAGE>
SPECIAL SERVICING AGREEMENT
Prior to the implementation of each underlying funds' Administration Services
Agreement, the Special Servicing Agreement (the "Service Agreement") was entered
into among the Advisor, the Underlying Scudder Funds, Scudder Service
Corporation, Scudder Fund Accounting Corporation, Scudder Investor Services,
Inc., Scudder Trust Company and the Trust. Under the Service Agreement, the
Advisor arranged for all services pertaining to the operation of the Trust
including the services of Scudder Service Corporation and Scudder Fund
Accounting Corporation to act as Shareholder Servicing Agent and Fund Accounting
Agent, respectively, for each Portfolio. In addition, the Service Agreement
provided that, if the officers of any Underlying Scudder Fund, at the direction
of the Board of Directors/Trustees, determined that the aggregate expenses of a
Portfolio were less than the estimated savings to the Underlying Scudder Fund
from the operation of that Portfolio, the Underlying Scudder Fund would bear
those expenses in proportion to the average daily value of its shares owned by
that Portfolio. No Underlying Scudder Fund would bear such expenses in excess of
the estimated savings to it. Such savings were expected to result primarily from
the elimination of numerous separate shareholder accounts which were or would
have been invested directly in the Underlying Scudder Funds and the resulting
reduction in shareholder servicing costs. In this regard, the shareholder
servicing costs to any Underlying Scudder Fund for servicing one account
registered to the Trust would have been significantly less than the cost to that
same Underlying Scudder Fund of servicing the same pool of assets contributed in
the typical fashion by a large group of individual shareholders owning small
accounts in each Underlying Scudder Fund.
The Special Servicing Agreement terminated upon implementation of an
Administration Services Agreement by each Portfolio and each applicable
Underlying Scudder Fund.
Based on actual expense data from the Underlying Scudder Funds and certain very
conservative assumptions with respect to the Trust, the Advisor, the Underlying
Scudder Funds, Scudder Service Corporation, Scudder Investor Services, Inc.,
Scudder Fund Accounting Corporation, Scudder Trust Company and the Series
anticipated that the aggregate financial benefits to the Underlying Scudder
Funds from these arrangements would have exceeded the costs of operating the
Portfolios. If such turned out to be the case, there would have been no charge
to the Trust for the services under the Service Agreement. Rather, in accordance
with the Service Agreement, such expenses would have been passed through to the
Underlying Scudder Funds in proportion to the value of each Underlying Scudder
Fund's shares held by each Portfolio.
In the event that the aggregate financial benefits to the Underlying Scudder
Funds did not exceed the costs of a Portfolio, the Advisor would have paid, on
behalf of that Portfolio, that portion of costs, as set forth herein, determined
to be greater than the benefits. The determination of whether and the extent to
which the benefits to the Underlying Scudder Funds from the organization of the
Trust would have exceeded the costs to such funds would have been made based
upon the analysis criteria set forth in the Order. This cost-benefit analysis
was initially reviewed by the Directors/Trustees of the Underlying Scudder Funds
before participating in the Service Agreement.
Certain non-recurring and extraordinary expenses were not paid in accordance
with the Service Agreement including: the fees and costs of actions, suits or
proceedings and any penalties or damages in connection therewith, to which the
Trust and/or a Portfolio may incur directly, or may incur as a result of its
legal obligation to provide indemnification to its officers, director and
agents; the fees and costs of any governmental investigation and any fines or
penalties in connection therewith; and any federal, state or local tax, or
related interest penalties or additions to tax, incurred, for example, as a
result of the Trusts' failure to distribute all of its earnings, failure to
qualify under subchapter M of the Internal Revenue Code, or failure to timely
file any required tax returns or other filings; the fees and expenses incurred
in connection with membership in investment company organizations; fees and
expenses of the Portfolios' accounting agent; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the transfer agent; the expenses of the fees for registering or
qualifying securities for sale; the fees and expenses of Trustees, officers and
employees of a Portfolio who are not affiliated with the Advisor; the cost of
printing and distributing reports and notices to shareholders; and fees of
disbursements of custodians. Under unusual circumstances, the parties to the
Service Agreement may agree to exclude certain other expenses.
Certain Underlying Scudder Funds impose a fee upon the redemption or exchange of
shares held for less than one year. The fees, which range between 1% and 2% of
the net asset value of the shares being redeemed or exchanged, are assessed and
retained by the Underlying Scudder Funds for the benefit of the remaining
shareholders. The fee is intended to encourage long-term investment in the Fund.
The fee is not a deferred sales charge, is not a commission
46
<PAGE>
paid to the Advisor of its subsidiary and does not benefit the Advisor in any
way. Each such Fund reserves the right to modify the terms of or terminate this
fee at any time. As a shareholder of such Underlying Scudder Funds, the
Portfolios will be subject to such fees. Under normal market conditions, the
Portfolios will seek to avoid taking action that would result in the imposition
of such a fee. However, in the event that a fee is incurred, the net assets of
the Portfolio would be reduced by the amount of such fees that are assessed and
retained by the Underlying Scudder Funds for the benefit of their shareholders.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
---------------------------------- ----------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ ---------------------- --------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
<S> <C> <C> <C>
Henry P. Becton, Jr. (56) Trustee President and General Manager, WGBH --
WGBH Educational Foundation
125 Western Avenue
Allston, MA 02134
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Linda C. Coughlin (48)+* Trustee and President Managing Director of Zurich Scudder Director and Senior
Investments, Inc. Vice President
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Dawn-Marie Driscoll (53) Trustee Executive Fellow, Center for Business --
4909 SW 9th Place Ethics, Bentley College; President,
Cape Coral, FL 33914 Driscoll Associates (consulting firm)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Edgar R. Fiedler (70) Trustee Senior Fellow and Economic --
50023 Brogden Counsellor, The Conference Board,
Chapel Hill, NC Inc. (Not-for-profit business
research organization)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Keith R. Fox (46) Trustee General Partner, Exeter Group of Funds --
10 East 53rd Street
New York, NY 10022
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Joan E. Spero (55) Trustee President, Doris Duke Charitable --
Doris Duke Charitable Foundation Foundation; Department of State -
650 Fifth Avenue Undersecretary of State for Economic,
New York, NY 10128 Business and Agricultural Affairs
(March 1993 to January 1997)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Jean Gleason Stromberg (56) Trustee Consultant; Director, Financial --
3816 Military Road, NW Institutions Issues, U.S. General
Washington, D.C. Accounting Office (1996-1997);
Partner, Fulbright & Jaworski (law
firm) (1978-1996)
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Jean C. Tempel (56) Trustee Managing Director, First Light --
One Boston Place Capital, LLC (venture capital firm)
23rd Floor
Boston, MA 02108
---------------------------------- ----------------------- --------------------------------------- -------------------------
47
<PAGE>
---------------------------------- ----------------------- --------------------------------------- -------------------------
Position with
Underwriter,
Scudder Investor
Name, Age, and Address Position with Fund Principal Occupation** Services, Inc.
---------------------- ------------------ ---------------------- --------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Steven Zaleznick (45)* Trustee President and CEO, AARP Services, Inc. --
601 E Street, NW
7th Floor
Washington, DC 20004
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Thomas V. Bruns (43)*** Vice President Managing Director of Zurich Scudder --
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
William F. Glavin (41) + Vice President Managing Director of Zurich Scudder Vice President
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
James E. Masur (40) + Vice President Senior Vice President of Zurich --
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Howard Schneider (43) + Vice President Managing Director of Zurich Scudder --
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Brenda Lyons (37) + Assistant Treasurer Senior Vice President of Zurich --
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Kathryn L. Quirk (47) # Vice President and Managing Director of Zurich Scudder Senior Vice President,
Assistant Secretary Investments, Inc. Director, Chief Legal
Officer and Assistant
Clerk
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
John R. Hebble (42)+ Treasurer Senior Vice President of Zurich Assistant Treasurer
Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Caroline Pearson (38)+ Assistant Secretary Senior Vice President of Zurich Clerk
Scudder Investments, Inc.; Associate,
Dechert Price & Rhoads (law firm)
1989 - 1997
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
John Millette (37)+ Vice President and Vice President of Zurich Scudder --
Secretary Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Donald E. Hall (48) ## Vice President Managing Director of Zurich Scudder --
Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and its
counsel to be "interested persons" of the Advisor or of the Trust as
defined in the 1940 Act.
** Unless otherwise stated, all officers and Trustees have been associated
with their respective companies for more than five years, but not
necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
## Address: 333 South Hope Street, Los Angeles, California 90071
48
<PAGE>
*** Address: 222 South Riverside Plaza, Chicago, Illinois 60606
The Trustees and officers of the Trust also serve in similar capacities with
respect to other Scudder Funds.
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 name of Merle and Betty Wingo. They may be deemed to be the
beneficial owner of such shares.
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, Zurich Scudder
Investments, Trustee, 322 James Avenue, Jamestown, NY 14701, who may deemed to
be the beneficial owner of such shares.
As of November 30, 2000, all Trustees and Officers of Scudder Pathway Series;
Moderate Portfolio, Scudder Pathway Series; Growth Portfolio and Scudder Pathway
Series; Conservative Portfolio, as a group, owned beneficially (as that term is
defined in Section 13 (d) of The Securities and Exchange Act of 1934) less than
1% of the outstanding shares.
To the knowledge of the Funds, as of November 30, 2000, no person owned
beneficially more than 5% of the outstanding shares of any class of any fund,
except as stated above.
REMUNERATION
The Board of Trustees of the Trust is responsible for the general oversight of
the Portfolios' business. A majority of the Board's members are not affiliated
with Zurich Scudder Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Portfolios are managed in the best
interests of their shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Portfolios of the Trust and other operational matters,
including policies and procedures designated to assure compliance with various
regulatory requirements. At least annually, the Independent Trustees review the
fees paid to Scudder and its affiliates for investment advisory services and
other administrative and shareholder services. In this regard, they evaluate,
among other things, the quality and efficiency of the various other services
provided, costs incurred by Scudder and its affiliates, and comparative
information regarding fees and expenses of competitive funds. They are assisted
in this process by the Portfolios' independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee of Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Portfolios' independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
49
<PAGE>
Each Independent Trustee receives compensation for his or her services, which
includes an annual retainer and an attendance fee for each meeting attended. The
Independent Trustee who serves as lead trustee receives additional compensation
for his or her service. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at trustee's educational
seminars or conferences, service on industry or association committees,
participation as speakers at trustees' conferences or service on special trustee
task forces or subcommittees. Independent Trustees do not receive any employee
benefits such as pension or retirement benefits or health insurance.
Notwithstanding the schedule of fees, the Independent Trustees have in the past
and may in the future waive a portion of their compensation.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services, Inc.,
Two International Place, Boston, MA 02110 (the "Distributor"), a Massachusetts
corporation, which is a subsidiary of the Advisor, a Delaware corporation. The
Trust's underwriting agreement dated May 18, 2000 will remain in effect until
September 30, 2001 and from year to year thereafter only if its continuance is
approved annually by a majority of the members of the Board of Trustees who are
not parties to such agreement or interested persons of any such party and either
by vote of a majority of the Board of Trustees or a majority of the outstanding
voting securities of the Trust. The underwriting agreement was approved by the
Trustees on May 18, 2000.
Under the underwriting agreement, the Distributor is not responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering the Trust as a broker or dealer in
various states as required; the fees and expenses of preparing, printing and
mailing prospectuses annually to existing shareholders (see below for expenses
relating to prospectuses paid by the Distributor); notices, proxy statements,
reports or other communications to shareholders of each Portfolio; the cost of
printing and mailing confirmations of purchases of shares and any prospectuses
accompanying such confirmations; any issuance taxes and/or any initial transfer
taxes; a portion of shareholder toll-free telephone charges and expenses of
shareholder service representatives; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); the cost of printing and postage of business reply envelopes; and
a portion of the cost of computer terminals used by both the Trust and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or reports
prepared for its use in connection with the offering of Portfolio shares to the
public and preparing, printing and mailing any other literature or advertising
in connection with the offering of Portfolio shares to the public. The
Distributor will pay all fees and expenses in connection with its qualification
and registration as a broker or dealer under federal and state laws, a portion
of the cost of toll-free telephone service and expenses of shareholder service
representatives, a portion of the cost of computer terminals, and expenses of
any activity which is primarily intended to result in the sale of shares issued
by a Portfolio, unless a Rule 12b-1 Plan is in effect which provides that a
Portfolio shall bear some or all of such expenses.
As agent, the Distributor currently offers shares of the Portfolios on a
continuous basis to investors in all states in which shares of the Portfolios
may from time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of a Portfolio.
TAXES
Taxation of the Portfolios and Their Shareholders
Each Portfolio intends to qualify annually and elects to be treated as a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, each Portfolio is required to distribute to its shareholders
at least 90 percent of its investment company taxable income (including net
short-term capital gain) and generally is not subject to federal income tax to
the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code.
50
<PAGE>
If for any taxable year a Portfolio does not qualify for the special federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deduction for distributions to its shareholders). In such event, dividend
distributions, would be taxable to shareholders to the extent of the Portfolios'
earnings and profits, and would be eligible for the dividends received deduction
for corporations in the case of corporate shareholders.
Each Portfolio is subject to a 4% nondeductible excise tax on amounts required
to be but not distributed under a prescribed formula. The formula requires
payment to shareholders during a calendar year of distributions representing at
least 98% of each Portfolio's ordinary income for the calendar year, at least
98% of the excess of its capital gains over capital losses (adjusted for certain
ordinary losses) realized during the one-year period ending October 31 during
such year, and all ordinary income and capital gains for prior years that were
not previously distributed.
Investment company taxable income generally is made up of dividends, interest
and net short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of a Portfolio. Presently, each
Portfolio has no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by a Portfolio for reinvestment, requiring federal
income taxes to be paid thereon by the Portfolio, the Portfolio intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a proportionate share of federal income taxes paid
by the Portfolio on such gains as a credit against the shareholder's federal
income tax liability, and will be entitled to increase the adjusted tax basis of
the shareholder's Portfolio shares by the difference between such reported gains
and the shareholder's tax credit. If a Portfolio makes such an election, it may
not be treated as having met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
To the extent that an Underlying Scudder Fund derives dividends from domestic
corporations, a portion of the income distributions of a Portfolio which invests
in that Fund may be eligible for the 70% deduction for dividends received by
corporations. Shareholders will be informed of the portion of dividends which so
qualify. The dividends-received deduction is reduced to the extent the shares
held by Underlying Scudder Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law and is eliminated if
either those shares or the shares of the Underlying Scudder Fund or the
Portfolio are deemed to have been held by the Underlying Scudder Fund, the
Portfolio or the shareholders, as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.
Income received by an Underlying Scudder Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
If more than 50% of the value of an Underlying Scudder Fund's total assets at
the close of its taxable year consists of stock or securities of foreign
corporations, the Underlying Scudder Fund will be eligible and may elect to
"pass-through" to its shareholders, including a Portfolio, the amount of such
foreign income and similar taxes paid by the Underlying Scudder Fund. Pursuant
to this election, the Portfolio would be required to include in gross income (in
addition to taxable dividends actually received), its pro rata share of foreign
income and similar taxes and to deduct such amount in computing its taxable
income or to use it as a foreign tax credit against its U.S. federal income
taxes, subject to limitations. A Portfolio, would not, however, be eligible to
elect to "pass-through" to its shareholders the ability to claim a deduction or
credit with respect to foreign income and similar taxes paid by the Underlying
Scudder Fund.
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of a Portfolio have
been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
51
<PAGE>
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares, including exchanges for shares of
another Scudder Fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution for any taxable
year only if (i) neither the individual nor his or her spouse (unless filing
separate returns) is an active participant in an employer's retirement plan, or
(ii) the individual (and his or her spouse, if applicable) has an adjusted gross
income below a certain level for 2001 ($53,000 for married individuals filing a
joint return, with a phase-out of the deduction for adjusted gross income
between $53,000 and $63,000; $33,000 for a single individual, with a phase-out
for adjusted gross income between $33,000 and $43,000). However, an individual
not permitted to make a deductible contribution to an IRA for any such taxable
year may nonetheless make nondeductible contributions up to $2,000 to an IRA (up
to $2,000 per individual for married couples if only one spouse has earned
income) for that year. There are special rules for determining how withdrawals
are to be taxed if an IRA contains both deductible and nondeductible amounts. In
general, a proportionate amount of each withdrawal will be deemed to be made
from nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by a Portfolio result in a reduction in the net asset value of the
Portfolio's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Each Portfolio will be required to report to the IRS all distributions of
investment company taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Portfolio shares, except in the case of
certain exempt shareholders. Under the backup withholding provisions of Section
3406 of the Code, distributions of investment company taxable income and capital
gains and proceeds from the redemption or exchange of the shares of a regulated
investment company may be subject to withholding of federal income tax at the
rate of 31% in the case of non-exempt shareholders who fail to furnish the
investment company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law.
Withholding may also be required if a Portfolio is notified by the IRS or a
broker that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
Shareholders of a Portfolio may be subject to state and local taxes on
distributions received from the Portfolio and on redemptions of the Portfolio's
shares.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of a Portfolio, including the possibility that such a shareholder may
be subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under
an applicable income tax treaty) on amounts constituting ordinary income
received by him or her, where such amounts are treated as income from U.S.
sources under the Code.
Taxation of the Underlying Scudder Funds
Each Underlying Scudder Fund intends to qualify annually and elects to be
treated as a regulated investment company under Subchapter M of the Code. In any
year in which an Underlying Scudder Fund qualifies as a regulated investment
52
<PAGE>
company and timely distributes all of its taxable income, the Fund generally
will not pay any federal income or excise tax.
Distributions of an Underlying Scudder Fund's investment company taxable income
are taxable as ordinary income to a Portfolio which invests in the Fund.
Distributions of the excess of an Underlying Scudder Fund's net long-term
capital gain over its net short-term capital loss, which are properly designated
as "capital gain dividends," are taxable as long-term capital gain to a
Portfolio which invests in the Fund, regardless of how long the Portfolio held
the Fund's shares, and are not eligible for the corporate dividends-received
deduction. Upon the sale or other disposition by a Portfolio of shares of an
Underlying Scudder Fund, the Portfolio generally will realize a capital gain or
loss which will be long-term or short-term, generally depending upon the
Portfolio's holding period for the shares.
Shareholders should consult their tax advisors about the application of the
provisions of tax law described in this statement of addition al information in
light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
Each Portfolio's average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. Purchases and
sales are made for each Portfolio whenever necessary, in management's opinion,
to meet that Portfolio's objective.
Each Portfolio is expected to operate at a zero expense ratio. To accomplish
this, the payment of a Portfolio's expenses is subject to the Administration
Agreement and certain provisions mentioned in the Agreement with the Advisor.
<TABLE>
<CAPTION>
Underlying Scudder Fund Portfolio Turnover Rate (%) ^(1)
----------------------- -------------------------------
<S> <C>
Scudder Cash Investment Trust(2) n/a
Scudder Money Market Series--Premium Money Market Shares (2) n/a
Scudder Emerging Markets Income Fund* 339
Scudder Global Bond Fund* 64
Scudder GNMA Fund - Class AARP* 308
Scudder High Yield Bond Fund* 81
Scudder Income Fund 104
Scudder Short Term Bond Fund* 194
Scudder Balanced Fund* 113
Scudder Capital Growth Fund - Class AARP* 79
Scudder Classic Growth Fund* 88
Scudder Development Fund 100
Scudder Dividend & Growth Fund* 123
Scudder Emerging Markets Growth Fund* 49
Scudder Global Fund 60
Scudder Global Discovery Fund* 126
Scudder Gold Fund* 24
Scudder Greater Europe Growth Fund* 64
Scudder Growth and Income Fund* 58
Scudder Health Care Fund 142
Scudder International Fund 83
Scudder Large Company Growth Fund 56
Scudder Large Company Value Fund 46
Scudder Latin America Fund* 75
Scudder Pacific Opportunities Fund* 175
Scudder Select 500 Fund* 53
Scudder Select 1000 Growth Fund* 39
Scudder S&P 500 Index Fund 11
Scudder Small Company Stock Fund - Class AARP* 56
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Underlying Scudder Fund Portfolio Turnover Rate (%) ^(1)
----------------------- -------------------------------
Scudder Small Company Value Fund 29
Scudder Technology Innovation Fund 83
Scudder 21st Century Growth Fund 135
Scudder Value Fund* 51
The Japan Fund* 87
</TABLE>
------------------------------
^(1) As of each Underlying Scudder Fund's most recent fiscal reporting
period.
^(2) Scudder Cash Investment Trust and Scudder Money Market Series - Scudder
Premium Shares are money market funds.
* Annualized
NET ASSET VALUE
The net asset value of Portfolio shares is computed as of the close of regular
trading on the Exchange on each day the Exchange is open for trading. The
Exchange is scheduled to be closed on the following holidays: New Year's Day,
Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value per
share is determined by dividing the value of the total assets of a Portfolio,
less all liabilities, by the total number of shares outstanding.
The net asset value of each Underlying Scudder Fund is determined based upon the
nature of the securities as set forth in the prospectus and statement of
additional information of such Underlying Scudder Fund. Shares of each
Underlying Scudder Fund in which a Portfolio may invest are valued at the net
asset value per share of each Underlying Scudder Fund as of the close of regular
trading on the Exchange on each day the Exchange is open for trading. The net
asset value per share of the Underlying Scudder Funds will be calculated and
reported to a Portfolio by each Underlying Scudder Fund's accounting agent.
Short-term securities with a remaining maturity of sixty days or less are valued
by the amortized cost method.
If, in the opinion of a Portfolio's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Portfolio is
determined in a manner which, in the discretion of the Valuation Committee, most
fairly reflects fair market value of the property on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of each Fund included in each Fund's prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been so included or incorporated by reference in reliance on
the report of PricewaterhouseCoopers LLP, 160 Federal Street, Boston,
Massachusetts 02110, independent accountants, and given on the authority of said
firm as experts in accounting and auditing. PricewaterhouseCoopers LLP is
responsible for performing annual audits of the financial statements and
financial highlights of each Fund in accordance with generally accepted auditing
standards and the preparation of federal tax returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a Massachusetts
business trust. Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the Trust. The Declaration of Trust contains an express disclaimer of
shareholder liability in connection with each Portfolio's property or the acts,
obligations or affairs of the Trust. The Declaration of Trust also provides for
indemnification out of a Portfolio's property of any shareholder held personally
liable for the claims and liabilities which a shareholder may become subject by
reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which a Portfolio itself would be unable to meet its
obligations.
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Other Information
Many of the investment changes in a Portfolio will be made at prices different
from those prevailing at the time they may be reflected in a regular report to
shareholders of the Portfolio. These transactions will reflect investment
decisions made by the Advisor in light of the objective and policies of the
particular Portfolio, and other factors such as its other portfolio holdings and
tax considerations, and should not be construed as recommendations for similar
action by other investors.
The name "Scudder Pathway Series" is the designation of the Trustees for the
time being under a Declaration of Trust dated July 1, 1994, as amended from time
to time, and all persons dealing with a Portfolio must look solely to the
property of the Portfolio for the enforcement of any claims against the
Portfolio as neither the Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Portfolio. No
series of the Trust shall be liable for the obligations of any other series.
Upon the initial purchase of shares, the shareholder agrees to be bound by the
Trust's Declaration of Trust, as amended from time to time. The Declaration of
Trust is on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts.
The CUSIP number of Conservative Portfolio Class AARP is 811189-885.
The CUSIP number of the Conservative Portfolio Class S is 811189-30-7.
The CUSIP number of Moderate Portfolio Class AARP is 811189-703.
The CUSIP number of the Moderate Portfolio Class S is 811189-50-5.
The CUSIP number of Growth Portfolio Class AARP is 811189-802.
The CUSIP number of the Growth Portfolio Class S is 811189-20-8.
Each Portfolio has a fiscal year end of August 31.
The prospectuses of each of the Portfolios are combined in this prospectus and
Statement of Additional Information. Each Portfolio offers only its own shares,
yet it is possible that a Portfolio might become liable for a misstatement or
omission regarding another Portfolio. The Trustees of the Trust have considered
this and approved the use of a combined prospectus and Statement of Additional
Information.
The Series employs State Street Bank and Trust Company as Custodian. State
Street Bank and Trust Company maintains shares of the Underlying Scudder Funds
in the book entry system of such funds' transfer agent, Scudder Service
Corporation.
The firm of Dechert is counsel to the Trust.
Scudder Service Corporation ("Service Corporation"), P.O. Box 219669, Kansas
City, Missouri, 64121-9669, a subsidiary of the Advisor, is the transfer and
dividend disbursing agent for the Trust. Service Corporation also serves as
shareholder service agent and provides subaccounting and recordkeeping services
for shareholder accounts in certain retirement and employee benefit plans.
The Portfolios, or the Advisor (including any affiliate of the Advisor), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Portfolio shares whose interests are held in
an omnibus account.
The Portfolios' combined prospectus and this combined Statement of Additional
Information omit certain information contained in the Registration Statement
which the Trust has filed with the SEC under the Securities Act of 1933, as
amended, and reference is hereby made to the Registration Statement for further
information with respect to the Portfolios and the securities offered hereby.
This Registration Statement and its amendments are available for inspection by
the public at the SEC in Washington, D.C.
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FINANCIAL STATEMENTS
The financial statements, including the investment portfolios of Scudder Pathway
Series, together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements are incorporated herein by
reference and are hereby deemed to be part of this Statement of Additional
Information.
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GLOSSARY
Prospective investors should consider certain Underlying Scudder Funds may
engage in the following investment practices.
INVESTMENT COMPANY SECURITIES. The Underlying Scudder Funds may acquire
securities of other investment companies to the extent consistent with its
investment objective and subject to the limitations of the 1940 Act. The
Underlying Scudder Fund will indirectly bear its proportionate share of any
management fees and other expenses paid by such other investment companies.
For example, the Underlying Scudder Fund may invest in a variety of investment
companies which seek to track the composition and performance of specific
indexes or a specific portion of an index. These index-based investments hold
substantially all of their assets in securities representing their specific
index. Accordingly, the main risk of investing in index-based investments is the
same as investing in a portfolio of equity securities comprising the index. The
market prices of index-based investments will fluctuate in accordance with both
changes in the market value of their underlying portfolio securities and due to
supply and demand for the instruments on the exchanges on which they are traded
(which may result in their trading at a discount or premium to their NAVs).
Index-based investments may not replicate exactly the performance of their
specified index because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the S&P 500 Index. They are issued by The Select Sector SPDR Trust, an
open-end management investment company with nine portfolios that each seeks to
closely track the price performance and dividend yield of a particular Select
Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBsSM: WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Common stocks. Common stock is issued by companies to raise cash for business
purposes and represents a proportionate interest in the issuing companies.
Therefore, an Underlying Scudder Fund may participate in the success or failure
of any company in which it holds stock. The market values of common stock can
fluctuate significantly, reflecting the business performance of the issuing
company, investor perception and general economic or financial
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<PAGE>
market movements. Despite the risk of price volatility, however, common stocks
have historically offered a greater potential for gain on investment, compared
to other classes of financial assets such as bonds or cash equivalents, although
there can be no assurance that this will be true in the future.
Convertible Securities. Certain Underlying Scudder Funds may invest in
convertible securities, that is, bonds, notes, debentures, preferred stocks and
other securities which are convertible into common stock. Investments in
convertible securities can provide an opportunity for capital appreciation
and/or income through interest and dividend payments by virtue of their
conversion or exchange features.
The convertible securities in which an Underlying Scudder Fund may invest are
either fixed income or zero coupon debt securities which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.
Of course, like all debt securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than
non-convertible securities. Convertible securities may be issued as fixed income
obligations that pay current income or as zero coupon notes and bonds, including
Liquid Yield option Notes ("LYONs"(TM)).
Small Company Risk. The Advisor believes that many small companies may have
sales and earnings growth rates which exceed those of larger companies and that
such growth rates may in turn be reflected in more rapid share price
appreciation over time. However, investing in smaller company stocks involves
greater risk than is customarily associated with investing in larger, more
established companies. For example, smaller companies can have limited product
lines, markets, or financial and managerial resources. Smaller companies may
also be dependent on one or a few key persons, and may be more susceptible to
losses and risks of bankruptcy. Also, the securities of the smaller companies in
which certain Underlying Scudder Funds may invest, may be thinly traded (and
therefore have to be sold at a discount from current market prices or sold in
small lots over an extended period of time). Transaction costs in smaller
company stocks may be higher than those of larger companies.
Investing in emerging growth companies. The investment risk associated with
emerging growth companies is higher than that normally associated with larger,
older companies due to the greater business risks of small size, the relative
age of the company, limited product lines, distribution channels and financial
and managerial resources. Further, there is typically less publicly available
information concerning smaller companies than for larger, more established ones.
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The securities of small companies are often traded over-the-counter and may not
be traded in the volumes typical on a national securities exchange.
Consequently, in order to sell this type of holding, an Underlying Scudder Fund
may need to discount the securities from recent prices or dispose of the
securities over a long period of time. The prices of this type of security may
be more volatile than those of larger companies which are often traded on a
national securities exchange.
Investments Involving Above-Average Risk. Certain Underlying Scudder Funds may
purchase securities involving above-average risk. For example, an Underlying
Scudder Fund has invested from time to time in relatively new companies but is
limited by a non-fundamental policy that it may not invest more than 5% of its
total assets in companies that, with their predecessors, have been in continuous
operation for less than three years. The Underlying Scudder Fund's portfolio may
also include the securities of small or little-known companies, commonly
referred to as emerging growth companies, that the Advisor believes have
above-average earnings growth potential and/or may receive greater market
recognition. Both factors are believed to offer significant opportunity for
capital appreciation. Investment risk is higher than that normally associated
with larger, older companies due to the higher business risks associated with
small size, frequently narrow product lines and relative immaturity. To help
reduce risk, the Underlying Scudder Fund allocates its investments among many
companies and different industries.
The securities of such companies are often traded only over-the-counter and may
not be traded in the volume typical of trading on a national securities
exchange. As a result, the disposition by the Underlying Scudder Fund of
holdings of such securities may require the Underlying Scudder Fund to offer a
discount from recent prices or to make many small sales over a lengthy period of
time. Such securities may be subject to more abrupt or erratic market movements
than those typically encountered on national securities exchanges.
Debt securities. In general, the prices of debt securities rise when interest
rates fall, and vice versa. This effect is usually more pronounced for longer
term debt securities.
Investment-Grade Bonds. Certain of the Underlying Scudder Funds may purchase
"investment-grade bonds" which are those rated, Aaa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P or, if unrated, judged to be of equivalent quality as
determined by the Advisor. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. To the extent
an Underlying Scudder Fund invests in higher-grade securities, it will be unable
to avail itself of opportunities for higher income which may be available with
lower grades. High Yield/High Risk Bonds. Certain Underlying Scudder Funds may
also purchase debt securities which are rated below investment-grade (commonly
referred to as "junk bonds"), that is, rated below Baa by Moody's or BBB by S&P
and unrated securities judged to be of equivalent quality as determined by the
Investment Advisor. These securities usually entail greater risk (including the
possibility of default or bankruptcy of the issuers of such securities),
generally involve greater volatility of price and risk to principal and income,
and may be less liquid, than securities in the higher rating categories. The
lower the ratings of such debt securities, the more their risks render them like
equity securities. Securities rated D may be in default with respect to payment
of principal or interest. Information regarding the ratings of debt securities
and the identity of those Underlying Scudder Funds that can invest in
investment-grade or below investment-grade debt securities may be found in the
Ratings Appendix to this Statement of Additional Information.
Issuers of such high yielding securities often are highly leveraged and may not
have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yield securities because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer. Prices and yields of high yield securities will
fluctuate over time and, during periods of economic uncertainty, volatility of
high yield securities may adversely affect the Fund's net asset value. In
addition, investments in high yield zero coupon or pay-in-kind bonds, rather
than income-bearing high yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.
The Underlying Fund may have difficulty disposing of certain high yield (high
risk) securities because they may have a thin trading market. Because not all
dealers maintain markets in all high yield securities, the Underlying Fund
anticipates that such securities could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid
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secondary market may have an adverse effect on the market price and the
Underlying Fund's ability to dispose of particular issues and may also make it
more difficult for the Underlying Fund to obtain accurate market quotations for
purposes of valuing the Underlying Fund's assets. Market quotations generally
are available on many high yield issues only from a limited number of dealers
and may not necessarily represent firm bids of such dealers or prices for actual
sales. Adverse publicity and investor perceptions may decrease the values and
liquidity of high yield securities. These securities may also involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
generally the policy of the Investment Manager not to rely exclusively on
ratings issued by established credit rating agencies, but to supplement such
ratings with its own independent and on-going review of credit quality. The
achievement of the Fund's investment objective by investment in such securities
may be more dependent on the Advisor's credit analysis than is the case for
higher quality bonds. Should the rating of a portfolio security be downgraded,
the Advisor will determine whether it is in the best interests of the Underlying
Fund to retain or dispose of such security.
Prices for below investment-grade securities may be affected by legislative and
regulatory developments. Also, Congress has from time to time considered
legislation which would restrict or eliminate the corporate tax deduction for
interest payments in these securities and regulate corporate restructurings.
Such legislation may significantly depress the prices of outstanding securities
of this type.Municipal Obligations. Certain Underlying Scudder Funds may acquire
municipal obligations when, due to disparities in the debt securities markets,
the anticipated total return on such obligations is higher than that on taxable
obligations. The Underlying Scudder Fund has no current intention of purchasing
tax-exempt municipal obligations that would amount to greater than 5% of the
Underlying Scudder Fund's total assets.
Municipal obligations are issued by or on behalf of states, territories, and
possessions of the U.S., and their political subdivisions, agencies, and
instrumentalities, and the District of Columbia to obtain funds for various
public purposes. The interest on these obligations is generally exempt from
federal income tax in the hands of most investors. The two principal
classifications of municipal obligations are "notes" and "bonds." Zero Coupon
Securities. Certain Underlying Scudder Funds may invest in zero coupon
securities which pay no cash income and are sold at substantial discounts from
their value at maturity. When held to maturity, their entire income, which
consists of accretion of discount, comes from the difference between the issue
price and their value at maturity. Zero coupon securities are subject to greater
market value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually issued with shorter maturities (15 years or less) and with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
Stripped Zero Coupon Securities. Zero coupon securities include securities
issued directly by the U.S. Treasury, and U.S. Treasury bonds or notes and their
unmatured interest coupons and receipts for their underlying principal
("coupons") which have been separated by their holder, typically a custodian
bank or investment brokerage firm. A holder will separate the interest coupons
from the underlying principal (the "corpus") of the U.S. Treasury security. A
number of securities firms and banks have stripped the interest coupons and
receipts and then resold them in custodial receipt programs with a number of
different names, including "Treasury Income Growth Receipts" ("TIGRS"(TM)) and
Certificate of Accrual on Treasuries ("CATS"(TM)). The underlying U.S. Treasury
bonds and notes themselves are held in book-entry form at the Federal Reserve
Bank or, in the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder thereof), in trust on behalf of the
owners thereof. The U.S. Treasury has facilitated transfers of ownership of zero
coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, the Fund will be able to have its beneficial ownership of zero
coupon securities recorded directly in the book-entry record-keeping system in
lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
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When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (i.e., cash)
payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself. (See "TAXES.")
Brady Bonds. Certain Underlying Scudder Funds may invest in Brady Bonds, which
are securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Mexico, Uruguay,
Venezuela, Costa Rica, Argentina, Nigeria, and the Philippines.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the dollar) and are actively traded
in over-the-counter secondary markets.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds or
floating rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Interest
payments on these Brady Bonds generally are collateralized by cash or securities
in an amount that, in the case of fixed rate bonds, is equal to at least one
year of rolling interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds, with respect
to commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative. Over $82 billion in Brady Bonds have been
issued by countries in Africa and Latin America, with 90% of these Brady Bonds
being denominated in U.S. dollars.
Sovereign Debt. Investment in sovereign debt can involve a high degree of risk.
The governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of
such debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
Mortgage-Backed Securities and Mortgage Pass-Through Securities. Certain
Underlying Scudder Funds may also invest in mortgage-backed securities, which
are interests in pools of mortgage loans, including mortgage loans made by
savings and loan institutions, mortgage bankers, commercial banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related, and private organizations as further
described below. Underlying mortgages may be of a variety of types, including
adjustable rate, conventional 30-year, graduated payment and 15-year.
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A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and expose an Underlying Scudder Fund to a lower rate of
return upon reinvestment. To the extent that such mortgage-backed securities are
held by the Underlying Scudder Fund, the prepayment right will tend to limit to
some degree the increase in net asset value of the Underlying Scudder Fund
because the value of the mortgage-backed securities held by the Underlying
Scudder Fund may not appreciate as rapidly as the price of non-callable debt
securities. Mortgage-backed securities are subject to the risk of prepayment and
the risk that the underlying loans will not be repaid. Because principal may be
prepaid at any time, mortgage-backed securities may involve significantly
greater price and yield volatility than traditional debt securities.
When interest rates rise, mortgage prepayment rates tend to decline, thus
lengthening the life of mortgage-related securities and increasing their
volatility, affecting the price volatility of the Underlying Fund's shares.
Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying property, refinancing, or foreclosure, net of fees or costs which may
be incurred. Some mortgage-related securities (such as securities issued by the
General National Mortgage Association ("GNMA")) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of mortgage-related securities is GNMA.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Underlying Scudder Fund shares. Also, GNMA securities often are
purchased at a premium over the maturity value of the underlying mortgages. This
premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and credit of
the U.S. Government) include Fannie Mae and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Fannie Mae is a government-sponsored corporation owned
entirely by private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. Fannie Mae purchases conventional
(i.e., not insured or guaranteed by any government agency) mortgages from a list
of approved seller/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions,
and mortgage bankers. Pass-through securities issued by Fannie Mae are
guaranteed as to timely payment of principal and interest by Fannie Mae but are
not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal Home
Loan Banks. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages from FHLMC's national portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection of principal,
but PCs are not backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers also create
pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
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guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets an Underlying Scudder
Fund's investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Underlying Scudder Fund may buy mortgage-related
securities without insurance or guarantees, if through an examination of the
loan experience and practices of the originators/servicers and poolers, the
Advisor determines that the securities meet the Underlying Scudder Fund's
quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series, (e.g., A, B,
C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to purchase
mortgages or mortgage pass-through certificates ("Collateral"). The Collateral
is pledged to a third party trustee as security for the Bonds. Principal and
interest payments from the Collateral are used to pay principal on the Bonds in
the order A, B, C, Z. The Series A, B, and C bonds all bear current interest.
Interest on the Series Z Bond is accrued and added to principal and a like
amount is paid as principal on the Series A, B, or C Bond currently being paid
off. When the Series A, B, and C Bonds are paid in full, interest and principal
on the Series Z Bond begins to be paid currently. With some CMOs, the issuer
serves as a conduit to allow loan originators (primarily builders or savings and
loan associations) to borrow against their loan portfolios.
The principal risk of CMOs results from the rate of prepayments on underlying
mortgages serving as collateral and from the structure of the deal. An increase
or decrease in prepayment rates will affect the yield, average life and price of
CMOs.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans during
any semiannual payment period is not sufficient to meet FHLMC's minimum sinking
fund obligation on the next sinking fund payment date, FHLMC agrees to make up
the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical to
those of FHLMC PCs. FHLMC has the right to substitute collateral in the event of
delinquencies and/or defaults.
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Other Mortgage-Backed Securities. The Advisor expects that governmental,
government-related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. An Underlying Scudder Fund will not purchase mortgage-backed
securities or any other assets which, in the opinion of the Advisor, are
illiquid if, as a result, more than 15% of the value of the Underlying Scudder
Fund's total assets will be. As new types of mortgage-related securities are
developed and offered to investors, the Advisor will, consistent with the
Underlying Scudder Fund's investment objective, policies, and quality standards,
consider making investments in such new types of mortgage-related securities.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgaged-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with an Underlying Scudder Fund's investment objectives
and policies, the Underlying Scudder Fund may invest in these and other types of
asset-backed securities that may be developed in the future. In general, the
collateral supporting these securities is of shorter maturity than mortgage
loans and is less likely to experience substantial prepayments with interest
rate fluctuations.
Several types of asset-backed securities have already been offered to investors,
including Certificates for Automobile ReceivablesSM ("CARSSM"). CARSSM represent
undivided fractional interests in a trust whose assets consist of a pool of
motor vehicle retail installment sales contracts and security interests in the
vehicles securing the contracts. Payments of principal and interest on CARSSM
are passed through monthly to certificate holders, and are guaranteed up to
certain amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the trustee or originator of the trust.
An investor's return on CARSSM may be affected by early prepayment of principal
on the underlying vehicle sales contracts. If the letter of credit is exhausted,
the trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage to or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payments, the securities may contain
elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. An Underlying Scudder
Fund will not pay any additional or separate fees for credit support. The degree
of credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
An Underlying Scudder Fund may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The
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amount of residual cash flow resulting from a particular issue of asset-backed
securities will depend on, among other things, the characteristics of the
underlying assets, the coupon rates on the securities, prevailing interest
rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the 1933 Act may be subject to certain restrictions on
transferability and would be subject to the Underlying Scudder Fund's
restriction on restricted or illiquid securities. In addition, there may be no
liquid market for such securities.
The availability of asset-backed securities may be affected by legislative or
regulatory developments. It is possible that such developments may require the
Underlying Scudder Fund to dispose of any then-existing holdings of such
securities.
Illiquid Securities and Restricted Securities.
The Fund may purchase securities that are subject to legal or contractual
restrictions on resale ("restricted securities"). Generally speaking, restricted
securities may be sold (i) only to qualified institutional buyers; (ii) in a
privately negotiated transaction to a limited number of purchasers; (iii) in
limited quantities after they have been held for a specified period of time and
other conditions are met pursuant to an exemption from registration; or (iv) in
a public offering for which a registration statement is in effect under the 1933
Act. Issuers of restricted securities may not be subject to the disclosure and
other investor protection requirements that would be applicable if their
securities were publicly traded.
Restricted securities are often illiquid, but they may also be liquid. For
example, restricted securities that are eligible for resale under Rule 144A are
often deemed to be illiquid.
Each Corporation/Trust's Board of Directors/Trustees has approved guidelines for
use by the Advisor in determining whether a security is illiquid. Among the
factors the Advisor may consider in reaching liquidity decisions relating to
Rule 144A securities are: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security and
the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
market for the security (i.e., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer).
Issuers of restricted securities may not be subject to the disclosure and other
investor protection requirements that would be applicable if their securities
were publicly traded. Where a registration statement is required for the resale
of restricted securities, a Fund may be required to bear all or part of the
registration expenses. A Fund may be deemed to be an "underwriter" for purposes
of the 1933 Act when selling restricted securities to the public and, in such
event, the Fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer is materially inaccurate or
misleading.
The Fund may also purchase securities that are not subject to legal or
contractual restrictions on resale, but that are deemed illiquid. Such
securities may be illiquid, for example, because there is a limited trading
market for them.
The Fund may be unable to sell a restricted or illiquid security. In addition,
it may be more difficult to determine a market value for restricted or illiquid
securities. Moreover, if adverse market conditions were to develop during the
period between the Fund's decision to sell a restricted or illiquid security and
the point at which the Fund is permitted or able to sell such security, the Fund
might obtain a price less favorable than the price that prevailed when it
decided to sell.
It is a Fund's policy that illiquid securities (including repurchase agreements
of more than seven days duration, certain restricted securities, and other
securities which are not readily marketable) may not constitute, at the time of
purchase, more than 15% of the value of the Underlying Fund's net assets.
This investment practice, therefore, could have the effect of increasing the
level of illiquidity of a Fund.
Repurchase Agreements. The Underlying Scudder Fund may invest in repurchase
agreements pursuant to its investment guidelines. In a repurchase agreement, the
Fund acquires ownership of a security and simultaneously commits to resell that
security to the seller, typically a bank or broker/dealer.
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A repurchase agreement provides a means for an Underlying Scudder Fund to earn
income on assets for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., the Underlying Scudder Fund) acquires a security
("Obligation") and the seller agrees, at the time of sale, to repurchase the
Obligation at a specified time and price. Securities subject to a repurchase
agreement are held in a segregated account and the value of such securities kept
at least equal to the repurchase price on a daily basis. The repurchase price
may be higher than the purchase price, the difference being income to the
Underlying Scudder Fund, or the purchase and repurchase prices may be the same,
with interest at a stated rate due to the Underlying Scudder Fund together with
the repurchase price upon repurchase. In either case, the income to the
Underlying Scudder Fund is unrelated to the interest rate on the Obligation
itself. Obligations will be held by the Custodian or in the Federal Reserve Book
Entry System.
It is not clear whether a court would consider the Obligation purchased by an
Underlying Scudder Fund subject to a repurchase agreement as being owned by the
Underlying Scudder Fund or as being collateral for a loan by the Underlying
Scudder Fund to the seller. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, an Underlying Scudder
Fund may encounter delay and incur costs before being able to sell the security.
Delays may involve loss of interest or decline in price of the Obligation. If
the court characterizes the transaction as a loan and the Underlying Scudder
Fund has not perfected a security interest in the Obligation, the Underlying
Scudder Fund may be required to return the Obligation to the seller's estate and
be treated as an unsecured creditor of the seller. As an unsecured creditor, the
Underlying Scudder Fund would be at risk of losing some or all of the principal
and income involved in the transaction. As with any unsecured debt instrument
purchased for the Underlying Scudder Fund, the Advisor seeks to reduce the risk
of loss through repurchase agreements by analyzing the creditworthiness of the
obligor, in this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the Obligation, in which case an Underlying Scudder Fund may
incur a loss if the proceeds to the Underlying Scudder Fund of the sale to a
third party are less than the repurchase price. However, if the market value of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Underlying Scudder Fund will direct
the seller of the Obligation to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. It is possible that an Underlying Scudder Fund will be
unsuccessful in seeking to impose on the seller a contractual obligation to
deliver additional securities.
Repurchase Commitments. Certain Underlying Scudder Funds may enter into
repurchase commitments with any party deemed creditworthy by the Advisor,
including foreign banks and broker/dealers, if the transaction is entered into
for investment purposes and the counterparty's creditworthiness is at least
equal to that of issuers of securities which an Underlying Scudder Fund may
purchase. Such transactions may not provide the Underlying Scudder Fund with
collateral marked-to-market during the term of the commitment.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase such securities at an agreed time and
price. The Fund maintains a segregated account in connection with outstanding
reverse repurchase agreements. The Fund will enter into reverse repurchase
agreements only when the Advisor believes that the interest income to be earned
from the investment of the proceeds of the transaction will be greater than the
interest expense of the transaction. Such transactions may increase fluctuations
in the market value of Fund assets and its yield.
Strategic Transactions and Derivatives. Certain Underlying Scudder Funds may,
but are not required to, utilize various other investment strategies as
described below for a variety of purposes, such as hedging various market risks,
managing the effective maturity or duration of fixed-income securities in the
Fund's portfolio, or enhancing potential gain. These strategies may be executed
through the use of derivative contracts.
In the course of pursuing these investment strategies, the Underlying Scudder
Fund may purchase and sell exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other instruments,
purchase and sell futures contracts and options thereon, enter into various
transactions such as swaps, caps, floors, collars, currency forward contracts,
currency futures contracts, currency swaps or options on currencies, or currency
futures and various other currency transactions (collectively, all the above are
called "Strategic Transactions"). In addition, strategic transactions may also
include new techniques, instruments or strategies that are permitted as
regulatory changes occur. Strategic Transactions may be used without limit
(subject to certain limitations imposed by the 1940 Act) to attempt to protect
against possible changes in the market value of securities held in or to be
purchased
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for the Underlying Scudder Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Underlying Scudder Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of fixed-income securities in the Underlying Scudder Fund's
portfolio, or to establish a position in the derivatives markets as a substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of the
Underlying Scudder Fund's assets will be committed to Strategic Transactions
entered into for non-hedging purposes. Any or all of these investment techniques
may be used at any time and in any combination, and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Underlying Scudder Fund to utilize these
Strategic Transactions successfully will depend on the Advisor's ability to
predict pertinent market movements, which cannot be assured. The Underlying
Scudder Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter fundamental investment purposes and
characteristics of the Underlying Scudder Fund, and the Underlying Scudder Fund
will segregate assets (or as provided by applicable regulations, enter into
certain offsetting positions) to cover its obligations under options, futures
and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Underlying Scudder Fund, force the sale or purchase
of portfolio securities at inopportune times or for prices higher than (in the
case of put options) or lower than (in the case of call options) current market
values, limit the amount of appreciation the Underlying Scudder Fund can realize
on its investments or cause the Fund to hold a security it might otherwise sell.
The use of currency transactions can result in the Underlying Scudder Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Underlying Scudder Fund creates the possibility that
losses on the hedging instrument may be greater than gains in the value of the
Underlying Scudder Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, the Underlying Scudder Fund might
not be able to close out a transaction without incurring substantial losses, if
at all. Although the use of futures and options transactions for hedging should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain which might
result from an increase in value of such position. Finally, the daily variation
margin requirements for futures contracts would create a greater ongoing
potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as
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the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Underlying Scudder Fund's ability to close out its position as a purchaser
or seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Underlying Scudder Fund will only sell OTC options (other than OTC currency
options) that are subject to a buy-back provision permitting the Underlying
Scudder Fund to require the Counterparty to sell the option back to the
Underlying Scudder Fund at a formula price within seven days. The Underlying
Scudder Fund expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Underlying Scudder Fund or fails to make a
cash settlement payment due in accordance with the terms of that option, the
Underlying Scudder Fund will lose any premium it paid for the option as well as
any anticipated benefit of the transaction. Accordingly, the Advisor must assess
the creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Underlying Scudder Fund will
engage in OTC option transactions only with U.S. government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers" or
broker/dealers, domestic or foreign banks or other financial institutions which
have received (or the guarantors of the obligation of which have received) a
short-term credit rating of A-1 from S&P or P-1 from Moody's or an equivalent
rating from any nationally recognized statistical rating organization ("NRSRO")
or, in the case of OTC currency transactions, are determined to be of equivalent
credit quality by the Advisor. The staff of the SEC currently takes the position
that OTC options purchased by the Underlying Scudder Fund, and portfolio
securities "covering" the amount of the Underlying Scudder Fund's obligation
pursuant to an OTC option sold by it (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to the Underlying
Scudder Fund's limitation on investing no more than 15% of its net assets in
illiquid securities.
If the Underlying Scudder Fund sells a call option, the premium that it receives
may serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Underlying Scudder Fund's income. The sale of put
options can also provide income.
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The Underlying Scudder Fund may purchase and sell call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
foreign sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets, and on
securities indices, currencies and futures contracts. All calls sold by the
Underlying Scudder Fund must be "covered" (i.e., the Underlying Scudder Fund
must own the securities or futures contract subject to the call) or must meet
the asset segregation requirements described below as long as the call is
outstanding. Even though the Underlying Scudder Fund will receive the option
premium to help protect it against loss, a call sold by the Underlying Scudder
Fund exposes the Underlying Scudder Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Underlying Scudder Fund to
hold a security or instrument which it might otherwise have sold.
The Underlying Scudder Fund may purchase and sell put options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
foreign sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. The Underlying Scudder Fund will not sell put options if, as
a result, more than 50% of the Underlying Scudder Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Underlying Scudder Fund may be required to
buy the underlying security at a disadvantageous price above the market price.
General Characteristics of Futures. The Underlying Scudder Fund may enter into
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate, currency or equity market changes, and
for duration management, risk management and return enhancement purposes.
Futures are generally bought and sold on the commodities exchanges where they
are listed with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by the Underlying Scudder
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such position.
The Underlying Scudder Fund's use of futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into for bona fide hedging, risk management (including duration
management) or other portfolio and return enhancement management purposes.
Typically, maintaining a futures contract or selling an option thereon requires
the Underlying Scudder Fund to deposit with a financial intermediary as security
for its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited thereafter on a daily basis as the mark
to market value of the contract fluctuates. The purchase of an option on
financial futures involves payment of a premium for the option without any
further obligation on the part of the Underlying Scudder Fund. If the Underlying
Scudder Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Underlying Scudder Fund will not enter into a futures contract or related
option (except for closing transactions) if, immediately thereafter, the sum of
the amount of its initial margin and premiums on open futures contracts and
options thereon would exceed 5% of the Underlying Scudder Fund's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The segregation requirements with respect to
futures contracts and options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Underlying
Scudder Fund also may purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option
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on an index gives the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of the index upon which the option is
based exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
making up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
Currency Transactions. The Underlying Scudder Fund may engage in currency
transactions with Counterparties primarily in order to hedge, or manage the risk
of the value of portfolio holdings denominated in particular currencies against
fluctuations in relative value. Currency transactions include forward currency
contracts, exchange listed currency futures, exchange listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and operates similarly to
an interest rate swap, which is described below. The Underlying Scudder Fund may
enter into currency transactions with Counterparties which have received (or the
guarantors of the obligations which have received) a credit rating of A-1 or P-1
by S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO
or (except for OTC currency options) are determined to be of equivalent credit
quality by the Advisor.
The Underlying Scudder Fund's dealings in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
generally will be limited to hedging involving either specific transactions or
portfolio positions except as described below. Transaction hedging is entering
into a currency transaction with respect to specific assets or liabilities of
the Underlying Scudder Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Underlying Scudder Fund generally will not enter into a transaction to hedge
currency exposure to an extent greater, after netting all transactions intended
wholly or partially to offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held in
its portfolio that are denominated or generally quoted in or currently
convertible into such currency, other than with respect to proxy hedging or
cross hedging as described below.
The Underlying Scudder Fund may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Underlying Scudder
Fund has or in which the Underlying Scudder Fund expects to have portfolio
exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Underlying Scudder Fund may
also engage in proxy hedging. Proxy hedging is often used when the currency to
which the Underlying Scudder Fund's portfolio is exposed is difficult to hedge
or to hedge against the dollar. Proxy hedging entails entering into a commitment
or option to sell a currency whose changes in value are generally considered to
be correlated to a currency or currencies in which some or all of the Underlying
Scudder Fund's portfolio securities are or are expected to be denominated, in
exchange for U.S. dollars. The amount of the commitment or option would not
exceed the value of the Underlying Scudder Fund's securities denominated in
correlated currencies. For example, if the Advisor considers that the Austrian
schilling is correlated to the German deutschemark (the "D-mark"), the
Underlying Scudder Fund holds securities denominated in schillings and the
Advisor believes that the value of schillings will decline against the U.S.
dollar, the Advisor may enter into a commitment or option to sell D-marks and
buy dollars. Currency hedging involves some of the same risks and considerations
as other transactions with similar instruments. Currency transactions can result
in losses to the Underlying Scudder Fund if the currency being hedged fluctuates
in value to a degree or in a direction that is not anticipated. Further, there
is the risk that the perceived correlation between various currencies may not be
present or may not be present during the particular time that the Underlying
Scudder Fund is engaging in proxy hedging. If the Underlying Scudder Fund enters
into a currency hedging transaction, the Underlying Scudder Fund will comply
with the asset segregation requirements described below.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Underlying Scudder Fund if it is unable to deliver or receive
currency or funds in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Combined Transactions. The Underlying Scudder Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts) and multiple interest rate transactions and any combination of
futures, options, currency and interest rate transactions ("component"
transactions), instead of a single Strategic Transaction, as part of a single or
combined strategy when, in the opinion of the Advisor, it is in the best
interests of the Underlying Scudder Fund to do so. A combined transaction will
usually contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into based on
the Advisor's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase such risks or hinder
achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Underlying Scudder Fund may enter are interest rate, currency, index and other
swaps and the purchase or sale of related caps, floors and collars. The
Underlying Scudder Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities the
Underlying Scudder Fund anticipates purchasing at a later date. The Underlying
Scudder Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Underlying
Scudder Fund may be obligated to pay. Interest rate swaps involve the exchange
by the Underlying Scudder Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments with respect to a notional amount of principal.
A currency swap is an agreement to exchange cash flows on a notional amount of
two or more currencies based on the relative value differential among them and
an index swap is an agreement to swap cash flows on a notional amount based on
changes in the values of the reference indices. The purchase of a cap entitles
the purchaser to receive payments on a notional principal amount from the party
selling such cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined interest
rate or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.
The Underlying Scudder Fund will usually enter into swaps on a net basis, i.e.,
the two payment streams are netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Underlying Scudder Fund receiving
or paying, as the case may be, only the net amount of the two payments. Inasmuch
as the Underlying Scudder Fund will segregate assets (or enter into offsetting
positions) to cover its obligations under swaps, the Advisor and the Underlying
Scudder Fund believes such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO or is determined to be of equivalent credit quality by the Advisor.
If there is a default by the Counterparty, the Underlying Scudder Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
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Eurodollar Instruments. The Underlying Scudder Fund may make investments in
Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. The Underlying Scudder Fund might use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which many
interest rate swaps and fixed income instruments are linked.
Risks of Strategic Transactions outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Underlying Scudder Fund's ability to
act upon economic events occurring in foreign markets during non-business hours
in the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Underlying Scudder Fund
segregate cash or liquid assets with its custodian to the extent Underlying
Scudder Fund obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by the Underlying Scudder Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by the Underlying Scudder Fund will require the Underlying
Scudder Fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate cash or liquid assets sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by the Underlying
Scudder Fund on an index will require the Underlying Scudder Fund to own
portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Underlying Scudder Fund requires
the Underlying Scudder Fund to segregate cash or liquid assets equal to the
exercise price.
Except when the Underlying Scudder Fund enters into a forward contract for the
purchase or sale of a security denominated in a particular currency, which
requires no segregation, a currency contract which obligates the Underlying
Scudder Fund to buy or sell currency will generally require the Underlying
Scudder Fund to hold an amount of that currency or liquid assets denominated in
that currency equal to the Underlying Scudder Fund's obligations or to segregate
cash or liquid assets equal to the amount of the Underlying Scudder Fund's
obligation.
OTC options entered into by the Underlying Scudder Fund, including those on
securities, currency, financial instruments or indices and OCC issued and
exchange listed index options, will generally provide for cash settlement. As a
result, when the Underlying Scudder Fund sells these instruments it will only
segregate an amount of cash or liquid assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed option
sold by the Underlying Scudder Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Underlying Scudder Fund sells a call option on an index at a time when
the in-the-money amount exceeds the exercise price, the Underlying Scudder Fund
will segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. OCC issued and exchange listed
options sold by the Underlying Scudder Fund other than those above generally
settle with physical delivery, or with an election of either physical delivery
or cash settlement and the Underlying Scudder Fund will segregate an amount of
cash or liquid assets equal to the full value of the option. OTC options
settling with physical delivery, or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option thereon, the Underlying Scudder
Fund must deposit initial margin and possible daily variation margin in addition
to segregating cash or liquid assets sufficient to meet its obligation to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures
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contract. Such liquid assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Underlying Scudder Fund will accrue the net amount of
the excess, if any, of its obligations over its entitlements with respect to
each swap on a daily basis and will segregate an amount of cash or liquid assets
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Underlying Scudder Fund's net
obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Underlying Scudder Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Underlying Scudder Fund could purchase
a put option if the strike price of that option is the same or higher than the
strike price of a put option sold by the Underlying Scudder Fund. Moreover,
instead of segregating cash or liquid assets if the Underlying Scudder Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
When-Issued Securities. Certain Underlying Scudder Funds may purchase securities
on a "when-issued", "delayed delivery" or "forward delivery" basis for payment
and delivery at a later date. The price of such securities, which is generally
expressed in yield terms, is generally fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities takes place at a later date. During the period between
purchase and settlement, no payment is made by an Underlying Scudder Fund to the
issuer and no interest on the securities accrues to the Underlying Scudder Fund.
When the Fund purchases such securities, it immediately assumes the risks of
ownership, including the risk of price fluctuation. Failure to deliver a
security purchased on this basis may result in a loss or missed opportunity to
make an alternative investment.
To the extent that assets of the Underlying Scudder Fund are held in cash
pending the settlement of a purchase of securities, the Underlying Scudder Fund
will earn no income. While such securities may be sold prior to the settlement
date, the Underlying Scudder Fund intends to purchase them with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time the Underlying Scudder Fund makes the commitment to purchase a
security on this basis, it will record the transaction and reflect the value of
the security in determining its net asset value. At the time of settlement, the
market value of the securities may be more or less than the purchase price. The
Fund will establish a segregated account in which it will maintain cash and
liquid securities equal in value to commitments for such securities.
Short Sales Against the Box. Certain Underlying Scudder Funds may make short
sales of common stocks if, at all times when a short position is open, an
Underlying Scudder Fund owns the stock or owns preferred stocks or debt
securities convertible or exchangeable, without payment of further
consideration, into the shares of common stock sold short. Short sales of this
kind are referred to as short sales "against the box." The broker/dealer that
executes a short sale generally invests cash proceeds of the sale until they are
paid to the Underlying Scudder Fund. Arrangements may be made with the
broker/dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Underlying Scudder Fund will segregate
the common stock or convertible or exchangeable preferred stock or debt
securities in a special account with the custodian.
Uncertainty regarding the tax effects of short sales of appreciated investments
may limit the extent to which the Underlying Fund may enter into short sales
against the box.
Foreign Securities. Investing in foreign securities involves certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect an Underlying Scudder Fund's performance. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
securities markets, while growing in volume of trading activity, have
substantially less volume than the U.S. market, and securities of some foreign
issuers are less liquid and more volatile than securities of domestic issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
U.S. and, at times, volatility of
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price can be greater than in the U.S. Fixed commissions on some foreign
securities exchanges and bid to asked spreads in foreign bond markets are
generally higher than commissions or bid to asked spreads on U.S. markets,
although the Advisor will endeavor to achieve the most favorable net results on
its portfolio transactions. There is generally less governmental supervision and
regulation of securities exchanges, brokers and listed companies than in the
U.S. It may be more difficult for an Underlying Scudder Fund's agents to keep
currently informed about corporate actions which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Payment for securities without delivery may be required in certain
foreign markets. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The management of an
Underlying Scudder Fund seeks to mitigate the risks associated with the
foregoing considerations through continuous professional management.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because certain Underlying Scudder
Funds may hold foreign currencies and forward contracts, futures contracts and
options on foreign currencies and foreign currency futures contracts, the value
of the assets of such Underlying Scudder Fund as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the Underlying Scudder Fund may incur
costs in connection with conversions between various currencies.
The strength or weakness of the U.S. dollar against these currencies is
responsible for part of the Fund's investment performance. If the dollar falls
in value relative to the Japanese yen, for example, the dollar value of a
Japanese stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the Japanese stock will fall. Many foreign
currencies have experienced significant devaluation relative to the dollar.
Although an Underlying Scudder Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to an Underlying Scudder Fund at one rate, while offering a lesser rate of
exchange should the Underlying Scudder Fund desire to resell that currency to
the dealer. An Underlying Scudder Fund will conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through entering into
options or forward or futures contracts to purchase or sell foreign currencies.
Investing in Emerging Markets. The Fund's investments in foreign securities may
be in developed countries or in countries considered by the Fund's Investment
Manager to have developing or "emerging" markets, which involves exposure to
economic structures that are generally less diverse and mature than in the
United States, and to political systems that may be less stable. A developing or
emerging market country can be considered to be a country that is in the initial
stages of its industrialization cycle. Currently, emerging markets generally
include every country in the world other than the United States, Canada, Japan,
Australia, New Zealand, Hong Kong, Singapore and most Western European
countries. Currently, investing in many emerging markets may not be desirable or
feasible because of the lack of adequate custody arrangements for the Fund's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop,
the Fund may expand and further broaden the group of emerging markets in which
it invests. In the past, markets of developing or emerging market countries have
been more volatile than the markets of developed countries; however, such
markets often have provided higher rates of return to investors. The Investment
Manager believes that these characteristics may be expected to continue in the
future.
Most emerging securities markets in which certain Underlying Scudder Funds may
invest, may have substantially less volume and are subject to less government
supervision than U.S. securities markets. Securities of many issuers in emerging
markets may be less liquid and more volatile than securities of comparable
domestic issuers. In addition, there
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is less regulation of securities exchanges, securities dealers, and listed and
unlisted companies in emerging markets than in the United States.
Emerging markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions. Delays in settlement could
result in temporary periods when a portion of the assets of an Underlying
Scudder Fund is uninvested and no cash is earned thereon. The inability of the
Underlying Scudder Fund to make intended security purchases due to settlement
problems could cause the Underlying Scudder Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Underlying Scudder Fund due to
subsequent declines in value of the portfolio security or, if the Underlying
Scudder Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities are generally higher than costs associated with transactions
in U.S. securities. Such transactions also involve additional costs for the
purchase or sale of foreign currency.
Certain emerging markets require prior governmental approval of investments by
foreign persons, limit the amount of investment by foreign persons in a
particular company, limit the investment by foreign persons only to a specific
class of securities of a company that may have less advantageous rights than the
classes available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging markets may also
restrict investment opportunities in issuers in industries deemed important to
national interest.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. An Underlying Scudder Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Underlying Scudder Fund of any restrictions on investments.
In the course of investment in emerging market debt obligations, an Underlying
Scudder Fund will be exposed to the direct or indirect consequences of
political, social and economic changes in one or more emerging markets. While
the Underlying Scudder Fund will manage its assets in a manner that will seek to
minimize the exposure to such risks, and will further reduce risk by owning the
bonds of many issuers, there can be no assurance that adverse political, social
or economic changes will not cause the Underlying Scudder Fund to suffer a loss
of value in respect of the securities in the Underlying Scudder Fund's
portfolio.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for an Underlying Scudder Fund's securities
in such markets may not be readily available. The Trust/Corporation may suspend
redemption of its shares for any period during which an emergency exists, as
determined by the SEC. Accordingly if the Underlying Scudder Fund believes that
appropriate circumstances exist, it will promptly apply to the Commission for a
determination that an emergency is present. During the period commencing from
the Underlying Scudder Fund's identification of such condition until the date of
the Commission action, the Underlying Scudder Fund's securities in the affected
markets will be valued at fair value determined in good faith by or under the
direction of the Board of Directors.
Volume and liquidity in most foreign bond markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although an Underlying Scudder Fund endeavors to achieve the
most favorable net results on its portfolio transactions. There is generally
less government supervision and regulation of business and industry practices,
securities exchanges, brokers, dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. In addition, with respect to certain emerging markets,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect the Underlying
Scudder Fund's investments in those countries. Moreover, individual emerging
market economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
chart below sets forth the risk ratings of selected emerging market countries'
sovereign debt securities.
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Sovereign Risk Ratings for Selected Emerging Market Countries
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)
Country Moody's Standard & Poor's
------- ------- -----------------
Chile Baa1 A-
Turkey B1 B
Mexico Ba2 BB
Czech Republic Baa1 A
Hungary Baa3 BBB-
Colombia Baa3 BBB-
Venezuela Ba2 B+
Morocco NR NR
Argentina Ba3 BB
Brazil B1 BB-
Poland Baa3 BBB-
Ivory Coast NR NR
An Underlying Scudder Fund may have limited legal recourse in the event of a
default with respect to certain debt obligations it holds. If the issuer of a
fixed-income security owned by the Underlying Scudder Fund defaults, the
Underlying Scudder Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market country governments differ from debt
obligations of private entities; remedies from defaults on debt obligations
issued by emerging market governments, unlike those on private debt, must be
pursued in the courts of the defaulting party itself. The Underlying Scudder
Fund's ability to enforce its rights against private issuers may be limited. The
ability to attach assets to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and other similar laws
applicable to private issuers of debt obligations may be substantially different
from those of other countries. The political context, expressed as an emerging
market governmental issuer's willingness to meet the terms of the debt
obligation, for example, is of considerable importance. In addition, no
assurance can be given that the holders of commercial bank debt may not contest
payments to the holders of debt obligations in the event of default under
commercial bank loan agreements. Income from securities held by an Underlying
Scudder Fund could be reduced by a withholding tax on the source or other taxes
imposed by the emerging market countries in which the Underlying Scudder Fund
makes its investments. The Underlying Scudder Fund's net asset value may also be
affected by changes in the rates or methods of taxation applicable to the
Underlying Scudder Fund or to entities in which the Underlying Scudder Fund has
invested. The Advisor will consider the cost of any taxes in determining whether
to acquire any particular investments, but can provide no assurance that the
taxes will not be subject to change.
Many emerging markets have experienced substantial, and in some periods
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Emerging market governmental issuers are among the largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. Certain emerging market governmental issuers have not
been able to make payments of interest on or principal of debt obligations as
those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and continue to
exercise substantial influence over many aspects of the private sector through
the ownership or control of many companies, including some of the largest in any
given country. As a result, government actions in the future could have a
significant effect on economic conditions in emerging markets, which in turn,
may adversely affect companies in the private sector, general market conditions
and prices and yields of certain of the securities in the Underlying Scudder
Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently
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over the history of certain emerging markets and could adversely affect the
Underlying Scudder Fund's assets should these conditions recur.
The ability of emerging market country governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of emerging markets to these
forms of external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging market country
governmental issuers to make payments on their obligations. In addition, the
cost of servicing emerging market debt obligations can be affected by a change
in international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country. Fluctuations
in the level of these reserves affect the amount of foreign exchange readily
available for external debt payments and thus could have a bearing on the
capacity of emerging market countries to make payments on these debt
obligations.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and inflows of foreign investment. The access of emerging markets to these forms
of external funding may not be certain, and a withdrawal of external funding
could adversely affect the capacity of emerging market country governmental
issuers to make payments on their obligations. In addition, the cost of
servicing emerging market debt obligations can be affected by a change in
international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
Investing in Latin America.
Investing in securities of Latin American issuers may entail risks relating to
the potential political and economic instability of certain Latin American
countries and the risks of expropriation, nationalization, confiscation or the
imposition of restrictions on foreign investment and on repatriation of capital
invested. In the event of expropriation, nationalization or other confiscation
by any country, the Underlying Fund could lose its entire investment in any such
country.
The securities markets of Latin American countries are substantially smaller,
less developed, less liquid and more volatile than the major securities markets
in the U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of monitoring
and regulation of the markets and the activities of investors in such markets.
The limited size of many Latin American securities markets and limited trading
volume in the securities of Latin American issuers compared to volume of trading
in the securities of U.S. issuers could cause prices to be erratic for reasons
apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
Some Latin American countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
Latin American countries may restrict the free conversion of their currencies
into other currencies. Further, certain Latin American currencies may not be
internationally traded. Certain of these
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currencies have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which Fund investments are denominated may
have a detrimental impact on the Fund's net asset value.
The economies of individual Latin American countries may differ favorably or
unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Certain Latin American
countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to a Fund
at a higher rate than those imposed by other foreign countries. This may reduce
the Fund's investment income available for distribution to shareholders
Certain Latin American countries such as Argentina, Brazil and Mexico are among
the world's largest debtors to commercial banks and foreign governments. At
times, certain Latin American countries have declared moratoria on the payment
of principal and/or interest on outstanding debt. The portion of an Underlying
Scudder Fund's assets invested directly in Chile may be less than the portions
invested in other countries in Latin America because, at present, capital
invested in Chile normally cannot be repatriated for as long as five years.
Latin America is a region rich in natural resources such as oil, copper, tin,
silver, iron ore, forestry, fishing, livestock and agriculture. The region has a
large population (roughly 300 million) representing a large domestic market.
Economic growth was strong in the 1960s and 1970s, but slowed dramatically (and
in some instances was negative) in the 1980s as a result of poor economic
policies, higher international interest rates, and the denial of access to new
foreign capital. Although a number of Latin American countries are currently
experiencing lower rates of inflation and higher rates of real growth in gross
domestic product than they have in the past, other Latin American countries
continue to experience significant problems, including high inflation rates and
high interest rates. Capital flight has proven a persistent problem and external
debt has been forcibly restructured. Political turmoil, high inflation, capital
repatriation restrictions and nationalization have further exacerbated
conditions.
Governments of many Latin American countries have exercised and continue to
exercise substantial influence over many aspects of the private sector through
the ownership or control of many companies, including some of the largest in
those countries. As a result, government actions in the future could have a
significant effect on economic conditions which may adversely affect prices of
certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect a Fund's investments in this region.
Changes in political leadership, the implementation of market oriented economic
policies, such as privatization, trade reform and fiscal and monetary reform are
among the recent steps taken to renew economic growth. External debt is being
restructured and flight capital (domestic capital that has left home country)
has begun to return. Inflation control efforts have also been implemented. Free
Trade Zones are being discussed in various areas around the region, the most
notable being a free zone among Mexico, the U.S. and Canada and another zone
among four countries in the southernmost point of Latin America. Currencies are
typically weak, but most are now relatively free floating, and it is not unusual
for the currencies to undergo wide fluctuations in value over short periods of
time due to changes in the market.
Investing in the Pacific Basin. Certain Underlying Scudder Funds are susceptible
to political and economic factors affecting issuers in Pacific Basin countries.
Many of the countries of the Pacific Basin are developing both economically and
politically. Economies of individual Pacific Basin countries in which certain
Underlying Scudder Funds may invest, may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, interest rate
levels, and balance of payments position. Of particular importance, most of the
economies in this region of the world are heavily dependent upon exports,
particularly to developed countries, and, accordingly, have been and may
continue to be adversely affected by trade barriers, managed adjustments in
relative currency values, and other protectionist measures imposed or negotiated
by the U.S. and other countries with which they trade. These economies also have
been and may continue to be negatively impacted by economic conditions in the
U.S. and other trading partners, which can lower the demand for goods produced
in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in which an
Underlying Scudder Fund may participate, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government
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regulation, social instability or diplomatic developments that could adversely
impact a Pacific Basin country including the Underlying Scudder Fund's
investment in that country.
Foreign companies, including Pacific Basin companies, are not generally subject
to uniform accounting, auditing and financial reporting standards, practices and
disclosure requirements comparable to those applicable to U.S. companies.
Consequently, there may be less publicly available information about such
companies than about U.S. companies. Moreover, there is generally less
government supervision and regulation of Pacific Basin stock exchanges, brokers,
and listed companies than in the U.S.
Investing in Africa. Africa is a continent of roughly 50 countries with a total
population of approximately 840 million people. Literacy rates (the percentage
of people who are over 15 years of age and who can read and write) are
relatively low, ranging from 20% to 60%. The primary industries include crude
oil, natural gas, manganese ore, phosphate, bauxite, copper, iron, diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism, and cattle.
Many of the countries in which certain Underlying Scudder Funds may invest are
fraught with political instability. However, there has been a trend over recent
years toward democratization. Many countries are moving from a military style,
Marxist, or single party government to a multi-party system. Still, there remain
many countries that do not have a stable political process. Other countries have
been enmeshed in civil wars and border clashes.
Economically, the Northern Rim countries (including Morocco, Egypt, and Algeria)
and Nigeria, Zimbabwe and South Africa are the wealthier countries on the
continent. The market capitalization of these countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as Burkinafaso,
Madagascar, and Malawi that are considered to be among the poorest or least
developed in the world. These countries are generally landlocked or have poor
natural resources. The economies of many African countries are heavily dependent
on international oil prices. Of all the African industries, oil has been the
most lucrative, accounting for 40% to 60% of many countries' GDP. However,
general decline in oil prices has had an adverse impact on many economies.
Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These risks include (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Underlying
Scudder Fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and (vii)
the possibility that recent favorable economic developments in Eastern Europe
may be slowed or reversed by unanticipated political or social events in such
countries, or in the countries of the former Soviet Union.
Investments in such countries involve risks of nationalization, expropriation
and confiscatory taxation. The Communist governments of a number of East
European countries expropriated large amounts of private property in the past,
in many cases without adequate compensation, and there may be no assurance that
such expropriation will not occur in the future. In the event of such
expropriation, the Underlying Scudder Fund could lose a substantial portion of
any investments it has made in the affected countries. Further, no accounting
standards exist in East European countries. Finally, even though certain East
European currencies may be convertible into U.S. dollars, the conversion rates
may be artificial to the actual market values and may be adverse to the
Underlying Scudder Fund's.
Investing in Europe. An Underlying Scudder Fund's performance may be susceptible
to political, social and economic factors affecting issuers in European
countries.
Most Eastern European nations in which certain Underlying Scudder Funds may
invest, including Hungary, Poland, Czechoslovakia, and Romania have had
centrally planned, socialist economies since shortly after World War II. A
number of their governments, including those of Hungary, the Czech Republic, and
Poland are currently implementing or considering reforms directed at political
and economic liberalization, including efforts to foster multi-party political
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systems, decentralize economic planning, and move toward free market economies.
At present, no Eastern European country has a developed stock market, but
Poland, Hungary, and the Czech Republic have small securities markets in
operation. Ethnic and civil conflict currently rage through the former
Yugoslavia. The outcome is uncertain.
Both the European Community ("EC") and Japan, among others, have made overtures
to establish trading arrangements and assist in the economic development of the
Eastern European nations. A great deal of interest also surrounds opportunities
created by the reunification of East and West Germany. Following reunification,
the Federal Republic of Germany has remained a firm and reliable member of the
EC and numerous other international alliances and organizations. To reduce
inflation caused by the unification of East and West Germany, Germany has
adopted a tight monetary policy which has led to weakened exports and a reduced
domestic demand for goods and services. However, in the long-term, reunification
could prove to be an engine for domestic and international growth.
The conditions that have given rise to these developments are changeable, and
there is no assurance that reforms will continue or that their goals will be
achieved.
Portugal is a genuinely emerging market which has experienced rapid growth since
the mid-1980s, except for a brief period of stagnation over 1990-91. Portugal's
government remains committed to privatization of the financial system away from
one dependent upon the banking system to a more balanced structure appropriate
for the requirements of a modern economy. Inflation continues to be about three
times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in the 1990s.
Turkey's economy has grown steadily since the early 1980s, with real growth in
per capita Gross Domestic Product (GDP) increasing more than 6% annually.
Agriculture remains the most important economic sector, employing approximately
55% of the labor force, and accounting for nearly 20% of GDP and 20% of exports.
Inflation and interest rates remain high, and a large budget deficit will
continue to cause difficulties in Turkey's substantial transformation to a
dynamic free market economy.
Like many other Western economies, Greece suffered severely from the global oil
price hikes of the 1970s, with annual GDP growth plunging from 8% to 2% in the
1980s, and inflation, unemployment, and budget deficits rising sharply. The fall
of the socialist government in 1989 and the inability of the conservative
opposition to obtain a clear majority have led to business uncertainty and the
continued prospects for flat economic performance. Once Greece has sorted out
its political situation, it will have to face the challenges posed by the
steadily increasing integration of the EC, including the progressive lowering of
trade and investment barriers. Tourism continues as a major industry, providing
a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may be subject
to risks due to the inexperience of financial intermediaries, the lack of modern
technology and the lack of a sufficient capital base to expand business
operations. Additionally, former Communist regimes of a number of Eastern
European countries had expropriated a large amount of property, the claims of
which have not been entirely settled. There can be no assurance that the
Underlying Scudder Fund's investments in Eastern Europe would not also be
expropriated, nationalized or otherwise confiscated. Finally, any change in
leadership or policies of Eastern European countries, or countries that exercise
a significant influence over those countries, may halt the expansion of or
reverse the liberalization of foreign investment policies now occurring and
adversely affect existing investment opportunities.
Depositary Receipts. Certain Underlying Scudder Funds may invest sponsored or
unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), International Depositary Receipts ("IDRs") and other types of
Depositary Receipts (which, together with ADRs, GDRs and IDRs are hereinafter
referred to as "Depositary Receipts"). Depositary receipts provide indirect
investment in securities of foreign issuers. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. In addition, the issuers of the stock of
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of the Depositary Receipts. ADRs
are Depositary Receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
GDRs, IDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be issued by United
States banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a United States corporation. Generally, Depositary
Receipts in registered form are designed for use in the United States securities
markets and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. For
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purposes of an Underlying Scudder Fund's investment policies, the Underlying
Scudder Fund's investments in ADRs, GDRs and other types of Depositary Receipts
will be deemed to be investments in the underlying securities. Depositary
Receipts, including those denominated in U.S. dollars will be subject to foreign
currency exchange rate risk. However, by investing in U.S. dollar-denominated
ADR's rather than directly in foreign issuer's stock, the Underlying Fund avoids
currency risks during the settlement period. However, certain Depositary
Receipts may not be listed on an exchange and therefore may be illiquid
securities.
Loan Participations and Assignments. Certain Underlying Scudder Funds may invest
in fixed and floating rate loans ("Loans") arranged through private negotiations
between an issuer of emerging market debt instruments and one or more financial
institutions ("Lenders"). An Underlying Scudder Fund's investments in Loans in
Latin America are expected in most instances to be in the form of participations
in Loans ("Participations") and assignments of portions of Loans ("Assignments")
from third parties. Participations typically will result in the Underlying
Scudder Fund having a contractual relationship only with the Lender and not with
the borrower. The Underlying Scudder Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
Underlying Scudder Fund generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement relating to the Loan, nor any
rights of set-off against the borrower, and the Underlying Scudder Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Underlying Scudder Fund will
assume the credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Underlying Scudder Fund may be treated as a general creditor
of the Lender and may not benefit from any set-off between the Lender and the
borrower. The Underlying Scudder Fund will acquire Participations only if the
Lender interpositioned between the Underlying Scudder Fund and the borrower is
determined by the Advisor to be creditworthy.
When an Underlying Scudder Fund purchases Assignments from Lenders, the
Underlying Scudder Fund will acquire direct rights against the borrower on the
Loan. Because Assignments are arranged through private negotiations between
potential assignees and potential assignors, however, the rights and obligations
acquired by the Underlying Scudder Fund as the purchaser of an Assignment may
differ from, and may be more limited than, those held by the assigning Lender.
An Underlying Scudder Fund may have difficulty disposing of Assignments and
Participations. Because no liquid market for these obligations typically exists,
the Underlying Scudder Fund anticipates that these obligations could be sold
only to a limited number of institutional investors. The lack of a liquid
secondary market will have an adverse effect on the Underlying Scudder Fund's
ability to dispose of particular Assignments or Participations when necessary to
meet the Underlying Scudder Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the borrower.
The lack of a liquid secondary market for Assignments and Participations may
also make it more difficult for the Underlying Scudder Fund to assign a value to
those securities for purposes of valuing the Underlying Scudder Fund's portfolio
and calculating its net asset value.
Real Estate Investment Trusts. Certain Underlying Scudder Funds invest in REITs.
REITs are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs. REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments on real estate
mortgages in which they are invested. Hybrid REITs combine the characteristics
of both equity REITs and mortgage REITs. Investment in REITs may subject an
Underlying Scudder Fund to risks associated with the direct ownership of real
estate, such as decreases in real estate values, overbuilding, increased
competition and other risks related to local or general economic conditions,
increases in operating costs and property taxes, changes in zoning laws,
casualty or condemnation losses, possible environmental liabilities, regulatory
limitations on rent and fluctuations in rental income. Equity REITs generally
experience these risks directly through fee or leasehold interests, whereas
mortgage REITs generally experience these risks indirectly through mortgage
interests, unless the mortgage REIT forecloses on the underlying real estate.
Changes in interest rates may also affect the value of an Underlying Scudder
Fund's investment in REITs. For instance, during periods of declining interest
rates, certain mortgage REITs may hold mortgages that the mortgagors elect to
prepay, which prepayment may diminish the yield on securities issued by those
REITs.
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Certain REITs have relatively small market capitalization, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended and to maintain exemption from the registration requirements of the 1940
Act. By investing in REITs indirectly through an Underlying Scudder Fund, a
shareholder will bear not only his or her proportionate share of the expenses of
an Underlying Scudder Fund's, but also, indirectly, similar expenses of the
REITs. In addition, REITs depend generally on their ability to generate cash
flow to make distributions to shareholders.
Trust Preferred Securities. Certain Underlying Scudder Funds invest in Trust
Preferred Securities, which are hybrid instruments issued by a special purpose
trust (the "Special Trust"), the entire equity interest of which is owned by a
single issuer. The proceeds of the issuance to the Underlying Scudder Funds of
Trust Preferred Securities are typically used to purchase a junior subordinated
debenture, and distributions from the Special Trust are funded by the payments
of principal and interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by the Special
Trust are deferred by the debenture issuer, the debentures would be treated as
original issue discount ("OID") obligations for the remainder of their term. As
a result, holders of Trust Preferred Securities, such as the Underlying Scudder
Funds, would be required to accrue daily for Federal income tax purposes, their
share of the stated interest and the de minimis OID on the debentures
(regardless of whether an Underlying Scudder Fund receives any cash
distributions from the Special Trust), and the value of Trust Preferred
Securities would likely be negatively affected. Interest payments on the
underlying junior subordinated debentures typically may only be deferred if
dividends are suspended on both common and preferred stock of the issuer. The
underlying junior subordinated debentures generally rank slightly higher in
terms of payment priority than both common and preferred securities of the
issuer, but rank below other subordinated debentures and debt securities. Trust
Preferred Securities may be subject to mandatory prepayment under certain
circumstances. The market values of Trust Preferred Securities may be more
volatile than those of conventional debt securities. Trust Preferred Securities
may be issued in reliance on Rule 144A under the 1933 Act and, unless and until
registered, are restricted securities; there can be no assurance as to the
liquidity of Trust Preferred Securities and the ability of holders of Trust
Preferred Securities, such as the Underlying Scudder Funds, to sell their
holdings.
Investment company securities. Securities of other investment companies may be
acquired by certain Underlying Scudder Funds consistent with their investment
objectives and subject to the limitations of the 1940 Act. The Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by such other investment companies.
For example, the Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). Index-based
investments may not replicate exactly the performance of their specified index
because of transaction costs and because of the temporary unavailability of
certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
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Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBsSM: WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Non-diversified investment company. Certain Underlying Scudder Funds are
classified as non-diversified investment companies under the 1940 Act, which
means that an Underlying Scudder Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in the obligations of a single
issuer. The investment of a large percentage of an Underlying Scudder Fund's
assets in the securities of a small number of issuers may cause an Underlying
Scudder Fund's share price to fluctuate more than that of a diversified
investment company.
Precious metals. Investments in precious metals and in precious metals-related
securities and companies involve a relatively high degree of risk. Prices of
gold and other precious metals can be influenced by a variety of global
economic, financial and political factors and may fluctuate markedly over short
periods of time. Among other things, precious metals values can be affected by
changes in inflation, investment speculation, metal sales by governments or
central banks, changes in industrial and commercial demand, and any governmental
restrictions on private ownership of gold or other precious metals.
Correlation of gold and gold securities. The Advisor believes that the value of
the securities of firms that deal in gold will correspond generally, over time,
with the prices of the underlying metal. At any given time, however, changes in
the price of gold may not strongly correlate with changes in the value of
securities related to gold, which are expected to constitute part of certain
Underlying Scudder Funds' assets. In fact, there may be periods in which the
price of gold stocks and gold will move in different directions. The reason for
this potential disparity is that political and economic factors, including
behavior of the stock market, may have differing impacts on gold versus gold
stocks.
Mining and exploration risks. The business of gold mining by its nature involves
significant risks and hazards, including environmental hazards, industrial
accidents, labor disputes, discharge of toxic chemicals, fire, drought, flooding
and natural acts. The occurrence of any of these hazards can delay production,
increase production costs and result in liability to the operator of the mines.
A mining operation may become subject to liability for pollution or other
hazards against which it has not insured or cannot insure, including those in
respect of past mining activities for which it was not responsible.
Exploration for gold and other precious metals is speculative in nature,
involves many risks and frequently is unsuccessful. There can be no assurance
that any mineralisation discovered will result in an increase in the proven and
probable reserves of a mining operation. If reserves are developed, it can take
a number of years from the initial phases of drilling and identification of
mineralisation until production is possible, during which time the economic
feasibility of production may change. Substantial expenditures are required to
establish ore reserves properties and to construct mining and processing
facilities. As a result of these uncertainties, no assurance can be given that
the exploration programs undertaken by a particular mining operation will
actually result in any new commercial mining.
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Asset-Indexed Securities. Certain Underlying Scudder Funds may purchase
asset-indexed securities which are debt securities usually issued by companies
in precious metals related businesses such as mining, the principal amount,
redemption terms, or interest rates of which are related to the market price of
a specified precious metal. An Underlying Scudder Fund will only enter into
transactions in publicly traded asset-indexed securities. Market prices of
asset-indexed securities will relate primarily to changes in the market prices
of the precious metals to which the securities are indexed rather than to
changes in market rates of interest. However, there may not be a perfect
correlation between the price movements of the asset-indexed securities and the
underlying precious metals. Asset-indexed securities typically bear interest or
pay dividends at below market rates (and in certain cases at nominal rates). The
Underlying Scudder Fund will purchase asset-indexed securities to the extent
permitted by law.
Special situation securities. From time to time, an Underlying Scudder Fund may
invest in equity or debt securities issued by companies that are determined by
the Advisor to possess "special situation" characteristics. In general, a
special situation company is a company whose securities are expected to increase
in value solely by reason of a development particularly or uniquely applicable
to the company. Developments that may create special situations include, among
others, a liquidation, reorganization, recapitalization or merger, material
litigation, technological breakthrough and new management or management
policies. The principal risk with investments in special situation companies is
that the anticipated development thought to create the special situation may not
occur and the investments therefore may not appreciate in value or may decline
in value.
Borrowing. An Underlying Scudder Fund will borrow only when the Advisor believes
that borrowing will benefit the Underlying Scudder Fund after taking into
account considerations such as the costs of the borrowing. Borrowing by the
Underlying Scudder Fund will involve special risk considerations. Although the
principal of the Underlying Scudder Fund's borrowings will be fixed, the
Underlying Scudder Fund's assets may change in value during the time a borrowing
is outstanding, proportionately increasing exposure to capital risk.
Lending of Portfolio Securities. Certain Underlying Scudder Funds may seek to
increase their income by lending portfolio securities. Such loans may be made to
registered broker/dealers, and are required to be secured continuously by
collateral in cash, U.S. Government securities and high grade debt obligations,
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. An Underlying Scudder Fund has
the right to call a loan and obtain the securities loaned on no more than five
days' notice. During the existence of a loan, the Underlying Scudder Fund
continues to receive the equivalent of any distributions paid by the issuer on
the securities loaned and also receives compensation based on investment of the
collateral. As with other extensions of credit there are risks of delay in
recovery and a loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans may be made only to firms deemed
by the Advisor to be of good standing and will not be made unless, in the
judgment of the Advisor, the consideration to be earned from such loans would
justify the risk.
Corporate and Municipal Bond Ratings. The following is a description of the
ratings given by S&P and Moody's to corporate and municipal bonds. Should the
rating of a portfolio security held by an Underlying Scudder Fund be downgraded,
the Advisor will determine whether it is in the best interest of the Underlying
Scudder Fund to retain or dispose of such security.
S&P. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
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Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating. Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class. Bonds which are rated
B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
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