-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, VamQH1zjxWdZrRdCF3yc6GqKz3am5T59LJ3Ukx2fJd1zHuTrEDLbMBk3TxfZklpG 65Cv9JxibpcCSQKSfj9tkA== 0000713331-95-000001.txt : 19950216 0000713331-95-000001.hdr.sgml : 19950216 ACCESSION NUMBER: 0000713331-95-000001 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950215 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AARP CASH INVESTMENT FUNDS CENTRAL INDEX KEY: 0000713331 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 042804129 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-81427 FILM NUMBER: 95511586 BUSINESS ADDRESS: STREET 1: 175 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173305464 FORMER COMPANY: FORMER CONFORMED NAME: AARP MONEY MARKET TRUST DATE OF NAME CHANGE: 19850723 FORMER COMPANY: FORMER CONFORMED NAME: MASTER INVESTMENT SERVICES FUND DATE OF NAME CHANGE: 19850225 497 1 AARP CASH INVESTMENT DEFINITIVE AARP INVESTMENT PROGRAM FROM SCUDDER PROSPECTUS February 1, 1995 There are eight pure no-load AARP Mutual Funds that have been developed to help meet the investment needs of AARP members. The Funds are organized into four Trusts (see page 3 1 for more information on the Trusts). Trusts AARP Mutual Funds AARP Cash Investment Funds AARP High Quality Money Fund AARP Income Trust AARP GNMA and U.S. Treasury Fund AARP High Quality Bond Fund AARP Tax Free Income Trust AARP High Quality Tax Free Money Fund AARP Insured Tax Free General Bond Fund AARP Growth Trust AARP Balanced Stock and Bond Fund AARP Growth and Income Fund AARP Capital Growth Fund This combined Prospectus provides information about the AARP Investment Program from Scudder that a prospective investor should know before investing. Please keep it for future reference. The U.S. Government does not and has never insured or guaranteed shares of any mutual fund, including the AARP Mutual Funds. For limitations on insurance relative to the AARP Insured Tax Free General Bond Fund, see page 20 . The AARP High Quality Money Fund and the AARP High Quality Tax Free Money Fund each seek to maintain a constant net asset value of $1.00 per share. The Fund Manager cannot assure investors that these funds will be able to maintain a stable $1.00 per share or constant net asset value. You may get more detailed information in the combined Statement of Additional Information (SAI) dated February 1, 1995, as amended from time to time. The SAI is considered part of this Prospectus by reference to it. The SAI is on file with the Securities and Exchange Commission (SEC). You may get a copy of the SAI or a LARGER PRINT VERSION OF THIS PROSPECTUS without charge. Call 1-800-253-2277, or write to Scudder Investor Services, Inc., P.O. Box 2540, Boston, MA 02208-2540. LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS COMBINED PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FUND EXPENSES The AARP Mutual Funds do not charge sales fees or commissions. 100% of your investment goes to work for you. * No fees to open your account * No fees to open or maintain an AARP IRA or AARP Keogh Plan account * No fees to buy shares * No fees to exchange (move investments from one fund to another) * No fees to sell (redeem) shares * No marketing fees or distribution fees (12b-1 fees) * No fees to reinvest dividends There are Annual Fund Operating Expenses for each of the AARP Funds. You do not pay these expenses directly. The AARP Funds pay these expenses before distributing net investment income to you. These expenses include the management fee paid to the Fund Manager as well as other expenses for services such as maintaining shareholder records and furnishing shareholder statements and fund reports. The expenses are reflected in the AARP Funds' share prices or dividends and are not directly charged to shareholder accounts. The following tables present information on the projected costs and expenses of investing in an AARP Fund. You may use these tables to compare the fees and expenses of the AARP Funds with other mutual funds. Annual Fund Operating Expenses (after reduction of fees and reimbursement of expenses ) are expressed as a percentage of each AARP Fund's average daily net assets. The chart shows the expenses for each of the Funds for the fiscal year ended September 30, 1994 had the current management agreement been in effect for the full fiscal year.**
Effective Total Fund Management Other Operating Fund Fee Rate** Expenses Expenses - ---- ---------- ------------- ----------- AARP High Quality Money Fund .40% .71% 1.11% AARP High Quality Tax Free Money Fund .40% .50% .90%# AARP GNMA and U.S. Treasury Fund .42% .24% .66% AARP High Quality Bond Fund .49% .46% .95% AARP Insured Tax Free General Bond Fund .49% .20% .69% AARP Balanced Stock and Bond Fund* .49% .56 % 1.05 %* AARP Growth and Income Fund .49% .27% .76% AARP Capital Growth Fund .62% .36% .98%
EXAMPLES OF WHAT FUND EXPENSES WOULD BE ON A $1,000 INVESTMENT IN EACH AARP FUND Based on the level of assets as of September 30, 1994, we have calculated the total expenses of a $1,000 investment in each AARP Fund for 1 year, 3 years, 5 years and 10 years. These examples assume 5% annual return. There are 3 other assumptions: (1) redemption at the end of each period, (2) reinvestment of all dividends and distributions, and (3) total fund operating expenses noted on page 2 remain the same each year. For additional information, including reference to a $5.00 wire service fee that is charged in some cases, please refer to page 37.
Fund 1 Year 3 Years 5 Years 10 Years - ----- ------ -------- ------- ---------- AARP High Quality Money Fund $11 $35 $61 $135 AARP High Quality Tax Free Money Fund 9 29 50 111 AARP GNMA and U.S. Treasury Fund 7 21 37 82 AARP High Quality Bond Fund 10 30 53 117 AARP Insured Tax Free General Bond Fund 7 22 38 86 AARP Balanced Stock and Bond Fund 11 33 58 128 AARP Growth and Income Fund 8 24 42 94 AARP Capital Growth Fund 10 31 54 120
You should not consider these examples as representations of past or future expenses or returns. Actual fund expenses may be higher or lower in the future. * The AARP Balanced Stock and Bond Fund was introduced on February 1, 1994. The Fund Manager agreed to maintain expenses of the Fund at not more than 1.50% from February 1, 1994 to September 30, 1994. As of September 30, 1994 the annualized ratio of operating expenses to average net assets was 1.31%. ** The AARP Funds ' fee structure is designed to recognize the degree to which the pooled resources of the Program provide economies in the management of the AARP Funds. The fee consists of two elements: a "Base Fee" and an "Individual Fund Fee." The combined Base Fee and Individual Fund Fee is called the Effective Management Fee Rate. See pages 31 and 32 for information on how the Effective Management Fee Rate is calculated. # The Fund Manager has agreed to maintain total annualized expenses of the AARP High Quality Tax Free Money Fund at not more than .90% of its average daily net assets until February 1, 1996. Had such expense maintenance not been in effect, total annualized expenses of the Fund would have been .91% for the fiscal year ending September 30, 1994 (of which .4 3 % would have consisted of management fees). FINANCIAL HIGHLIGHTS On the next six pages you will find a variety of information about the income and the expenses of each AARP Fund for the stated periods. You will also find the following: (1) the net gain or loss on the investments, (2) the distributions, if any, of income and gain, and, (3) the change in net asset value per share from the beginning to the end of the stated periods. Price Waterhouse LLP , the AARP Funds' independent accountants, have examined this information. The Annual Report to Shareholders includes their report. For a copy of the Annual Report to Shareholders, please contact an AARP Mutual Fund Representative at 1-800-253-2277.
Net Asset Net Realized Dividends For the Years Ended Value at Net & Unrealized Total from from Net Distributions September 30 Beginning Investment Investment Investment Investment from Net - ------------ of Period Income (a) Gain (Loss) Operations Income Realized Gains --------- ---------- ------------ ---------- ---------- --------------- AARP High Quality Money Fund 1994 $1.00 $.028 _ $.028 $(.028) _ 1993 1.00 .021 _ .021 (.021) _ 1992 1.00 .040 _ .040 (.040) (c) _ 1991 1.00 .060 _ .060 (.060) _ 1990 1.00 .073 _ .073 (.073) _ 1989 1.00 .080 _ .080 (.080) _ 1988 1.00 .060 _ .060 (.060) _ 1987 1.00 .050 _ .050 (.050) _ 1986 1.00 .064 _ .064 (.064) _ 1985 (d) 1.00 .012 _ .012 (.012) _ AARP High Quality Tax Free Money Fund (h) 1994 $1.000 $.017 _ $.017 $(.017) _ 1993 1.000 .016 _ .016 (.016) _ 1992 1.000 .026 _ .026 (.026) _ 1991 (h) .996 .055 $.004 .059 (.055) _ 1990 .998 .061 (.002) .059 (.061) _ 1989 1.008 .059 (.010) .049 (.059) _ 1988 .998 .055 .010 .065 (.055) _ 1987 1.027 .049 (.026) .023 (.049) $(.003) 1986 .996 .048 .031 .079 (.048) _ 1985 (e) .989 .031 .007 .038 (.031) _ AARP GNMA and U.S. Treasury Fund 1994 $15.96 $.93 $(1.23) $(.30) $(.93) _ 1993 16.19 1.15 (.23) .92 (1.15) _ 1992 15.72 1.22 .47 1.69 (1.22) _ 1991 14.95 1.26 .77 2.03 (1.26) _ 1990 14.98 1.31 (.03) 1.28 (1.31) _ 1989 15.11 1.31 (.13) 1.18 (1.31) _ 1988 14.89 1.37 .22 1.59 (1.37) _ 1987 15.99 1.35 (1.09) .26 (1.35) $(.01) 1986 15.52 1.54 .50 2.04 (1.54) (.03) 1985 (e) 15.00 1.17 .52 1.69 (1.17) _
Net Asset For the Years Value at Net Assets Ended Total End of Total End of Period September 30 Distributions Period Return % ($ millions) - ------------ -------------- --------- -------- -------------- AARP High Quality Money Fund 1994 $(.028) $1.00 2.84 333 1993 (.021) 1.00 2.13 254 1992 (.040) 1.00 4.12 323 1991 (.060) 1.00 6.22 357 1990 (.073) 1.00 7.58 376 1989 (.080) 1.00 8.32 324 1988 (.060) 1.00 6.15 224 1987 (.050) 1.00 5.13 178 1986 (.064) 1.00 6.60 104 1985 (d) (.012) 1.00 1.34(f) 45 AARP High Quality Tax Free Money Fund (h) 1994 $(.017) $1.000 1.76 129 1993 (.016) 1.000 1.62 134 1992 (.026) 1.000 2.58 127 1991 (h) (.055) 1.000 6.10 119 1990 (.061) .996 6.02 98 1989 (.059) .998 4.98 90 1988 (.055) 1.008 6.65 79 1987 (.052) .998 2.25 70 1986 (.048) 1.027 8.07 48 1985 (e) (.031) .996 3.90 30 AARP GNMA and U.S. Treasury Fund 1994 $(.93) $14.73 (1.90) 5,585 1993 (1.15) 15.96 5.89 6,712 1992 (1.22) 16.19 11.19 5,232 1991 (1.26) 15.72 14.12 3,311 1990 (1.31) 14.95 8.86 2,583 1989 (1.31) 14.98 8.17 2,518 1988 (1.37) 15.11 11.07 2,837 1987 (1.36) 14.89 1.54 2,827 1986 (1.57) 15.99 13.62 1,963 1985 (e) (1.17) 15.52 11.77 322
Ratio of Ratio of Net Operating Investment For the Years Expenses to Income to Portfolio Per Share Ended Average Net Average Net Turnover Reimbursement of September 30 Assets % (a) Assets % Rate % Expenses (a): - ------------ ------------- -------------- --------- ------------------- AARP High Quality Money Fund 1994 1.125 2.889 _ _ 1993 1.312 2.123 _ _ 1992 1.151 3.613 _ $.000 1991 1.053 6.050 _ .001 1990 1.058 7.319 _ .001 1989 1.071 8.061 _ .001 1988 1.097(b) 6.025 _ .001 1987 1.160 5.090 _ .004 1986 .712 6.310 _ .009 1985 (d) .662(g) 7.317(g) _ _ AARP High Quality Tax Free Money Fund (h) 1994 .90 1.75 _ $ .000 1993 .93 1.60 _ .002 1992 .95 2.54 _ .002 1991 (h) 1.06 5.43 _ .001 1990 1.12 6.06 39.88 _ 1989 1.17 5.85 21.28 _ 1988 1.27 5.47 62.73 .005 1987 1.31 4.80 22.20 .006 1986 1.48 4.72 23.00 _ 1985 (e) 1.50(g) 4.51(g) _ .015 AARP GNMA and U.S. Treasury Fund 1994 .66 6.09 114.54 _ 1993 .70 7.15 105.49 _ 1992 .72 7.69 74.33 _ 1991 .74 8.23 86.64 _ 1990 .79 8.71 60.54 _ 1989 .79 8.76 48.35 _ 1988 .81 9.09 84.72 _ 1987 .88 8.76 50.68 _ 1986 .90 9.49 61.92 _ 1985 (e) 1.03(g) 10.62(g) 67.24(g) _
(a) Reflects a per share reimbursement of expenses during the period by the Fund Manager. See last column. (b) Reflects fees not imposed by the Fund Manager of $.001 per share. (c) Includes approximately $.005 per share of net realized short-term capital gains. (d) Operations for the period of July 22, 1985 (commencement of operations) to September 30, 1985. (e) Operations for the period of November 30, 1984 (commencement of operations) to September 30, 1985. (f) Not Annualized. (g) Annualized. (h) On August 1, 1991 the Fund implemented a 15.17 to 1.00 stock split and adopted its present name and investment objectives. Prior to that date, the Fund was known as the AARP Insured Tax Free Short Term Fund. Financial information prior to August 1, 1991 has been restated to reflect the stock split and should not be considered representative of the present Fund.
Net Asset Net Realized & Dividends Value at Net Unrealized Total from from Net Distributions For the Years Ended Beginning Investment Investment Investment Investment from Net September 30 of Period Income (a) Gain (Loss) Operations Income Realized Gains - ------------------- ---------- ---------- ----------------- ---------- ---------- -------------- AARP High Quality Bond Fund 1994 $17.19 $.85 $(1.76) $(.91) $(.85) _ 1993 16.44 .93 .93 1.86 (.93) $ (.18) 1992 15.71 1.03 .73 1.76 (1.03) _ 1991 14.63 1.10 1.08 2.18 (1.10) _ 1990 15.04 1.17 (.41) .76 (1.17) _ 1989 14.80 1.23 .24 1.47 (1.23) _ 1988 14.45 1.27 .46 1.73 (1.27) (.11) (f) 1987 15.87 1.22 (1.19) .03 (1.22) (.23) 1986 15.31 1.41 .61 2.02 (1.41) (.05) 1985 (b) 15.00 1.06 .31 1.37 (1.06) _ AARP Insured Tax Free General Bond Fund 1994 $19.00 $.86 $(1.67) $(.81) $(.86) $(.34) 1993 17.88 .90 1.55 2.45 (.90) (.43) 1992 17.30 .93 .75 1.68 (.93) (.17) 1991 16.12 1.00 1.18 2.18 (1.00) _ 1990 16.61 1.04 (.24) .80 (1.04) (.25) 1989 16.02 1.08 .59 1.67 (1.08) _ 1988 15.00 1.08 1.02 2.10 (1.08) _ 1987 16.69 1.07 (1.49) (.42) (1.07) (.20) 1986 15.12 1.01 1.63 2.64 (1.01) (.06) 1985 (b) 15.00 .64 .12 .76 (.64) _ AARP Balanced Stock and Bond Fund 1994 (e) $15.00 $.25 $(.37) (g) $(.12) $(.24) _ AARP Growth and Income Fund 1994 $32.91 $.94 $1.62 $2.56 $(1.13) $(.21) 1993 28.67 .83 4.58 5.41 (.87) (.30) 1992 26.97 .97 2.11 3.08 (.90) (.48) 1991 22.30 1.11 4.78 5.89 (1.17) (.05) 1990 26.11 1.11 (3.69) (2.58) (1.15) (.08) 1989 20.94 1.01 5.20 6.21 (1.04) _ 1988 25.54 1.04 (3.93) (2.89) (.94) (.77) 1987 20.88 .67 5.51 6.18 (.64) (.88) 1986 16.84 .73 4.10 4.83 (.70) (.09) 1985 (b) 15.00 .39 1.64 2.03 (.19) _
Distributions Net Asset in Excess of Value at Net Assets For the Years Ended Net Realized Total End of Total End of Period September 30 Gains Distributions Period Return % ($ millions) - ------------------- ------------- -------------- --------- -------- ------------- AARP High Quality Bond Fund 1994 $(.38) $(1.23) $15.05 (5.55) 568 1993 _ (1.11) 17.19 11.88 604 1992 _ (1.03) 16.44 11.56 384 1991 _ (1.10) 15.71 15.44 201 1990 _ (1.17) 14.63 5.21 151 1989 _ (1.23) 15.04 10.38 129 1988 _ (1.38) 14.80 12.38 123 1987 _ (1.45) 14.45 (.09) 108 1986 _ (1.46) 15.87 13.60 88 1985 (b) _ (1.06) 15.31 9.40(c) 45 AARP Insured Tax Free General Bond Fund 1994 $(.06) $(1.26) $16.93 (4.48) 1,914 1993 _ (1.33) 19.00 14.31 2,087 1992 _ (1.10) 17.88 10.01 1,487 1991 _ (1.00) 17.30 13.85 1,068 1990 _ (1.29) 16.12 4.89 771 1989 _ (1.08) 16.61 10.66 527 1988 _ (1.08) 16.02 14.39 312 1987 _ (1.27) 15.00 (2.94) 238 1986 _ (1.07) 16.69 17.96 129 1985 (b) _ (.64) 15.12 5.09(c) 62 AARP Balanced Stock and Bond Fund 1994 (e) _ $(.24) $14.64 (.78)(c) 175 AARP Growth and Income Fund 1994 _ $(1.34) $34.13 7.99 2,312 1993 _ (1.17) 32.91 19.38 1,560 1992 _ (1.38) 28.67 11.59 748 1991 _ (1.22) 26.97 27.19 392 1990 _ (1.23) 22.30 (10.19) 248 1989 _ (1.04) 26.11 30.58 236 1988 _ (1.71) 20.94 (10.75) 228 1987 _ (1.52) 25.54 30.92 358 1986 _ (.79) 20.88 29.00 99 1985 (b) _ (.19) 16.84 13.53(c) 27
Ratio of Ratio of Net Operating Investment Per Share Expenses to Income to Portfolio Reimbursement For the Years Ended Average Net Average Net Turnover of Expenses September 30 Assets %(a) Assets % Rate % (a): - ------------------- -------------- ------------- --------- -------------- AARP High Quality Bond Fund 1994 .95 5.31 63.75 _ 1993 1.01 5.64 100.98 _ 1992 1.13 6.40 63.00 _ 1991 1.17 7.26 90.43 _ 1990 1.14 7.86 47.39 $.009 1989 1.16 8.33 57.69 .007 1988 1.17 8.55 23.57 .005 1987 1.18 7.81 192.80 .034 1986 1.30 8.86 62.72 .011 1985 (b) 1.50(d) 9.86(d) 53.87(d) .003 AARP Insured Tax Free General Bond Fund 1994 .68 4.80 38.39 _ 1993 .72 4.90 47.96 _ 1992 .74 5.31 62.45 _ 1991 .77 5.92 32.18 _ 1990 .80 6.29 48.24 _ 1989 .84 6.52 148.94 _ 1988 .92 6.95 163.51 _ 1987 1.00 6.58 135.32 _ 1986 1.13 6.40 35.99 _ 1985 (b) 1.29(d) 6.11(d) 90.76(d) _ AARP Balanced Stock and Bond Fund 1994 (e) 1.31(d) 3.58(d) 49.32(d) _ AARP Growth and Income Fund 1994 .76 3.00 31.82 _ 1993 .84 3.08 17.44 _ 1992 .91 3.84 36.40 _ 1991 .96 4.61 53.68 _ 1990 1.03 4.76 58.47 _ 1989 1.04 4.19 55.21 _ 1988 1.06 4.52 61.34 _ 1987 1.08 3.81 43.25 $.007 1986 1.21 4.55 37.44 _ 1985 (b) 1.50(d) 5.62(d) 12.75(d) .020
(a) Reflects a per share reimbursement of expenses during the period by the Fund Manager. See last column. (b) Operations for the period of November 30, 1984 (commencement of operations) to September 30, 1985. (c) Not Annualized. (d) Annualized. (e) Operations for the period of February 1, 1994 (commencement of operations) to September 30, 1994. (f) Includes $0.06 of distributions from paid-in capital. (g) The amount shown for a share outstanding throughout the period does not accord with the change in the aggregate gains and losses in the portfolio securities during the period because of the timing of sales and repurchases of Fund shares in relation to fluctuating market values during the period.
Net Asset Net Realized Dividends For the Years Value at Net & Unrealized Total from from Net Distributions Ended Beginning Investment Investment Investment Investment from Net Total September 30 of Period Income (a) Gain (Loss) Operations Income Realized Gains Distributions - -------------- ---------- ---------- ------------ ---------- ---------- -------------- -------------- AARP Capital Growth Fund 1994 $36.20 $.00 $(1.51) $(1.51) $(.05) $(2.90) $(2.95) 1993 30.30 .06 7.19 7.25 (.14) (1.21) (1.35) 1992 30.23 .15 1.09 1.24 (.23) (.94) (1.17) 1991 23.32 .24 9.05 9.29 (.59) (1.79) (2.38) 1990 34.17 .54(d) (9.27) (8.73) (.19) (1.93) (2.12) 1989 23.88 .21 10.17 10.38 (.09) _ (.09) 1988 27.55 .10 (1.97) (1.87) (.15) (1.65) (1.80) 1987 21.13 .11 7.40 7.51 (.19) (.90) (1.09) 1986 16.95 .18 4.28 4.46 (.09) (.19) (.28) 1985 (b) 15.00 .12 1.83 1.95 _ _ _
Net Asset Total Net Assets Ratio of Ratio of Net Portfolio Per Share For the Value at Return % End of Period Operating Investment Turnover Reimbursement of Years Ended End of ($ millions) Expenses to Income to Rate % Expenses (a): September 30 Period Average Net Average Net - ------------ Assets %(a) Assets % AARP Capital Growth Fund 1994 $31.74 (4.70) 683 .97 .02 79.65 _ 1993 36.20 24.53 607 1.05 .22 100.63 _ 1992 30.30 3.94 424 1.13 .61 89.20 _ 1991 30.23 42.81 242 1.17 .90 99.62 _ 1990 23.32 (26.94) 160 1.11 2.00 83.28 $.009 1989 34.17 43.62 180 1.16 .89 63.51 _ 1988 23.88 (5.44) 91 1.23 .37 45.37 .044 1987 27.55 37.02 116 1.24 .62 53.61 .025 1986 21.13 26.65 56 1.44 1.27 46.32 _ 1985 (b) 16.95 12.93(c) 21 1.50(d) 1.95(d) 41.95(d) .031
(a) Reflects a per share reimbursement of expenses during the period by the Fund Manager. See last column. (b) Operations for the period of November 30, 1984 (commencement of operations) to September 30, 1985. (c) Not Annualized. (d) Annualized. AN OVERVIEW OF THE AARP INVESTMENT PROGRAM AARP is a nonprofit organization dedicated to addressing the needs and interests of persons aged 50 and older. It seeks through education, advocacy, and service to enhance the quality of life for all by promoting independence, dignity, and purpose. In the early 1980s, research conducted by AARP indicated that many members were not taking steps to invest adequately for their future. To encourage members to plan for their retirement and beyond, AARP decided to make available a family of mutual funds. The family of funds would provide members with a limited number of distinct investment choices that were managed by an experienced investment adviser. To provide the family of funds, AARP sought an investment management firm to develop and manage the funds. After interviewing a number of investment managers, AARP selected Scudder, Stevens & Clark, Inc., who will be referred to in this prospectus as Scudder or the Fund Manager. Who is Scudder, Stevens & Clark? Scudder, Stevens & Clark is America's oldest independent investment counsel firm. Its founder, Theodore T. Scudder, established the profession of long-term, fee-based investment counsel in 1919 at a time when investment firms were focused on short-term, commission-based trading. In the more than 75 years that have passed since then, Scudder has grown to be one of America's largest independent investment managers. Today, Scudder manages more than $90 billion in assets for clients around the world. Scudder manages corporate funds, pension plans, and endowments for institutions, and provides an array of investment products and services . These include the Scudder Funds, a family of no-load mutual funds; a no-load variable annuity; 401 ( k ) Plan s ; and several closed-end funds. Scudder brings decades of experience and innovation to mutual fund investing. In 1928, Scudder offered America's first no-load mutual fund. Scudder was the first company to offer an international mutual fund to U.S. investors. In 1984, Scudder was selected by AARP to develop and manage the AARP Mutual Funds. What are the roles of AARP and Scudder? The AARP Investment Program from Scudder was established in accordance with criteria set by AARP. Specifically, these criteria include providing members with competitive investment performance, allowing easy access to investments, offering easy-to-understand information concerning investing and consistently delivering superior service. Fulfilling this mandate is the mission of AARP and Scudder. Both organizations work closely to ensure these criteria are met. AARP provides insight into the diversity and changing character of AARP members. Association staff closely monitor Program services and review all Program materials developed for members to ensure conformity to AARP's high standards. Members of AARP leadership also serve as Trustees for the AARP Funds. Scudder provides investment management and administrative services for the AARP Funds and brings to the Program more than 75 years of investment counseling and management experience. WHAT DO THE AARP MUTUAL FUNDS OFFER? The eight AARP Mutual Funds offer members a choice of conservatively managed investments which vary in the potential returns and risk they offer. The Funds address four major investment needs: stability of principal, income, tax-free income and growth. Each of the AARP Mutual Funds is managed to offer you competitive returns. In addition, you can feel confident when you invest in an AARP Fund because, recognizing the needs of AARP members, each AARP Fund seeks to moderate share price volatility . Consequently, your investment will be managed conservatively and knowledgeably , and with the needs of AARP investors always in mind. Conservative investment management entails our focus on moderating share price volatility of the AARP Funds. Other mutual funds with higher share price volatility may also have higher returns. While the AARP Funds are conservatively managed, it is important that you realize that your principal is never insured or guaranteed, and the value of your investment and your return will move up and down as market conditions change. The share price of a mutual fund, other than a money market fund, typically moves up and down on a day-to-day basis. Share price volatility reflects the level of fluctuation of the value of a Fund's shares over relatively short time periods. A mutual fund that experiences large changes in its share price on a daily basis would be considered to have high share price volatility. The AARP Funds will be managed to seek to reduce share price volatility as compared to other mutual funds or securities described in a Fund's investment objective. This does not mean a Fund's share price will not be affected by market forces. Market forces may include downward and upward movements of the stock market or interest rates with resulting upward or downward movement in the Fund's share price. For a more detailed discussion of each AARP Fund, please read the "Investment Objectives and Policies" section. Information on each AARP Fund is included in this Prospectus, focusing on how the AARP Funds differ in their potential return and risk. Before investing, you should determine your investment objectives and personal time horizons. This will help you decide which Fund or combination of AARP Funds fits your investment needs. The following is a brief summary of the diversity of investment needs the AARP Funds seek to meet. The differing nature of an investment in each Fund will affect the length of time for which you should be planning to invest. If you are investing for stability of principal and income : Consider the AARP High Quality Money Fund or the AARP High Quality Tax Free Money Fund. Each provides opportunities to meet short-term needs ( 1 year or less) while providing a modest level of income. Both seek to provide investors with stability of principal through a constant $1.00 share price, although this may not always be achieved. Like other money funds, the AARP Money Funds invest in short-term securities whose yields tend to follow changes in short-term interest rates. If short-term interest rates rise or fall dramatically, so could the yields of the AARP Money Funds in relatively short periods of time. Keep in mind that the two AARP Money Funds differ in that the income paid by the AARP High Quality Money Fund is taxable, whereas the income paid by the AARP High Quality Tax Free Money Fund is normally free from federal income taxes. If you are investing for the longer term and are interested in monthly income: Consider the AARP GNMA and U.S. Treasury Fund, the AARP High Quality Bond Fund or the AARP Insured Tax Free General Bond Fund. When you choose one of these conservatively managed funds, remember that both the value of your shares and the yield will change daily, generally in reaction to shifting interest rates. In most cases, as interest rates rise, the value of investments in bond funds like these tends to fall. As interest rates fall, the value of investments in these bond funds tends to rise. Investing in these Funds offers the opportunity for gain through potential appreciation in the value of your investment and from the monthly income that the investment earns. While each of these Funds is managed to attempt to moderate share price volatility , the value of your investment can decrease due to price changes of Fund investments . That's why you should be prepared to tolerate some fluctuation in the value of your investment and in the income you earn and to invest for the longer term (at least 1 year or more). If you are investing for the long term and you are interested in growth: Consider the AARP Balanced Stock and Bond Fund, the AARP Growth and Income Fund or the AARP Capital Growth Fund. When you invest in one of these Funds, remember that any investment in stocks involves risk and that the value of your shares will fluctuate daily. The share price of these AARP Funds will tend to rise when the stock market rises and decline when the stock market declines. Investing in these Funds offers the opportunity for gain through potential appreciation in the value of your investment as well as from the income that the investment earns. While each of these Funds is managed to attempt to moderate share price volatility , the value of your investment can decrease due to price changes of Fund investments . That's why you should consider your investment as one that you can afford to let work for you over time_generally for a period of 3 to 5 years or more. How is my Investment Managed? The AARP Mutual Funds are managed to seek both competitive returns and to moderate share price volatility . Each of the AARP Mutual Funds is run by a team of investment professionals at Scudder. Professional portfolio managers develop investment strategies and select securities for each AARP Fund's portfolio. They are supported by Scudder's dedicated staff of economists, research analysts, traders, and other investment specialists who work in offices across the United States and abroad. At Scudder, there has always been a strong partnership between research analysts and portfolio managers. Scudder's large staff of independent research analysts helps the portfolio managers assess economic and industry trends as they make their investment decisions. Because of this emphasis on "fundamentals," the portfolio managers do not take a short-term approach to investing. Instead, they seek to add value over the long term, carefully selecting investments they believe have superior potential for achieving each Fund's objectives. WHAT DOES THE AARP INVESTMENT PROGRAM OFFER ME? The Program was created to address the investment concerns of AARP members and to help them make informed investment decisions. It features several benefits that may make investing advantageous and give you greater confidence that you've made decisions appropriate for your needs: * A Unique Family of Funds: The Program offers a range of mutual funds which recognize the needs of AARP members. Each of the AARP Funds is conservatively managed, seeking to moderate share price volatility , while seeking competitive returns. This makes the AARP Funds distinct from other mutual funds, which may seek higher returns but do not focus on reducing share price volatility. * No Sales Fees or Commissions: Unlike most other mutual funds, the AARP Funds are pure no-loadt so you don't pay any sales fees or commissions to purchase, exchange or sell (redeem) shares. In addition, the Funds do not charge 12b-1 fees, which are a form of a sales charge that covers marketing and distribution expenses. * No Fees to open and maintain an AARP IRA or AARP Keogh Plan account: You'll pay no separate fees to open or maintain your retirement plan account. All your money goes to work for your retirement. * Low initial investment: Open an account for just $500 for each AARP Fund ($2,500 for the AARP High Quality Tax Free Money Fund) or $250 for each AARP Fund in an AARP IRA or AARP Keogh Plan account. So it's easy to get started. See page 34 of this prospectus for more information on minimum investments. * Professional investment management by Scudder, Stevens & Clark: Scudder brings over 75 years of investment management experience to the AARP Funds. * Responsive Service from AARP Mutual Fund Representatives: Our knowledgeable representatives are ready to answer your questions, initiate transactions or help you select the AARP Fund which meets your needs_call them toll-free. They are available Monday through Friday, from 8 a.m. to 8 p.m. Eastern time. * Access to your investment when you need it. You'll be able to redeem your investment at no charge by simply calling toll-free or writing_your investment is not locked in. See page 37 of this prospectus for more information. You'll also benefit from: * Informative Communications, such as newsletters and free educational guides; * Consolidated Monthly Statements or Quarterly AARP IRA or AARP Keogh Plan Statements; * Prompt transaction confirmations; * Special Services designed to make investing simple and convenient; * AARP's commitment to represent your interests; and * Dedication to delivery of quality investor service. INVESTMENT OBJECTIVES AND POLICIES The following pages provide detail on the investment objectives and policies of the eight AARP Mutual Funds. Included are each Fund's objectives, whom it is designed for, what it offers investors, what it can invest in, the risks involved, when distributions are paid and who at Scudder manages the Fund . As with any investment, there is no guarantee that the AARP Funds will successfully meet their investment objectives. Be sure to read the section titled "Other Investment Policies and Risk Factors" on page 26. Each Trust's Trustees can modify a Fund's objectives without the approval of a majority of that Fund's shareholders. Shareholders will be informed in writing of any changes in objectives. In that event, they should consider whether the Fund is still an appropriate investment given their then current financial position and needs. AARP HIGH QUALITY MONEY FUND Fund Objective: From investments in high quality securities, the Fund is designed to provide current income. The Fund also seeks to maintain stability and safety of principal while offering liquidity. The Fund seeks to maintain a constant net asset value of $1.00 per share. There may be circumstances under which this goal cannot be achieved. Whom is the Fund designed for? The Fund may be appropriate for investors who have short-term needs or who do not want the risk that accompanies investing in stocks or bonds. These investors include: * Investors creating a diversified portfolio who want a portion of their assets in a conservative investment designed to offer safety and stability. * Investors seeking a short-term investment prior to making longer-term investment choices. * Investors seeking money market income to meet regular day-to-day needs. * Investors who need immediate access to their money through free checkwriting services. The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan accounts. What does the Fund offer to investors? The Fund is designed to offer current income, while maintaining stability and safety of principal. In addition, it provides a convenient way to easily access your money through checkwriting. What does the Fund invest in? The Fund purchases high quality 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 their foreign branches, including bankers' acceptances, certificates of deposit, deposit notes and time deposits; obligations of savings and loan institutions; 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; asset-backed securities, including certificates, participations and notes; municipal securities including notes, bonds and participation interests, either taxable or tax-free, as described in more detail for the AARP High Quality Tax Free Money Fund; securities with put features; and repurchase agreements. These securities will have remaining maturities of 397 calendar days or less, except for U.S. Government securities, which may have maturities up to 762 calendar days. The average dollar-weighted maturity of the Fund's investments is 90 days or less. All of the securities that the Fund purchases , or that underly its repurchase agreements, are considered to be high quality. Generally, the Fund may purchase only securities rated, or issued by an entity with comparable securities rated, within the two highest quality rating categories of one or more rating agencies such as : Moody's Investors Service, Inc. (Moody's), Standard & Poor's (S&P), and Fitch Investors Service, Inc. (Fitch). Securities rated by only one agency may be purchased if the rating falls within the categories above. Unrated securities may be purchased if the Fund Manager judges them to be comparable in quality to securities described above. Generally, the Fund will invest in securities rated in the highest quality rating by at least two of these rating agencies. All of the securities purchased are U.S. dollar-denominated. The securities must meet credit standards applied by the Fund Manager following procedures established by the Trustees. If a security ceases to be rated or is reduced below the Fund's standards, it will be sold unless the Trustees determine that disposing of the security would not be in the best interests of the Fund. The Fund has certain nonfundamental policies designed to maintain diversification. These policies may be changed without shareholder approval. With limited exceptions, the Fund may not invest more than 5% of its assets in the securities of a single issuer, except for U.S. Government securities. Nor may it invest more than 10% of its total assets in securities subject to unconditional puts by a single issuer. What are the risks ? The risk to your principal is low, since the Fund seeks to maintain a stable share price of $1.00. While the Fund has maintained a stable share price since it began in June 1985, there may be situations under which this goal cannot be achieved. The level of income you receive will be affected by movements up and down in short-term interest rates. By investing generally in highest -quality securities, the Fund may offer less income than a money market fund investing in other high-quality securities in which money market funds are allowed to invest. See "Other Investment Policies and Risk Factors." When are distributions paid? Dividends are declared daily and distributed monthly to investors. Net realized capital gain or loss is included in the daily declaration of income. See page 30 for additional information on distributions and taxes. Who at Scudder manages my investment? Lead Portfolio Manager Robert T. Neff has been responsible for setting the Fund's investment strategy and has overseen the Fund's day-to-day management since 1985. Mr. Neff joined Scudder in 1972 and has more than 20 years of experience managing short-term fixed-income assets. Debra A. Hanson, Portfolio Manager, assists with the development and execution of investment strategy and has been with Scudder since 1983. Stephen L. Akers, Portfolio Manager, focuses on securities selection and assists with the creation and implementation of investment strategy for the Fund. Mr. Akers joined the Fund's team in 1995 and has managed several fixed-income portfolios since joining Scudder in 1984. AARP HIGH QUALITY TAX FREE MONEY FUND Fund Objective: From investments in high quality municipal securities, the Fund is designed to provide current income free from federal income taxes. The Fund also seeks to maintain stability and safety of principal, while offering liquidity. The Fund seeks to maintain a constant net asset value of $1.00 per share. There may be circumstances under which this goal cannot be achieved. Whom is the Fund designed for? The Fund may be appropriate for investors in high tax brackets who have short-term investment needs or who do not want the risk that accompanies investing in stocks or bonds. These include: * Investors creating a diversified portfolio who want a portion of their assets in a conservative investment designed to offer safety and stability. * Investors seeking a short-term investment prior to making longer-term investment choices. * Investors seeking tax free money market income to meet regular day-to-day expenses. * Investors who need immediate access to their money through free checkwriting services. This Fund is not available for AARP IRA, AARP SEP-IRA or AARP Keogh Plan accounts. What does the Fund offer to investors? The Fund is designed to offer current income free from federal income tax, while providing you with stability and safety of principal. Depending on your tax bracket, the after-tax income from the Fund may be higher than from a taxable investment of comparable quality and risk. In addition, it provides a convenient way to easily access your money through checkwriting. What does the Fund invest in? The Fund invests in high-quality, short-term municipal securities. These securities will have remaining maturities of 397 calendar days or less. The average dollar-weighted maturity of its investments is 90 days or less. These municipal securities may include obligations issued by or on behalf of states, territories and possessions of the United States and the District of Columbia. Interest from these securities is, in the opinion of the issuer's bond counsel, exempt from federal income taxes. The Fund has no current intention to invest in securities whose income is subject to federal income tax, including the individual alternative minimum tax (AMT). Municipal securities may include municipal notes such as tax anticipation notes, revenue anticipation notes, bond anticipation notes and construction loan notes; municipal bonds, which include general obligation bonds secured by the issuer's pledge of its faith, credit and taxing power for payment of principal and interest; and revenue bonds (including private activity bonds), which are generally paid from the revenues of a particular facility, a specific excise tax, or other source. The Fund's municipal investments may also include participation interests in bank holdings of municipal securities, municipal lease obligations, securities with variable or floating interest rates, demand obligations, and tax-exempt commercial paper. The Fund may also purchase securities on a "when-issued" or "forward delivery" basis, and may enter into stand-by commitments, which are securities that may be sold back to the seller at the Fund's option. All of the securities that the Fund purchases, or that underly its repurchase agreements, are considered to be high quality. These securities are generally rated or issued by an issuer rated within the two highest quality ratings of two or more rating agencies such as: Moody's (Aaa and Aa, M1G1 and M1G2, and P1), S&P (AAA and AA, SP1+ and SP1, A1+ and A1) and Fitch (AAA and AA, F1 and F2). The Fund may purchase a security rated by only one rating agency if it meets the above rating standards. An unrated security may be purchased if the Fund Manager judges it to be of comparable quality to securities described above. Generally, the Fund will invest in securities rated in the highest quality rating by at least two of these rating agencies. As a fundamental policy, under normal circumstances, at least 80% of the Fund's net assets will be invested in tax-exempt securities. Up to 20% of the Fund's net assets may be invested in taxable securities. For defensive purposes, or if unusual circumstances make it advisable, the Fund may purchase U.S. Government securities and repurchase agreements collateralized by such securities. For temporary defensive purposes, the Fund's investment in taxable securities may exceed 20%. Ordinarily, the Fund expects that 100% of its portfolio securities will be tax-exempt securities. All of the securities purchased are U.S. dollar-denominated. The securities must meet credit standards applied by the Fund Manager, following procedures established by the Trustees. If a security ceases to be rated, or its rating is reduced below the Fund's standard, it will be sold unless the Trustees determine that disposing of the security would not be in the best interests of the Fund. As a matter of nonfundamental policy, which may be changed without a shareholder vote, the Fund, with respect to 75% of its total assets, may not invest more than 5% of its total assets in securities subject to puts from any one issuer. What are the risks? The risk to your principal is low, since the Fund seeks to maintain a stable share price of $1.00. While the Fund has maintained a stable share price since it began operating as a tax-free money fund in August 1991, there may be situations under which this goal cannot be achieved. The level of income you receive will be affected by movements up and down in short-term interest rates. By investing generally in highest-quality securities, the Fund may offer less income than a money market fund investing in other high-quality securities in which money market funds are allowed to invest. See "Other Investment Policies and Risk Factors." Will I be subject to taxes on this fund? All income distributed by the Fund is expected to be exempt from federal income taxes. However, income may be subject to state and local income taxes. Each year you will be provided with a breakdown of the Fund's investments on a state by state basis so that you can determine your state and local income tax liability. Your state or local Department of Revenue or tax advisor can answer questions regarding taxability of distributions. Income from taxable securities is not exempt from federal income taxes. When are distributions paid? Dividends are declared daily and distributed monthly to investors. Any net realized capital gain typically will be distributed annually after September 30 and is usually taxable. See page 30 for additional information on distributions and taxes. Who at Scudder manages my investment? Lead Portfolio Manager K. Sue Cote has been responsible for setting the Fund's investment strategy and has overseen the Fund's day-to-day management since 1991. Ms. Cote joined Scudder in 1983 and has over 10 years of experience in the investment industry. Donald C. Carleton, Portfolio Manager, focuses on securities selection and assists with the creation and implementation of investment strategy for the Fund. Mr. Carleton has more than 20 years' experience in tax-free investing and has been at Scudder since 1983. AARP GNMA AND U.S. TREASURY FUND Fund Objective: To produce a high level of current income and to keep the price of its shares more stable than that of a long-term bond. The Fund pursues this objective by investing principally in U.S. Government-guaranteed GNMA securities and U.S. Treasury obligations. Whom is the Fund designed for? The Fund is suitable for conservative investors who want high current income but want a degree of protection from bond market price risk. Investors should be seeking to invest for the longer term and be comfortable with fluctuation in the value of their principal. The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan accounts. What does the Fund offer to investors? The Fund is designed to offer current income from a portfolio of high-quality securities. The level of income should generally be higher than available from fixed - price money market mutual funds, government - insured bank accounts and fixed - rate, government - insured CDs. By including short-term U.S. Treasury securities in its portfolio, the Fund seeks to offer less share price volatility than long-term bonds or many GNMA mutual funds , although its yield may be lower. What does the Fund invest in? The Fund invests principally in U.S. Treasury bills, notes, and bonds, and other securities issued or backed by the full faith and credit of the U.S. Government. These include Government National Mortgage Association (GNMA) securities. GNMA securities represent part ownership of a pool of U.S. Government-guaranteed mortgage loans each of which is insured by the Federal Housing Administration or guaranteed by the Veterans Administration. Each pool of mortgages is also guaranteed by GNMA as to the timely payment of principal and interest (regardless of whether the mortgagors actually make their payments). This guarantee by GNMA represents the full faith and credit of the U.S. Government. However, this guarantee is not related to the Fund's yield or the value of shareholders' investments, which will fluctuate daily. The maturities and types of securities held by the Fund may vary with current market conditions. At any time, the Fund may invest a substantial portion of its assets in securities of a particular maturity. With GNMA securities, principal is paid back to the Fund over the life of the bond, rather than at maturity. The Fund will receive monthly scheduled payments of principal and interest and may receive unscheduled principal payments resulting from prepayments of the underlying mortgages. The Fund may realize a gain or loss upon receiving principal payments. The Fund typically reinvests all payments and prepayments of principal in additional GNMA securities or other U.S. Government-guaranteed securities. What are the risks ? The Fund is not a fixed price money market fund, so the value of its shares will fluctuate up and down with changes in interest rates and other market conditions. The level of income you receive will be affected by movements up or down in interest rates. Like bonds, the value of mortgage-backed securities decreases when interest rates rise. However, when interest rates fall their value may not rise as much as does the value of bonds because of the anticipation of prepayment of the underlying mortgages. This prepayment may expose the Fund to a lower rate of return upon reinvestment. Thus, the prepayment rate may also tend to limit any increase in net asset value. See "Other Investment Policies and Risk Factors." How does the Fund seek to manage risk? The Fund actively seeks to reduce fluctuation, or price volatility to your principal, by investing in a combination of short-, intermediate-, and long-term securities and by using portfolio management techniques. These techniques, which are subject to applicable regulatory guidelines, may include limited transactions in financial futures contracts and related option transactions which are unrated (see "Other Investment Policies and Risk Factors"). The Fund may purchase "when issued" securities and repurchase agreements, and may write (sell) covered call options to enhance investment returns. These techniques will be entered into to reduce risk, but such techniques involve risks themselves and under certain conditions may reduce current income. When are distributions paid? Dividends are declared daily and distributed monthly to investors. Any net realized capital gain typically will be distributed annually after September 30. See page 30 for additional information on distributions and taxes. Who at Scudder manages my investment? Lead Portfolio Manager David H. Glen has been responsible for setting the Fund's investment strategy and overseeing security selection for the Fund's portfolio since 1985 . Mr. Glen has more than 14 years' experience in finance and investing. Mark Boyadjian, Portfolio Manager, focuses on securities selection and assists with the creation and implementation of investment strategy for the Fund. Mr. Boyadjian joined the Fund's team in 1995 and has been involved in investment management since joining Scudder in 1989. AARP HIGH QUALITY BOND FUND Fund Objective: Consistent with investments primarily in high quality securities, the Fund seeks to provide a high level of income and to keep the value of its shares more stable than that of a long-term bond. Whom is the Fund designed for? The Fund is suitable for investors who want high current income with moderate risk from a high quality portfolio. Investors should be seeking to invest for the longer term (at least 1 year or more) and be comfortable with fluctuation in the value of their principal. The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan accounts. What does the Fund offer to investors? The Fund is designed to offer a high level of current income from a portfolio of high-quality securities. Normally the level of return should be higher than that available from the AARP GNMA and U.S. Treasury Fund, with greater fluctuation in the value of your principal. By including short- and medium-term bonds in its portfolio, the Fund seeks to offer less share price volatility than long-term bonds or many long-term bond funds, although its yield may be lower. What does the Fund invest in? Under normal circumstances, at least 65% of the assets of the Fund are invested in U.S. Government, corporate and other fixed-income securities. All the Fund's securities will be rated or judged by the Fund Manager to be the equivalent of those rated in the three highest rating categories of Moody's (Aaa, Aa, and A) or S&P (AAA, AA, and A) and at least 65% of the Fund's assets must be in securities rated in the two highest rating categories by Moody's or S&P. The Fund may invest in any investment eligible for the AARP GNMA and U.S. Treasury Fund. It may also purchase corporate notes and bonds, including convertible issues, and obligations of federal agencies that are not backed by the full faith and credit of the U.S. Government. Additionally, the Fund may also purchase obligations of international agencies, U.S. dollar-denominated foreign debt securities, and money market instruments such as commercial paper, banker's acceptances, and certificates of deposit issued by domestic and foreign branches of U.S. banks. The Fund will invest in a broad range of short-, intermediate- and long-term securities. The maturities and types of securities held by the Fund will vary with current market conditions. The Fund may have a substantial portion of its assets in securities of a particular maturity. The non-governmental investments of the Fund will be spread among a variety of companies and will not be concentrated in any one industry. What are the risks ? The Fund is not a fixed price money market fund, so the value of its shares will fluctuate up and down with changes in interest rates and other market conditions. Due to the greater market price risk of the securities in which it invests, the Fund may have a more variable share price than the AARP GNMA and U.S. Treasury Fund. See "Other Investment Policies and Risk Factors." The level of income provided will be affected by movements up and down in interest rates. Also, income from high-quality securities the Fund purchases may be lower than income from lower-quality securities. How does the Fund seek to manage risk? The Fund actively seeks to reduce fluctuation, or the price volatility of your investment, by investing in securities with varying maturities. Also, the Fund may use approved portfolio management techniques, if appropriate, such as limited transactions in financial futures contracts and related option transactions which are unrated (see "Other Investment Policies and Risk Factors"). The Fund may purchase "when issued" securities and repurchase agreements, and may write (sell) covered call options to enhance investment returns. These techniques will be entered into to reduce risk, but such techniques involve risks themselves and under certain conditions may reduce current income. When are distributions paid? Dividends are declared daily and distributed monthly to investors. Any net realized capital gain typically will be distributed annually after September 30. See page 30 for additional information on distributions and taxes. Who at Scudder manages my investment? Lead Portfolio Manager William M. Hutchinson has set the Fund's overall investment strategy and has overseen the Fund's day-to-day management since 1987. Mr. Hutchinson has over 20 years of investment experience. Stephen Wohler, Portfolio Manager, focuses on securities selection and assists in identifying attractive investment opportunities for the Fund. Mr. Wohler has over 14 years' experience managing fixed-income investments. He joined Scudder in 1979 as a portfolio manager and quantitative analyst. He became the senior fixed-income manager for Scudder's domestic portfolios in 1993. AARP INSURED TAX FREE GENERAL BOND FUND Fund Objective: From a portfolio consisting primarily of municipal securities covered by insurance, the Fund seeks to provide high income free from federal income taxes and to keep the value of its shares more stable than that of a long-term municipal bond. Whom is the Fund designed for? The Fund is suitable for investors in higher tax brackets who want high income free from federal income taxes. Investors should invest for the longer term (at least 1 year or more) and be comfortable with fluctuation in the value of their principal. The Fund is not available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan accounts. What does the Fund offer to investors? The Fund is designed to offer high income free from federal tax. Depending on an investor's tax bracket, the after - tax income from the Fund may be higher than from a taxable investment of comparable quality and risk. The Fund will typically pay higher income than the AARP High Quality Tax Free Money Fund, although yield and principal value will fluctuate up and down with market conditions. By including short- and medium-term bonds in its portfolio, the Fund seeks to offer less share price volatility than long-term municipal bonds or many long-term municipal bond funds, although its yield may be lower. The Fund is one of a distinct group of tax-free mutual funds with insurance on the majority of its investments. Insurance on its securities protects the Fund against loss from default by the municipal issuer. However, it does not protect the investor from fluctuation in the yield or share price. What does the Fund invest in? The Fund invests primarily in a mix of short, intermediate and long-term municipal securities that are insured against default by private insurers. The municipal securities purchased by the Fund will be only high-grade securities or repurchase agreements on such securities. These may include obligations issued by or on behalf of states, territories and possessions of the United States and the District of Columbia to raise money for public purposes. Interest from these securities is, in the opinion of the issuer's bond counsel, exempt from federal income taxes. The Fund has no current intention of investing in securities whose income is subject to federal income tax, including the individual alternative minimum tax (AMT). However, under unusual circumstances, the Fund may invest in taxable securities for defensive purposes or to benefit from disparities in the financial markets. Municipal securities may include municipal notes, municipal bonds, municipal lease obligations, participation interests in bank holdings of municipal securities, securities with variable or floating interest rates, demand obligations, and tax-exempt commercial paper. The Fund may purchase securities on a "when issued" or "forward delivery" basis, and may enter into stand-by commitments in which securities may be sold back to the seller at the Fund's option. Also, the Fund may use approved portfolio techniques, if appropriate, such as limited use of financial futures contracts and related options transactions (see "Other Investment Policies and Risk Factors"). What portion of the securities is insured? At least 65% of the Fund's assets are fully insured by private insurers as to payment of face value and interest to the Fund, when due. If uninsured securities or securities not directly or indirectly backed or guaranteed by the U.S. Government are purchased and expected to be held for 60 days or more, insurance will be obtained within 30 days to ensure that 65% of the Fund's assets are insured by the issuer or arranged for by the Fund. If at least 65% of its assets are not insured securities, the Fund will obtain insurance for a portion of its U.S. Government guaranteed or backed securities so that the 65% standard is achieved. What are the risks ? The Fund is not a fixed price money market fund, so the value of its shares will move up and down as interest rates and other market conditions change. The level of income you receive will be affected by movements up and down in interest rates. Income from the high quality securities which the Fund purchases may be lower than the income from lower quality securities. See "Other Investment Policies and Risk Factors." How does the Fund seek to manage risk? The Fund actively seeks to manage fluctuation, or the price volatility of your investment, by investing in securities of varying maturities. The Fund may also use approved portfolio management techniques. Insurance on the securities held by the Fund protects the Fund as to default by the municipal issuer. It does not protect an investor from fluctuation in the Fund's yield or value per share, which change daily. Insurance also involves a cost to the Fund which will reduce yield. Historically, the yields on insured securities have been attractive in comparison to the yields on uninsured securities of comparable quality. There can be no assurance, however, that this relationship will continue. Moreover, to the extent the Fund must purchase insurance on U.S. Government securities, this will involve a cost to the Fund while not increasing the quality rating since U.S. Government-guaranteed or backed securities are already high quality. Although the financial condition of each insurer of its securities is periodically reviewed by the Fund, there can be no guarantee that insurers can honor their obligations under all circumstances. See "Other Investment Policies and Risk Factors." Will I be subject to taxes on this fund? All income distributed by the Fund is expected to be exempt from federal income taxes. However, income may be subject to state and local income taxes. Ordinarily, the Fund expects that 100% of its portfolio securities will be in federally tax-exempt securities. As a fundamental policy, under normal circumstances, at least 80% of the Fund's net assets will be invested in federally tax exempt securities. Up to 20% of the Fund's net assets may be invested in federally taxable securities. For defensive purposes, or if unusual circumstances make it advisable, the Fund may purchase U.S. Government securities and repurchase agreements collateralized by such securities. For temporary defensive purposes, the Fund's investment in federally taxable securities may exceed 20%. Each year you will be provided with a breakdown of the Fund's investments on a state by state basis so that you can determine your state and local income tax liability. Your state or local Department of Revenue or tax advisor can answer questions regarding the taxability of distributions. Income from taxable securities is not exempt from federal income taxes. In addition, any capital gains earned by the Fund are usually taxable. When are distributions paid? Dividends are declared daily and distributed monthly to investors. Any net realized capital gain typically will be distributed annually after September 30 and is usually taxable. See page 30 for additional information on distributions and taxes. Who at Scudder manages my investment? Lead Portfolio Manager Donald C. Carleton has been responsible for setting the Fund's investment strategy and has overseen the Fund's day-to-day management since 1990. Mr. Carleton has over 20 years' experience in tax-free investing. Philip G. Condon, Portfolio Manager, focuses on securities selection and assists with the creation and implementation of investment strategy for the Fund. Mr. Condon has been with Scudder since 1983 and has more than 17 years of investment experience. AARP BALANCED STOCK AND BOND FUND Fund Objective: To seek to provide long-term growth of capital and income while attempting to keep the value of its shares more stable than other balanced mutual funds. The Fund pursues these objectives by investing in a combination of stocks, bonds, and cash reserves. Whom is the Fund designed for? This Fund is suitable for conservative investors who are seeking long-term growth of their assets, but want less risk than an investment solely in stocks. Investors should invest for the longer term (at least 3 years or more) and be comfortable with the value of their principal fluctuating up and down. The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan accounts. What does the Fund offer to investors? The Fund offers the opportunity for long-term growth of principal through a single investment combining stocks, bonds, and cash reserves. Growth will come from possible appreciation in the value of common stocks and other equity investments. Bonds and other fixed-income investments provide current income and may, over time, help reduce fluctuation in the Fund's share price. Through a broadly diversified portfolio consisting primarily of stocks with above average dividend yields and investment-grade bonds, the Fund seeks to offer less share price volatility than many balanced mutual funds. The Fund should typically have less risk and a lower return than the AARP Growth and Income Fund and the AARP Capital Growth Fund. The Fund does not take extreme investment positions as part of an effort to "time the market." Shifts between stocks and fixed - income investments are expected to occur in generally small increments. On occasion, the Fund will adjust its investment mix. The Fund Manager will do so after analyzing factors such as the level and direction of interest rates, capital flows, inflationary expectations, anticipated growth of corporate profits, and the financial climate worldwide. What does the Fund invest in? The Fund seeks to manage fluctuation by investing in a broadly diversified mix of equity securities, bonds, and cash reserves. The Fund may invest up to 70% of its assets in equity securities (stocks). At least 30% of the Fund will be in investment-grade fixed-income securities and cash reserves. For liquidity, defensive purposes, and when market conditions dictate, the Fund may invest without limit in money market and short-term instruments. These include commercial paper, bankers' acceptances, and certificates of deposit issued by domestic and foreign branches of U.S. banks. Equity securities consist of common stocks, securities convertible into common stocks, and preferred stocks. A research-oriented approach to investing is used by the Fund, taking advantage of Scudder's large research department. The Fund emphasizes securities of companies that offer the opportunity for capital growth and growth of earnings while providing dividends. The Fund will generally invest in companies domiciled in the U.S.; it may invest, however, in foreign securities without limit. All of the Fund's debt securities will be investment-grade, i.e., rated at the time of purchase Baa or higher by Moody's or BBB or higher by S&P, or deemed of comparable quality by the Fund's Manager. At least 75% of these will be securities rated within the three highest quality ratings of Moody's (Aaa, Aa and A) or S&P (AAA, AA, and A) or those the Fund Manager judges are of equivalent quality (high-grade). Securities rated BBB by S&P or Baa by Moody's are neither highly protected nor poorly secured. These securities normally pay higher yields but involve potentially greater price variability than higher-quality securities and are regarded as having adequate capacity to repay principal and pay interest. Moody's considers bonds it rates Baa to have speculative elements as well as investment-grade characteristics. If the rating agencies downgrade a security, the Fund Manager will determine whether to keep it or eliminate it based on the best interests of the Fund. The Fund does not purchase securities rated below investment-grade, commonly known as junk bonds. The Fund can invest in a broad range of corporate bonds and notes, convertible bonds, and preferred and convertible preferred securities. The Fund may also invest in U.S. Government securities, obligations of federal agencies, and instruments not backed by the full faith and credit of the U.S. Government. The latter include obligations of the Federal Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage Corporation. The Fund may also invest in obligations of international agencies, U.S. and non-U.S. dollar denominated foreign debt securities, mortgage-backed and other asset-backed securities, municipal obligations, zero-coupon securities, and restricted securities issued in private placements. The Fund may make limited use of financial futures contracts and related options and may also invest in forward foreign currency exchange contracts. The Fund may write (sell) covered call options and may purchase and sell options on stock indices for hedging purposes. It may also invest in securities on a "when-issued" or forward delivery basis. What are the risks ? The risk to principal is consistent with an investment primarily in stocks and bonds. The value of shares will fluctuate up and down with changes in interest rates and other market conditions. Investors should focus on the longer-term and be comfortable with fluctuation in the value of their principal. The level of income will be affected by movements up and down in interest rates and by dividends paid on the stocks held by the Fund. See "Other Investment Policies and Risk Factors." When are distributions paid ? Dividends from the Fund's net ordinary income are distributed quarterly in March, June, September and December. Any net realized capital gain typically will be distributed annually after September 30. See page 30 for additional information on distributions and taxes. Who at Scudder manages my investment? Lead Portfolio Manager Robert T. Hoffman is responsible for managing the stock portion of the Fund. William M. Hutchinson, Portfolio Manager, is responsible for the bond portion of the Fund . Messrs. Hutchinson and Hoffman have been Portfolio Managers for the Fund since it commenced operations on February 1, 1994. Kathleen T. Millard, Portfolio Manager, focuses on stock strategy and stock selection. Ms. Millard has worked in the investment industry since 1983 and at Scudder since 1991. AARP GROWTH AND INCOME FUND Fund Objective: From investments primarily in common stocks and securities convertible into common stocks, the Fund seeks to provide long-term capital growth and income, and to keep the value of its shares more stable than other growth and income mutual funds. Whom is the Fund designed for? The Fund is suitable for investors who are seeking long-term growth of their assets to keep ahead of inflation. Investors should invest for the longer-term (at least 3 years or more) and be comfortable with fluctuation to their principal that is associated with investing in stocks. The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan accounts. What does the Fund offer to investors? The Fund offers the opportunity for long-term growth of principal with some income. This growth will come from possible appreciation in the value of shares, as well as quarterly dividend distributions if they are reinvested in additional shares of the Fund. Dividends can also produce current income for investors. Through a broadly diversified portfolio consisting primarily of stocks with above average dividend yields, the Fund seeks to offer less share price volatility than many growth and income funds. The Fund should offer a greater opportunity for share price appreciation, over time, with less income and with greater share price fluctuation than the AARP Balanced Stock and Bond Fund. What does the Fund invest in? The Fund invests primarily in common stocks and securities convertible into common stocks. The Fund may also invest in preferred stock. The Fund emphasizes securities of companies that offer the opportunity for capital growth and growth of earnings while providing dividends. A research-oriented approach to investing is used by the Fund, taking advantage of Scudder's large research department. The Fund will invest in a variety of industries and companies. Generally, the Fund will invest in companies domiciled in the United States. It may invest, however, in foreign securities without limit. Also, the Fund may write (sell) covered call options to enhance investment return, and may purchase and sell options on stock indices for hedging purposes (see "Other Investment Policies and Risk Factors"). The Fund's policy is to remain substantially invested in stocks and securities convertible into stocks. However, for liquidity, temporary defensive purposes, or when market conditions warrant, the Fund may invest without limit in high quality money market securities. These include U.S. Treasury Bills, commercial paper, certificates of deposit, bankers' acceptances, and repurchase agreements. What are the risks ? The risk to principal is consistent with an investment in stocks. The stock market doesn't go up every year, and can rise and fall_sometimes quite dramatically over a short period of time. Investors should focus on the longer term (at least 3 years or more) and be comfortable with fluctuation in the value of their principal. See "Other Investment Policies and Risk Factors." The level of income you receive will be affected by dividends paid on the securities held by the Fund. When are distributions paid ? Dividends from the Fund's net ordinary income are distributed quarterly in March, June, September and December. Any net realized capital gain typically will be distributed annually after September 30. See page 30 for additional information on distributions and taxes. Who at Scudder manages my investment? Lead Portfolio Manager Robert T. Hoffman has had responsibility for setting the Fund's stock investment strategy and has oversee n the Fund's day-to-day management since 1991 . Mr. Hoffman, who joined Scudder in 199 0 , has over 9 years of experience in the investment industry. Kathleen T. Millard, Portfolio Manager, focuses on stock investing strategy and stock selection. Ms. Millard has worked in the investment industry since 1983 and at Scudder since 1991. Benjamin W. Thorndike, Portfolio Manager, is the Fund's chief analyst and strategist for convertible securities. Mr. Thorndike, who has more than 15 years of investment experience, joined Scudder and the Fund in 1986. AARP Capital Growth Fund Fund Objective: From investments primarily in common stocks and securities convertible into common stocks, the Fund seeks to provide long-term capital growth, and to keep the value of its shares more stable than other capital growth mutual funds. Whom is the Fund designed for? The Fund is suitable for investors seeking high long-term growth of their principal. Investors should invest for the longer term (at least 5 years or more) and be comfortable with the value of their principal fluctuating up and down. The Fund is also available for AARP IRA, AARP SEP-IRA, and AARP Keogh Plan accounts. What does the Fund offer to investors? The Fund offers the opportunity for long-term growth of principal. This growth will come primarily from possible appreciation in the value of shares. The Fund is not expected to provide income. In pursuing long-term growth, the Fund will typically have more risk than any other AARP Fund. The Fund should offer greater opportunity for share price appreciation, over time, with greater share price fluctuation than other AARP Funds. Through a broadly diversified portfolio consisting primarily of high quality, medium- to large-sized companies with strong competitive positions in their industries, and relatively low portfolio turnover, the Fund seek s to offer less share price volatility than many growth funds. What does the Fund invest in? The Fund invests primarily in common stocks and securities convertible into common stocks. The Fund may also invest in preferred stocks. The Fund's policy is to remain substantially invested in these securities. In seeking capital growth, the Fund will invest in stocks which will offer above-average potential for long-term growth of market value as represented by the Standard & Poor's 500 Composite Stock Price Index. A research-oriented approach to investing is used by the Fund, taking advantage of Scudder's large research department. The Fund will invest in a variety of industries and companies. Generally, the Fund will invest in companies domiciled in the U .S . It may invest, however, in foreign securities without limit. Also, the Fund may write (sell) covered call options to enhance investment return, and may purchase and sell options on stock indices for hedging purposes. See "Other Investment Policies and Risk Factors." For liquidity, temporary defensive purposes, or when market conditions warrant, the Fund may invest without limit in high quality money market securities, including repurchase agreements, and other debt securities, such as U.S. Government obligations and corporate debt instruments. What are the risks ? The risk to principal is consistent with the Fund's objective of seeking long-term growth. The Fund generally has greater share price fluctuation than other AARP Funds. The stock market doesn't go up every year, and can rise and fall_sometimes quite dramatically over a short period of time. Some of the securities selected may have above-average stock market risk. Investors should focus on the longer term (at least 5 years or more) and be comfortable with fluctuation to the value of their principal. See "Other Investment Policies and Risk Factors." When are distributions paid ? Any dividends typically will be distributed in December. Any net realized capital gain typically will be distributed annually after September 30. See page 30 for additional information on distributions and taxes. Who at Scudder manages my investment? Lead Portfolio Manager William F. Gadsden has set the Fund's overall investment strategy since 1994 and has been part of the Fund's day-to-day management since 1989. He has 13 years of investment industry experience and joined Scudder in 1983. Bruce F. Beaty, Portfolio Manager, focuses on securities selection and assists with the creation and implementation of investment strategy for the Fund. He has 14 years of investment industry experience and joined Scudder in 1991. OTHER INVESTMENT POLICIES AND RISK FACTORS Below are some detailed descriptions of several types of securities and investment techniques referred to in this prospectus. Maintaining $1.00 Constant Share Price in Money Funds The AARP High Quality Money Fund and the AARP High Quality Tax Free Money Fund attempt to maintain a constant net asset value per share. To do so, they operate in accordance with a rule of the Securities and Exchange Commission (SEC) that requires all assets to be cash, cash items, and high-quality U.S. dollar-denominated investments having a remaining maturity of generally not more than 397 calendar days from the date of purchase. The AARP High Quality Money Fund, however, may invest in U.S. Government securities having maturities of up to 762 calendar days. The SEC also requires that the average dollar-weighted maturity of these Funds not exceed 90 days. When-Issued Securities All AARP Funds, except the AARP Growth and Income Fund and the AARP Capital Growth Fund, may purchase securities on a when-issued or forward delivery basis. That means payment and delivery of the security will be at a later date. The price and yield are generally fixed on the date of commitment to purchase. The Fund does not earn interest before delivery of the security. At the time of settlement, the market value of the security may be more or less than the purchase price. Repurchase Agreements This is an agreement under which a Fund may buy one or more U.S. Government obligations which the seller simultaneously agrees to repurchase at a specified time and price. The Fund can earn income for periods as short as overnight. Such an agreement may enhance liquidity since it is normally a short-term commitment. If the seller under a repurchase agreement becomes insolvent, the Fund's right to sell the securities may be restricted. Also, the value of such securities may decline before the Fund can sell them. The Fund might also incur transaction costs by selling the securities. Each of the AARP Funds may enter into repurchase agreements only with Federal Reserve member banks or broker-dealers recognized as reporting government securities dealers. Foreign Securities The AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, AARP High Quality Bond Fund and the AARP Capital Growth Fund may each invest without limit in foreign securities. Investments in foreign securities may benefit a Fund by providing access to different markets and opportunities. It may also help to reduce risk by increasing diversification. However, foreign securities involve special considerations. Brokerage costs are higher. Information about foreign securities is more limited. Foreign companies or securities often have different and less stringent government regulations, different accounting standards, slower settlement of transactions, and more limited and volatile trading markets. Investments in foreign securities may also involve other risks. These include possible imposition of withholding, confiscatory and other taxes; possible currency blockages or transfer restrictions; expropriation, nationalization or other adverse political or economic developments; and the difficulty of enforcing obligations in other countries. A Fund may incur currency conversion costs of purchases made in foreign currencies. There may also be favorable or unfavorable consequences from the changes in the value of foreign currencies against the U.S. dollar. Derivatives The following descriptions of Forward Foreign Currency Exchange Contracts, Options Transactions, Futures Contracts and Related Options discuss the types of derivatives in which certain of the AARP Funds may invest. Forward Foreign Currency Exchange Contracts Each of the Funds in the AARP Growth Trust may enter into forward foreign currency exchange contracts. These contracts, which involve costs, permit the funds to purchase or sell a specific amount of a particular currency at a specified price on a specified future date. They may be used by a Fund only to hedge against possible variations in exchange rates of currencies in countries in which it may invest. A Fund will realize a benefit only to the extent that the relevant currencies move as anticipated. If the currencies do not move as anticipated, the use of these contracts may result in losses greater than if they had not been used. Options Transactions In an attempt to enhance investment returns, Funds in the AARP Growth Trust and the AARP Income Trust may each write covered call options. These are agreements to sell a particular security in the Fund's portfolio at a specified price on or before the expiration date of the option. Covered call options may be written on portfolio securities worth up to 25% of the Fund's net assets. There are risks associated with writing covered options. These include the possible inability to make closing transactions at favorable prices or because an exercise notice has been received. The Funds also risk giving up appreciation on the underlying security in excess of the exercise price. Each of the Funds in the AARP Growth Trust may purchase and sell exchange-traded options on stock indices. In addition, these Funds may engage in over-the-counter options transactions with broker-dealers who make markets in these options. Over-the-counter options may be more difficult to terminate than exchange-traded options. They are frequently illiquid, and involve counterparty credit risk. The Fund Manager will engage in such transactions to hedge against unfavorable price movements which can adversely affect the value of the Fund's securities or securities the Fund intends to buy. These transactions involve risk, including the risk that market prices may move in unanticipated directions or will not correlate well with a Fund's portfolio, causing a Fund to lose the value of the option premium and to fail to realize any benefit from the transaction. Further, a closing transaction may not be available when a Fund wishes to close out a transaction. Futures Contracts and Related Options To a limited extent, the Funds in the AARP Income Trusts and the AARP Insured Tax Free General Bond Fund and the AARP Balanced Stock and Bond Fund may enter into financial futures contracts including futures contracts on securities indices, may purchase and write related put and call options, and may engage in related closing transactions. These techniques are used to attempt to protect against adverse effects of interest rates changes. A particular index-based futures contract may be used when the Fund Manager believes that correlation exists between price movements in an index-based futures contract and securities in a Fund's portfolio. Such correlation is not likely to be perfect. That is because a Fund's portfolio is not likely to contain the same securities used in the index. The margin deposits for futures contracts and premiums paid for related options may not be more than 5% of a Fund's total assets. These transactions require a Fund to segregate assets (such as liquid securities and cash) to cover contracts that would require it to purchase securities. These transactions also result in brokerage costs. These techniques involve some risk. A Fund may be precluded from realizing a benefit from favorable price movements and could lose the expected benefit of the transactions if interest rates move in an unanticipated manner. To the extent that the Fund Manager's view of market movements is incorrect, the use of such instruments may result in losses greater than if they had not used them. In addition, if the AARP Insured Tax Free General Bond Fund purchases futures contracts on taxable securities or indices of such securities, their value may not fluctuate in proportion to the value of the Fund's securities. This would limit that Fund's ability to hedge effectively against interest rate risk. Further, while a Fund buys a futures contract only if there appears to be a liquid secondary market for such contracts, there can be no assurance that a Fund will be able to close out any particular futures contract. Segregated Accounts Each Fund may be required to segregate assets (such as cash, U.S. Government securities and other high grade debt obligations) or otherwise provide coverage consistent with applicable regulatory policies. This would be in respect to the Fund's permissible obligations under the call and put options it writes, the forward foreign currency exchange contracts it enters into and the futures contracts it enters into. Convertible Securities Convertible securities include convertible bonds, notes and debentures, convertible preferred stocks, and other securities that give the holder the right to exchange the security for a specific number of shares of common stock. Convertible securities entail less credit risk than the issuer's common stock because they are considered to be "senior" to common stock. Convertible securities generally offer lower interest or dividend yields than non-convertible debt securities of similar quality. They may also reflect changes in value of the underlying common stock. Demand Obligations Each of the AARP Funds may purchase demand obligations. Demand obligations permit the holder to demand payment of a specified amount prior to maturity. The holder's right to payment depends upon the issuer's ability to pay principal and interest on demand. A Fund will purchase demand notes only to enhance liquidity. The Fund Manager will continuously monitor the creditworthiness of issuers of such obligations. Stand-by Commitments The AARP Tax Free Funds may enter into stand-by commitments (also known as puts) to facilitate liquidity. Stand-by commitments permit a Fund to resell municipal securities to the original seller at a specified price and generally involve no cost. Costs, in any event, are limited to .5% of a Fund's total assets. To minimize the risk that the seller may not be able to repurchase the security, the Fund Manager will monitor the creditworthiness of the seller. "Put" Bonds The AARP Tax Free Funds may also purchase long-term fixed rate bonds that have been coupled with an option granted by a third party financial institution. This allows the Funds to tender (or "put") bonds to the institution at specified intervals and receive the face value of them. For the AARP High Quality Tax Free Money Fund, an interval can not exceed 397 calendar days. These third party puts are available in several different forms. They may be custodial receipts or trust certificates, and may be combined with other features such as interest rate swaps. Tax-exempt Participation Interests The AARP Tax Free Funds may purchase tax-exempt participation interests from a bank representing a fully-insured portion of the bank's holdings of municipal securities. The Fund will obtain an irrevocable letter of credit or guarantee from the bank and will have, under certain circumstances, the right to resell the participation to the bank on 7 days' notice. To the extent any participation interest is illiquid, it is subject to the Fund's limit on restricted and not readily marketable securities. Municipal Lease Obligations The AARP Tax Free Funds may also invest in municipal lease obligations generally as a participation interest in a municipal obligation from a bank or other financial intermediary. Municipal lease obligations are issued by state and local governments to acquire land, equipment or facilities. Unlike general obligation or revenue bonds, these contracts are not secured by the issuer's credit, and if the issuing state or local government does not appropriate payments, the lease may terminate, leaving the funds with property that may prove costly to dispose of. In deciding which contracts to invest in, the Fund Manager evaluates the likelihood of the governmental issuer discontinuing appropriation for the leased property. Portfolio Turnover Each of the AARP Funds may buy and sell securities to take advantage of investment opportunities. The Fund Manager will do so to improve overall investment return consistent with that Fund's objectives. These transactions involve transaction costs in the form of spreads or brokerage commissions. INVESTMENT RESTRICTIONS To help reduce investment risk, each of the AARP Funds has adopted certain investment policies. Only the shareholders can approve changes to the following policies: * A Fund may not make loans. (A purchase of a debt security is not a loan for this purpose.) However, the Fund may lend its portfolio securities and enter into repurchase agreements. * A Fund may borrow money only for temporary or emergency purposes. The following policies may be changed without shareholder approval if applicable legal requirements change. * Each AARP Fund may not invest more than 10% of its net assets in restricted or not readily marketable securities. These "illiquid securities" include repurchase agreements maturing in more than 7 days. Funds in the AARP Growth Trust may not invest more than 5% of their net assets in restricted securities. A complete description of these and other policies and restrictions is contained in the Statement of Additional Information. ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES Are taxes withheld? Generally, taxes are not withheld on purchases, redemptions, or distributions. However, federal tax law requires the AARP Funds to withhold 31% of taxable dividends , capital gain distributions and redemption or exchange proceeds for accounts without a certified social security or tax identification number, or other certified information. To avoid this withholding, make sure you complete and sign the Signature and Investor Information Section of your Enrollment Form. AARP IRA, AARP SEP-IRA and AARP Keogh Plan accounts are exempt from withholding regulations. The AARP Funds reserve the right to reject Enrollment Forms or close accounts without a certified Social Security or tax identification number . In such cases, Enrollment Forms received without this information will be returned to the investor with a check for the amount invested. What else should I know about distributions and taxes? * You can receive your dividend and capital gain distributions in one of three ways: 1. You can have a check sent to your address; 2. You can reinvest them in additional shares of an AARP Fund; or 3. You can invest them in shares of another AARP Fund. * If your investment is in the form of an AARP IRA, AARP SEP-IRA or AARP Keogh Plan account, all distributions are automatically reinvested. * If you reinvest your dividends and capital gains, you will be purchasing shares at the current share price. * All taxable dividends from net investment income are taxable to you as ordinary income. This is so whether you receive dividends as cash or additional shares. * Distributions are taxable in the same manner, whether received in cash or reinvested. * Distributions of short-term capital gains by all the AARP Funds are taxable as ordinary income. * Distributions of long-term capital gains are taxable for federal income tax purposes as long-term capital gains regardless of the length of time you have owned shares. Any capital gain distributed by either AARP Tax Free Fund is generally taxable in the same manner as distributions by other Funds. * The AARP Tax-Free Funds are managed to pay you dividends free from federal income taxes, including the Alternative Minimum Tax (AMT). However, these dividends may be subject to state and local income taxes. Also, these dividends are taken into account in determining whether your income is large enough to subject a portion of your social security benefits and certain railroad retirement benefits, if any, to federal income taxes. * Each AARP Fund annually sends you detailed tax information about the amount and type of its distributions. * A redemption involves a sale of shares and may result in a capital gain or loss for federal income tax purposes. Exchanges are treated as redemptions for federal income tax purposes. Exchanges occur when you sell shares in one AARP Fund and purchase shares in another AARP Fund. * The AARP Funds reserve the right to make extra distributions for tax purposes. FUND ORGANIZATION The AARP Investment Program Trusts The eight mutual funds described in this prospectus are organized as four Massachusetts business trusts_AARP Cash Investment Funds, AARP Income Trust, AARP Tax Free Income Trust and AARP Growth Trust. Each trust is a diversified, open-end management investment company registered under the Investment Company Act of 1940. The AARP Cash Investment Funds was organized in January 1983, and the other trusts were organized in June 1984. The AARP Tax Free Income Trust (formerly the AARP Insured Tax Free Income Trust) was renamed effective August 1, 1991. General Management The Trustees have overall responsibility for the management of their respective Trusts under Massachusetts law. Under their direction, the Fund Manager_Scudder, Stevens & Clark, Inc._provides general investment management of the AARP Funds. The Trustees supervise each Trust's activities. The shareholders elect the Trustees and may remove them. Shareholders have one vote per share held on matters on which they are entitled to vote. The Trusts are not required to hold annual shareholder meetings and have no current intention to do so. There may be special meetings for purposes such as electing or removing Trustees, changing fundamental policies or approving an investment advisory contract. The Fund Manager will help shareholders to communicate with other shareholders in connection with removing a Trustee as if Section 16(c) of the Investment Company Act of 1940 applied. Since the Trusts use a combined prospectus, it is possible that one Trust or AARP Fund might become liable for a misstatement in this prospectus regarding another Trust or AARP Fund. The Trustees of each Trust considered this risk when approving the use of a combined prospectus. The right of the Trusts and AARP Funds to use the AARP name will end upon termination of the member services agreement with the Fund Manager unless AARP otherwise agrees to let the AARP Funds continue to use the AARP name. Management Fees Each AARP Fund pays the Fund Manager a fee for management and administrative services. Commencing February 1, 1994, the following fee arrangement was instituted. The management fee consists of two elements: a Base Fee and an Individual Fund Fee. The Base Fee is calculated as a percentage of the combined net assets of all of the AARP Funds. Each AARP Fund pays, as its portion of the Base Fee, an amount equal to the ratio of its daily net assets to the daily net assets of all of the AARP Funds. The table below shows the annual Base Fee Rate at specified levels of Program assets:
Annual Base Fee Rate Program Assets - -------------------------- ------------------------ .350% First $2 billion .330% Next $2 billion .300% Next $2 billion .280% Next $2 billion .260% Next $3 billion .250% Next $3 billion .240% Thereafter
In addition to the Base Fee Rate, each AARP Fund pays a flat Individual Fund Fee based on the net assets of that Fund. This fee rate is not linked to the total assets of the Program. The Individual Fee Rate recognizes the different characteristics of each AARP Fund, the varying levels of complexity of investment research and securities trading required to manage each Fund, as well as the relative value that can be, and has been, added by the Fund Manager. The following table shows the Individual Fund Fee Rate for each of the AARP Funds:
Fund Individual Fee Rate - -------------------------------------- ------------------- AARP High Quality Money Fund .10% AARP High Quality Tax Free Money Fund .10% AARP GNMA and U.S. Treasury Fund .12% AARP High Quality Bond Fund .19% AARP Insured Tax Free General Bond Fund .19% AARP Balanced Stock and Bond Fund .19% AARP Growth and Income Fund .19% AARP Capital Growth Fund .32%
Under this fee structure, the combined Base Fee and the Individual Fund Fee, called the "Effective Management Fee Rate," would be reduced if total Program assets increase to certain levels, regardless of whether an individual AARP Fund's assets increase or decrease. The converse is also true_if assets decrease to certain levels, the Effective Management Fee Rate increases, regardless of any increase or decrease in assets of an individual AARP Fund. For the fiscal year ended September 30, 1994 (under the former fee arrangement from October 1, 1993 to January 31, 1994, and the new agreement from February 1, 1994 to September 30, 1994), fees paid to the Fund Manager totaled .42 of 1% of the average daily net assets of the AARP High Quality Money Fund, .43 of 1% of the AARP High Quality Tax Free Money Fund, .42 of 1% of the AARP GNMA and U.S. Treasury Fund, .62 of 1% of the AARP Capital Growth Fund, and .49 of 1% for each of the AARP High Quality Bond Fund, AARP Insured Tax Free General Bond Fund, AARP Growth and Income Fund and AARP Balanced Stock and Bond Fund. The Fund Manager pays a portion of the management fee to AARP Financial Services Corporation (AFSC). AFSC provides the Fund Manager with advice and other services relating to AARP Fund investment by AARP members. The fee paid to AFSC is calculated on a daily basis and depends on the level of total assets of the AARP Investment Program. The fee rate decreases as the level of total assets increases. The fee rate for each level of assets is .07 of 1% for the first $6 billion, .06 of 1% for the next $10 billion and .05 of 1% thereafter. UNDERSTANDING FUND PERFORMANCE Performance of an AARP Fund may be included in advertisements, sales literature or shareholder reports. Important components of performance are yield, total return and cumulative total return. These components vary based on changes in market conditions, the level of interest rates and the level of the Fund's expenses. Yield, total return, and cumulative total return are based on historical earnings and are not intended to indicate future performance. What is Yield? For the AARP High Quality Money Fund, the AARP Income Funds and the AARP Tax Free Funds, yield is a measure of income. Yield refers to the net investment income generated over a specific period of time. It is always calculated using a standard industry formula so it is a useful way to compare the income produced by different mutual funds. For non-money market funds, yield refers to the net investment income generated by the investments in the fund over a specified 30-day period. This income is then annualized and then expressed as a percentage. For money market funds, yield refers to the net investment income generated by the fund over a specified 7-day period. This income is then annualized and expressed as a percentage. For the money market funds, effective yield is expressed similarly but, when annualized, the income earned by an investment in the fund is assumed to be reinvested. The effective yield will be slightly higher than the yield because of the compounding effect of this assumed reinvestment. For GNMA securities, net investment income includes realized gains or losses based on historic cost for principal repayments received. For other securities, net investment income includes the amortization of market premium or market discount. What is Total Return? The total return of a mutual fund refers to the average annual percentage change in value of an investment in the fund assuming that the investment has been held for the stated period. Total return quotations are expressed in terms of average annual compound rates of return for all periods quoted and assume that all dividends and capital gain distributions during the period were reinvested in shares of the fund. What is Cumulative Total Return? Cumulative total return of a mutual fund represents the cumulative change in value of an investment in a fund for various periods. It assumes that all dividends and capital gain distributions during the period were reinvested in shares of the fund. What is meant by Tax-Equivalent Yield and how is it calculated? To determine if tax-free investing is right for you, it is helpful to convert a yield from a tax-free mutual fund to its equivalent taxable yield. The tax-equivalent yields of the AARP Tax Free Funds, which may be quoted from time to time, let you determine the yield you would have to receive from a fully taxable investment to produce an after-tax yield equivalent to a tax-free fund. The calculation is as follows: (Tax-Free Yield)/(100% - your tax rate)=Tax-Equivalent Yield Example: If a tax-free mutual fund has a 30-day average annualized yield of 5.30% and you are in the 31% tax bracket, the calculation would be: (5.30%)/(100%-31%)=7.68% You would need to earn 7.68% with a taxable investment to equal the 5.30% yield of a tax-free fund. The tax-equivalent yield will vary depending upon your income tax bracket. UNDERSTANDING SHARE PRICE How is a Fund's share price determined? Share price is based on a Fund's net assets. It is calculated by dividing the current market value (amortized cost in the case of the AARP High Quality Tax Free Money Fund) of total fund assets, less all liabilities, by the total number of shares outstanding. The AARP Funds' custodian, State Street Bank and Trust Company, determines net asset value per share of each Fund as of the close of regular trading on the New York Stock Exchange, normally 4:00 p.m. Eastern time on each day the Exchange is open for trading. The Trusts reserve the right to suspend the sale of Fund shares after appropriate notice to shareholders if the Trustees determine that it is in the best interest of shareholders. OPENING AN ACCOUNT How do I get started? Decide on the AARP Fund or Funds which meets your needs. Then fill out, sign and return your Enrollment Form with your check in the postage paid envelope provided. Once your Enrollment Form is received, an account number will be assigned to you. Your check should only be drawn on a U.S. bank and be payable to the AARP Investment Program. If you don't want to send your check through the mail, you can send a bank wire. Simply fill out and return your Enrollment Form in the mail. Then, before you send the wire, call an AARP Mutual Fund Representative. The Representative will set up the account and contact you to provide you with your account number and further wiring instructions. To complete the wire transfer, follow the special wire transfer instructions below. Please note you cannot open AARP IRA or AARP Keogh Plan accounts by wire. What is the minimum investment? The minimum is $500 for each AARP Fund, except for the AARP High Quality Tax Free Money Fund, which has a minimum investment of $2,500. You can open an AARP IRA with as little as $250 for each applicable AARP Fund. What happens if my investment falls below its minimum balance? The Funds reserve the right to redeem accounts below the minimum balance and return the proceeds to you if you do not increase an account above the minimum within 60 days after notice. However, if your account falls below the minimum solely as a result of market activity, your account will not be closed. What is the normal processing time of checks when purchasing shares? If checks are drawn on a Federal Reserve System member bank, the Program will normally execute checks (and wire transfers) received in good order on the same business day that they are received. When do I start earning income on this purchase? For AARP Funds paying daily dividends (AARP Money Funds, AARP Income Funds and the AARP Insured Tax Free General Bond Fund), income begins to accrue on the business day following actual execution of the order. Third party transactions If purchases and redemptions of Fund shares are arranged and settlement is made at an investor's election through a member of the National Association of Securities Dealers, Inc., other than Scudder Investor Services, Inc., that member may, at its discretion, charge a fee for that service. WIRE TRANSFER INSTRUCTIONS * To open an account (mail Enrollment Form first and make sure to call a Representative to obtain an account number_AARP IRA and AARP Keogh Plan accounts cannot be opened by wire) * To add to your account Contact your bank with the following information: 1) the names(s) on your account; 2) your AARP Fund account number; 3) the name of the Fund(s) you want to invest in; 4) the name and address of the Fund's custodian bank: State Street Bank and Trust Company, Boston MA 02101; 5) the routing numbers ABA Number 011000028 and AC-99035420. Can I add another AARP Fund to my account? You can open another AARP Fund at any time. The new investment must meet the minimum initial investment described above. Your new AARP Fund will have the same account number and registration as your existing one(s). You can open a new AARP Fund in a number of ways: Mail your request Send a letter stating your request and naming the new AARP Fund. Include a check made payable to the AARP Investment Program. Wire the money Have your account number ready and follow the wire instructions above. Exchange from an AARP See instructions on how to exchange_page 36. Fund Telephone Transactions When you open an account you automatically become eligible to exchange shares by telephone and to redeem by telephone up to $50,000 to your registered address. You may also request by telephone that redemption proceeds be wired to a bank account you select. When exchange or redemption requests are made over the telephone, procedures are in place to give reasonable assurance that telephone instructions are genuine, including recording telephone calls, testing a caller's identity and sending written confirmation of such transactions. If an AARP Fund does not follow such procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions. ADDING TO YOUR INVESTMENT How do I add to my investment? After your account is opened, you can add to your AARP Fund investment in any amount in the following ways: Mail your request Send your check with a personalized investment slip or with a letter naming your account number and AARP Fund. Call Toll-Free If you selected the Transact By Phone service, you'll be able to call and have money transferred from your checking account to cover the purchase. See page 39. Wire the purchase Have your account number ready and follow the wire instructions on page 35. Exchange from an AARP See Exchanging below. Fund Invest Automatically See page 40 for information on the Automatic Investment Plan. EXCHANGING What is an exchange? You make an exchange when you sell shares in one AARP Fund to purchase shares in another. This is technically two transactions, a sale and a purchase of shares. If the value of the shares sold in the exchange was higher or lower than your original purchase price, you may have a capital gain or loss. This is important to note for tax planning purposes. You may exchange all or part of your shares in one AARP Fund for shares in another AARP Fund. Exchanges between existing AARP Funds can be for any amount. Exchanges that open a new AARP Fund must meet the minimum balance. How can I exchange shares? There are several ways to exchange, including: Mail or fax your request Tell us the AARP Fund from which to take the money and the AARP Fund to exchange to. Include your account number, registered name(s) and address, and either the dollar amount or number of shares you want to exchange. Be sure to sign your name(s) exactly as it appears on the account statement. Call Toll-Free Call us before 4:00 p.m. Eastern time to exchange by close of business the same day. If you purchased shares by check or by phone, you may not use this option until 7 business days after the purchase date to allow the check to clear. During this period, you must send your exchange request by mail or fax. Call the Easy-Access You can exchange shares through this automated Line toll-free line. It is available 24 hours a day, 7 days a week. Simply call toll-free and follow the recorded voice instructions. ACCESS TO YOUR INVESTMENT How do I redeem? You can sell (redeem) fund shares in a number of ways. The share price may be more or less than your original purchase price. Therefore, you may have either a taxable capital gain or loss. Keep in mind that you can redeem shares of your AARP IRA or AARP Keogh Plan account only by sending your request in writing. Mail or Fax your Tell us the name of the AARP Fund and the number of shares or request dollar amount you wish to sell. Make sure to give us your account number, registered name(s) and where you want the proceeds sent. If you want the proceeds to go to an address other than your registered address, to your bank, or to someone else, please provide complete details. Under certain circumstances, this may require a special type of authorization called a Signature Guarantee (see page 38). Sign the letter exactly as it appears on your account statement. If your request requires a Signature Guarantee, you must mail the request instead of faxing it. Call Toll-Free Call before 4:00 p.m. Eastern time business days and redeem up to $50,000 per AARP Fund. The proceeds will be mailed to your registered address or to your bank (unless you declined the Telephone Redemption to your Bank feature on your Enrollment Form). The proceeds can also be wired to your bank if it is a member of the Federal Reserve System. A $5.00 fee will be charged for each wire to your bank. Your bank may also charge you for receiving a wire. In the event that you are unable to reach us by telephone, you should write to the AARP Investment Program; see "Service Information" for the address. If you elected the Transact by Phone option on your Enrollment Form, you can have the proceeds sent electronically to your checking account. See page 39 for more information on Transact By Phone. Call the You can redeem shares through this automated toll-free line. Easy-Access Line Initiate redemptions any time_24 hours a day. Simply call toll-free and follow the recorded voice instructions. Sell See page 40 for information on the Automatic Withdrawal Plan Automatically or Systematic Withdrawal Plan for AARP IRA or AARP Keogh Plan accounts. When are redemptions processed? Any redemption request received in good order prior to 4:00 p.m. Eastern time during normal business operations will be processed on that day. The request will be processed at that night's closing share price. Normally, requests received in good order after 4:00 p.m. Eastern time will be processed on the next business day. Shares redeemed from Funds in the AARP Income Trust, AARP Tax Free Income Trust or the AARP High Quality Money Fund will earn a dividend on the day of redemption. Normally, proceeds of your redemption will be sent on the business day following a redemption request in good order. In any event, the AARP Funds may take no more than 7 calendar days to send your redemption proceeds. When can I expect to receive my money? We will mail your redemption proceeds promptly. If you purchase shares by check or by telephone and then redeem them by letter within 7 business days of the purchase, the redemption proceeds may be held until the purchase check has cleared the banking system. When the check has cleared, we will mail your redemption proceeds promptly. We will not accept redemption requests by telephone or by checkwriting prior to the expiration of the 7 business day period. You may avoid this delay by purchasing shares by wire. Short-Term Trading You should make purchases and sales for long-term investment purposes only. The AARP Funds do not permit a pattern of frequent purchases and sales in response to short-term changes in share price. When such a pattern occurs, the AARP Funds and Scudder Investor Services, Inc. reserve the right to restrict purchases or exchanges. This restriction does not apply to the AARP money funds. This right extends to individual purchasers or groups of related purchasers. SIGNATURE GUARANTEES What is a "Signature Guarantee"? A "Signature Guarantee" is a certification of your signature. We require this for your protection and to prevent fraudulent redemptions. In effect, the appropriate institution (see below) guarantees that you are authorized to make certain requests. When do I need one? A "Signature Guarantee" from each person on the account registration is needed for the following redemption requests: 1) Redemptions of more than $50,000; 2) When redemption proceeds are payable to someone other than the registered shareholder(s); 3) When redemption proceeds are to be sent to an address other than the registered address; or 4) If the account's registered address has changed during the last 30 days. Transactions requiring signature guarantees cannot be faxed. Where can I get one? You can get your signature guaranteed through most banks, credit unions or savings associations, or from broker-dealers, government securities broker-dealers, national securities exchanges, registered securities associations, or clearing agencies deemed eligible by the Securities and Exchange Commission. Signature Guarantees by notary publics are not acceptable. INVESTOR SERVICES To make investing simpler and more convenient there are many free investor services available to you. Easy-Access Line * Exchange between AARP Funds * Exchange to open a new AARP Fund CALL TOLL-FREE * Redeem money to your registered address 1-800-631-4636 * Get current performance information 24 HOURS A DAY * Get current account balance information 7 DAYS A WEEK * Confirm your last transaction With the Easy-Access Line you can get performance, and account information. If you have a touch-tone phone, you can also exchange or redeem shares worth up to $50,000. Simply call toll-free 1-800-631-4636 using a touch-tone phone and follow the easy pre-recorded voice instructions. Transact By Phone * Add to an AARP Fund by transfer from your bank checking or NOW account CALL TOLL-FREE * Redeem and send the proceeds to your 1-800-253-2277 checking or NOW account Transact By Phone allows you to call toll-free to purchase and redeem shares. The money will be automatically transferred to or from your bank checking account. Your bank must be a member of the Automated Clearing House for you to take advantage of this service. Buying Shares Call us before 3:00 p.m. Eastern time, business days, when through Transact you want to buy additional shares, and money will be By Phone: transferred from your bank account to your AARP Fund account to cover the purchase. Purchases must be for at least $250 but not more than $50,000. Your purchase will generally be completed in 2 business days at the closing share price on the day it takes place. Shares purchased in this manner will not be redeemable for a period of up to 7 business days. Selling Shares Call us before 4:00 p.m. Eastern time, business days, when through Transact you want to sell shares. We'll sell your shares and transfer By Phone: the proceeds to your bank account_generally within 2 business days from the day of your request. You can redeem any amount greater than $250. Shares will be sold at that night's closing price on the day of your request. Requests received after 4:00 p.m. will be sold at the next business day's closing price. Free Checkwriting Shareholders in the AARP High Quality Money Fund or the AARP High Quality Tax Free Money Fund have free checkwriting privileges. There is no charge to shareholders for this service, but the AARP Funds reserve the right to impose a charge in the future. To enroll, you must fill out a signature card on the Enrollment Form. If shares were purchase by your personal check, you may only write checks against your purchase 7 business days from the day that the purchase took place. Keep in mind that you cannot close your account by writing a check. This service may be suspended or terminated at any time upon notice to shareholders. Distributions Direct You may choose to have dividend and capital gain distributions automatically deposited into your bank checking or NOW account. To enroll in this service, your bank must be a member of the Automated Clearing House (ACH) network. Once you enroll, your dividends and capital gains will be automatically deposited into your personal bank account within 3 business days of the distribution date. You'll receive a statement confirming the amount. There is no charge to shareholders for the service. Systematic Plans Several other investor services are available. These include: * Automatic Investment Plan: Arrange for regular investments into your AARP Fund through automatic deductions from your bank checking account. * Direct Deposit: At your direction, your Social Security, U.S. Government or any regular income checks (pension, dividend, interest or payroll) will be automatically deposited into your AARP Fund. * Automatic Withdrawal Plan: At your direction, we will automatically send a monthly redemption of $50 or more directly to you when you have at least $10,000 or more in an AARP Fund. * Direct Payment of Fixed Bills: With $10,000 or more in an AARP Fund, you can arrange for us to automatically pay regular bills of a fixed amount. Pay your rent, mortgage or other payments of $50 or more. * Systematic Retirement Withdrawal Plan: You can receive periodic distributions from an AARP IRA or AARP Keogh Plan account. STATEMENTS AND REPORTS What kinds of statements do I receive? You will receive a prompt confirmation statement for your transactions. You will also receive a monthly Consolidated Statement. AARP IRA or AARP Keogh Plan accounts will receive a quarterly Consolidated Statement. The Consolidated Statement details the market value of all the AARP Funds in your account. It also includes a listing of recent transactions. You should keep these statements for your records. What other reports do I get? Each year, you will receive a current prospectus, mid year report and annual report. To reduce the volume of mail, we will only send one copy of most reports to a household (same surname, same address). Please contact us if you wish to receive additional reports. SERVICE PROVIDERS OF THE AARP FUNDS Legal Counsel Dechert Price & Rhoads, Washington, DC Independent Accountants Price Waterhouse LLP , Boston, MA Underwriter Scudder Investor Services, Inc., Two International Place, Boston, MA (a wholly-owned subsidiary of Scudder) is principal underwriter of the AARP Funds. Scudder Investor Services, Inc. offers for sale and confirms as agent all purchases of shares of the AARP Funds. Custodian State Street Bank and Trust Company, Boston, MA Transfer and Dividend-Disbursing Agent Scudder Service Corporation, P.O. Box 2540, Boston, MA 02208-2540 (a wholly-owned subsidiary of Scudder) Investment Adviser Scudder, Stevens & Clark, Inc., 345 Park Avenue, New York, New York is investment adviser for the AARP Funds. TRUSTEES AND OFFICERS ADELAIDE ATTARD, Trustee ( 1, 2,4), Consultant, Gerontology; Commissioner, County of Nassau, New York, Department of Senior Citizen Affairs (1971-1991); Chairperson, Federal Council on Aging (1983-1992). CYRIL F. BRICKFIELD, Trustee (2,3,4), Honorary Trustee (1); Honorary President and Special Counsel, American Association of Retired Persons. ROBERT N. BUTLER, M.D., Trustee (2,4) Brookdale Professor of Geriatrics and Adult Development, Mount Sinai School of Medicine; formerly Director, National Institute on Aging, National Institute of Health. LINDA C. COUGHLIN, President and Trustee (5), Managing Director, Scudder, Stevens & Clark, Inc., Director, Scudder Investor Services, Inc.* HORACE B. DEETS, Vice Chairman and Trustee (5), Executive Director, American Association of Retired Persons; Member, Board of Councilors, Andrus Gerontology Center; Member of the Board, HelpAge International. MARY JOHNSTON EVANS, Trustee (1,3,4), Corporate Director; Senior Member, The Conference Board, Inc. EDGAR R. FIEDLER, Trustee (1,2,3), Vice President and Economic Counselor, The Conference Board, Inc. CUYLER W. FINDLAY, Chairman and Trustee (5), Managing Director, Scudder, Stevens & Clark, Inc., Senior Vice President and Director, Scudder Investor Services, Inc.* EUGENE P. FORRESTER, Trustee (2,3), Lt. General (Retired) U.S. Army; International Trade Consultant; Corporate Director. WAYNE F. HAEFER, Trustee (2,3,4), Director, Membership Division of AARP; Secretary, Employee's Pension and Welfare Trusts of AARP and Retired Persons Services, Inc.; Formerly Director, Administration and Data Management Division of AARP. WILLIAM B. MACOMBER, Trustee (3,4), formerly Teacher, History and Government, Nantucket H.S., Nantucket, MA; formerly President, The Metropolitan Museum of Art and U.S. Ambassador to Turkey and Jordan. GEORGE L. MADDOX, JR., Trustee (2,3), Chairman, Duke University Council on Aging and Human Development; Professor of Sociology, Departments of Sociology and Psychiatry, Duke University. ROBERT J. MYERS, Trustee (1,2,4), Actuarial Consultant; formerly Executive Director, National Commission on Social Security Reform; formerly Chairman, Commission on Railroad Retirement Reform. JOSEPH S. PERKINS, Trustee (5), Director, American Association of Retired Persons; Corporate Retirement Manager, Polaroid Corporation. JAMES H. SCHULZ, Trustee ( 2, 3,4), Professor of Economics and Kirstein Professor of Aging Policy, Policy Center on Aging, Florence Heller School, Brandeis University. GORDON SHILLINGLAW, Trustee (1,3,4), Professor Emeritus of Accounting, Columbia University Graduate School of Business. EDWARD V. CREED*, Vice President (5) THOMAS W. JOSEPH*, Vice President (5) DAVID S. LEE*, Vice President and Assistant Treasurer (5) DOUGLAS M. LOUDON*, Vice President (5) THOMAS F. McDONOUGH*, Vice President and Assistant Secretary (5) PAMELA A. McGRATH*, Vice President and Treasurer (5) EDWARD J. O'CONNELL*, Vice President and Assistant Treasurer (5) KATHRYN L. QUIRK*, Vice President and Secretary (5) HOWARD SCHNEIDER*, Vice President (5) CORNELIA M. SMALL*, Vice President (5) *Scudder, Stevens & Clark, Inc. (1) AARP Cash Investment Funds (2) AARP Income Trust (3) AARP Tax Free Income Trust (4) AARP Growth Trust (5) All Funds AARP INVESTMENT PROGRAM FROM SCUDDER AARP Cash Investment Funds: AARP HIGH QUALITY MONEY FUND AARP Income Trust: AARP GNMA and U.S. TREASURY FUND AARP HIGH QUALITY BOND FUND AARP Tax Free Income Trust: AARP HIGH QUALITY TAX FREE MONEY FUND AARP INSURED TAX FREE GENERAL BOND FUND AARP Growth Trust: AARP BALANCED STOCK AND BOND FUND AARP GROWTH AND INCOME FUND AARP CAPITAL GROWTH FUND STATEMENT OF ADDITIONAL INFORMATION February 1, 1995 This Statement of Additional Information is not a prospectus and should be read in conjunction with the combined Prospectus for all eight of the above Funds, dated February 1, 1995, as amended from time to time, copies of which may be obtained without charge by writing to the AARP INVESTMENT PROGRAM FROM SCUDDER, P.O. Box 2540, Boston, Massachusetts 02208-2540 or by calling 1-800- 253-2277. TABLE OF CONTENTS
PAGE ---- AARP INVESTMENT PROGRAM FROM SCUDDER 1 Summary of Advantages and Benefits 1 THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES 3 AARP Money Funds 3 AARP Income Funds 6 AARP Insured Tax Free Income Fund 8 AARP Growth Funds 11 Special Investment Policies of the AARP Funds 13 General Investment Policies of the AARP Funds 23 Investment Restrictions 24 PURCHASES 28 General Information 28 Checks 28 Share Price 28 Share Certificates 28 Direct Deposit Program 29 Wire Transfers 29 Holidays 29 Other Information 29 REDEMPTIONS 29 General Information 29 Redemption by Telephone 30 Redemption by Mail or Fax 31 Redemption by Checkwriting 31 Redemption-in-Kind 32 Other Information 32 EXCHANGES 32 TRANSACT BY PHONE 33 Purchasing Shares by Transact by Phone 33 Redeeming Shares by Transact by Phone 33 FEATURES AND SERVICES OFFERED BY THE FUNDS 34 Automatic Dividend Reinvestment 34 Distributions Direct 34 Reports to Shareholders 34 Consolidated Statements 34 RETIREMENT PLANS 34 AARP No-Fee Individual Retirement Account (" AARP No- 35 Fee IRA") AARP Keogh Plan 36 OTHER PLANS 36 Automatic Investment 36 Automatic Withdrawal Plan 37 Direct Payment of Regular Fixed Bills 37 DIVIDENDS AND YIELD 37 Performance Information: Computation of Yields and Total Return 38 TRUST ORGANIZATION 43 MANAGEMENT OF THE FUNDS 44 TRUSTEES AND OFFICERS 48 REMUNERATION 51 DISTRIBUTOR 53 TAXES 53 BROKERAGE AND PORTFOLIO TURNOVER 57 Brokerage 57 Portfolio Turnover 59 NET ASSET VALUE 59 AARP Money Funds 59 AARP Non-Money Market Funds 59 ADDITIONAL INFORMATION 60 Experts 60 Shareholder Indemnification 60 Ratings of Corporate Bonds 61 Ratings of Commercial Paper 61 Ratings of Municipal Bonds 61 Other Information 62 Tax-Exempt Income vs. Taxable Income 63 FINANCIAL STATEMENTS 64
AARP INVESTMENT PROGRAM FROM SCUDDER The AARP Investment Program from Scudder (the "Program") was developed by the American Association of Retired Persons ("AARP") to provide an array of conservatively managed investment options for its members. Today's financial markets present an enormous, ever-changing selection of investments suited for investors with varying needs. AARP, a non-profit organization dedicated to improving the quality of life, independence and dignity of older people, has undertaken to help its members by designing an investment program which attempts to satisfy the investment and retirement planning needs of most of its members, whether they be experienced investors or savers who have never invested at all. As with any program with the "AARP" name, the Program includes special benefits as described in the combined prospectus for the four Trusts, dated February 1, 1995 (the "Prospectus"). AARP endorses this program which was developed with the assistance of Scudder, Stevens & Clark, Inc. (" the Fund Manager"), a firm with over 75 years of investment counseling and management experience. Scudder, Stevens & Clark, Inc. was selected after an extensive search among qualified candidates, and provides the Program with continuous and conservative professional investment management. (See "MANAGEMENT OF THE FUNDS"). The Program consists of four Trusts - AARP Cash Investment Funds, AARP Income Trust, AARP Tax Free Income Trust, and AARP Growth Trust (the "Trusts"). Each of the Trusts is an open-end, management investment company authorized to issue its shares of beneficial interest in separate series (" the AARP Funds"). A total of eight diversified Funds are currently offered by the four Trusts. The differing investment objectives of the eight Funds in the Program provide AARP members with a variety of sensible investment alternatives, and by matching their own objectives with those of the different AARP Funds, AARP members may design an investment program to meet their personal needs. Not all your money is the same. There is short-term money, for example money needed for your regular budgeting and for emergencies, and there is money which can be invested for the longer term. It is generally thought that three months of income/expenses should be set aside in a savings account or money market fund to cover short-term needs. The Program is designed to offer alternatives to keeping all of your money in short-term fixed price investments like money market funds, insured short-term savings accounts and insured six-month certificates of deposit. The AARP Money Funds provide a taxable and a tax free alternative for short-term monies and the AARP Income Funds, the AARP Insured Tax Free General Bond Fund and the AARP Growth Funds provide a range of choices for longer term investment dollars. The Program includes functions performed by AARP Member Services ; the AARP Funds ; Scudder Investor Services, Inc., the AARP Funds' "underwriter" ; Scudder Service Corporation ("SSC"), the AARP Funds' "transfer agent" ; and State Street Bank and Trust Company, the AARP Funds' "custodian." Summary of Advantages and Benefits * Experienced Professional Management: Scudder, Stevens & Clark, Inc., investment counsel since 1919 and mutual Fund managers since 1928, provides investment advice to the Funds. * AARP's Commitment: the Program was designed with AARP's active participation to provide strong ongoing representation of the members' interests and to help ensure a high level of service. * Wide Selection of Investment Objectives: you can emphasize money market returns and liquidity, income, tax-free income, growth, or any combination. * Diversification: you benefit from investing in one or more large portfolios of carefully selected securities. * $500 Minimum Starting Investment for Seven of the Funds ($2,500 Minimum Starting Investment in AARP High Quality Tax Free Money Fund, $250 Minimum Starting Investment for AARP IRA and Keogh Plan Accounts): you may make additional investments in any amount at any time. * No Sales Commissions: the AARP Funds are pure no-load(tm), so you pay no sales charges to purchase, transfer or redeem shares nor do you pay Rule 12b-1 fees. * Investment Flexibility and Exchange: you may exchange among the eight AARP Funds in the Program at any time without charge. * Dividends: the AARP Money Funds, the AARP Income Funds, and the AARP Insured Tax Free Income Fund all pay dividends monthly, the AARP Balanced Stock and Bond Fund and the AARP Growth and Income Fund are expected to pay dividends quarterly and the AARP Capital Growth Fund pays dividends, if any, annually. * Automatic Dividend Reinvestment: you may receive dividends by check or arrange to have them automatically reinvested. * Readily Available Account, Price, Yield and Total Return Information: the yield for the AARP Money Funds is quoted weekly and the net asset value of each other Fund is quoted daily in the financial pages of leading newspapers. You may also dial our automated Easy-Access Line, toll-free, 1-800-631-4636 for recorded account information, share price, yield and total return information, 7 days a week. * Convenience and Efficiency: simplified investment procedures save you time and help your money work harder for you. * Liquidity: on any business day (subject to a 7 day waiting period for investment checks to clear), you may request redemption of your shares at the next determined net asset value, and, in the case of the AARP Money Funds, you may elect free Checkwriting and write checks for $100 or more on your account to make payments to any person or business. * Direct Deposit Program: you may have your Social Security or other checks from the U.S. Government or any other regular income checks, such as pension, dividend, interest, and even payroll checks automatically deposited directly to your account. * Automatic Withdrawal Plan: with a minimum qualifying balance of $10,000 in one AARP Fund, you may arrange to receive monthly, quarterly or periodic checks from your account for any designated amount of $50 or more. * Direct Payment of Regular Fixed Bills: with a minimum qualifying balance of $10,000 in one AARP Fund, you may arrange to have your regular fixed bills that are of fixed amounts, such as rent, mortgage, or other payments of $50 or more sent directly from your account at the end of the month. * Personal Service and Information: professionally trained service representatives help you whenever you have questions through our toll-free number, 1-800-253-2277. * Consolidated Statements: in addition to receiving a confirmation statement of each transaction in your account, you receive, without extra charge, a convenient monthly consolidated statement. (Retirement Plan statements are mailed quarterly.) This statement contains the market value of all your holdings and a complete listing of your transactions for the statement period. * Shareholder Handbook: the Shareholder Handbook was created to help answer many of the questions you may have about investing in the Program. * IRA Shareholder Handbook: The IRA Shareholder Handbook was created to help answer many of the questions you may have about investing in the no-fee AARP IRA. * A Glossary of Investment Terms: the Glossary defines commonly used financial and investment terms. * Newsletter: every month, shareholders receive our newsletter, Financial Focus (retirement plan shareholders receive a special edition of Financial Focus on a quarterly basis) which is designed to help keep you up to date on economic and investment developments, and any new financial services and features of the Program. This Statement of Additional Information supplements the Prospectus, and provides more detailed information about the Trusts and the Funds. THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES AARP Money Funds (See "AARP High Quality Money Fund", "AARP High Quality Tax Free Money Fund", "INVESTMENT OBJECTIVES AND POLICIES", and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.) The AARP Funds offer a choice of a taxable and a tax free money fund for small savers, big savers and people looking for a way to invest. People who earn a relatively low interest rate in an insured bank savings account, who have to make withdrawals or deposits in person or whose money isn't easily accessible may find that the AARP Money Funds can help. AARP High Quality Money Fund. The AARP High Quality Money Fund is a separate series of AARP Cash Investment Funds and is the only Fund currently offered by that Trust. Additional series of the Trust may be offered in the future. From investments in high quality securities, the Fund is designed to provide current income. The Fund also seeks to maintain stability and safety of principal while offering liquidity. The Fund seeks to maintain a constant net asset value of $1.00 per share. There may be circumstances under which this goal cannot be achieved. The Fund invests in securities with remaining maturities of 397 calendar days or less, except in the case of U.S. Government securities which may have maturities of up to 762 calendar days. The average dollar- weighted maturity of its investments is 90 days or less. The investment policies and restrictions of the Fund are described as follows: To provide safety and liquidity, the investments of the AARP High Quality Money Fund are limited to those that at the time of purchase are rated, or judged by the Fund Manager to be the equivalent of those rated, within the two highest credit ratings ("high quality instruments") by one or more rating agencies such as: Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P") or Fitch Investors Service ("Fitch"). In addition, the Fund Manager seeks through its own credit analysis to limit investments to high-quality instruments presenting minimal credit risks. If a security ceases to be rated or is downgraded below the second highest quality rating indicated above, the Fund will promptly dispose of the security, unless the Trustees determine that continuing to hold such security is in the best interests of the Fund. Generally, the Fund will invest in securities rated in the highest quality rating by at least two of these rating agencies. Securities eligible for investment by the Fund include "first tier securities" and "second tier securities." "First tier securities" are those securities which are generally rated (or issued by an issuer with comparable securities rated) in the highest category by at least two rating services (or by one rating service, if no other rating service has issued a rating with respect to that security). Securities generally rated (or issued by an issuer with comparable securities rated) in the top two categories by at least two rating agencies (or one, if only one rating agency has rated the security) which do not qualify as first tier securities are known as "second tier securities." To ensure diversity of the Fund's investments, as a matter of non-Fundamental policy the Fund will not invest more than 5% of its total assets in the securities of a single issuer, other than the U.S. Government. The Fund may, however, invest more than 5% of its total assets in the first tier securities of a single issuer for a period of up to three business days after purchase, although the Fund may not make more than one such investment at any time. The Fund may not invest more than 5% of its total assets in securities which were second tier securities when acquired by the Fund. Further, the Fund may not invest more than the greater of (1) 1% of its total assets, or (2) one million dollars, in the securities of a single issuer which were second tier securities when acquired by the Fund. The Fund purchases high quality 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 their foreign branches, including bankers' acceptances, certificates of deposit, deposit notes and time deposits; obligations of savings and loan institutions; 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; asset-backed securities, including certificates, participations and notes; municipal securities including notes, bonds and participation interests, either taxable or tax-free, as described in more detail for the AARP High Quality Tax Free Money Fund; securities with put features; and repurchase agreements. The Fund may hold cash, which does not earn interest, to facilitate stabilizing its net asset value per share and for liquidity purposes. Commercial paper at the time of purchase will be rated, or judged by the Fund Manager under the supervision of the Trustees, to be the equivalent of securities rated, A-1 or higher by S&P, Prime-1 or higher by Moody's or F-1 or higher by Fitch. Investments in other corporate obligations, such as bonds or notes, will be limited to securities rated, or judged by the Fund Manager to be the equivalent of securities rated, AA or higher by S&P or Fitch or Aa or higher by Moody's. Obligations which are the subject of repurchase agreements will be limited to those of the type described above. Shares of this Fund are not insured or guaranteed by the U.S. Government. The Fund may invest in certificates of deposit and bankers' acceptances of large domestic banks (i.e., banks which at the time of their most recent annual financial statements show total assets in excess of $1 billion) and their foreign branches and of smaller banks as described below. These as well as all other investments of the Fund must be U.S. dollar denominated. The Fund will not invest in certificates of deposit or bankers' acceptances of foreign banks without additional consideration by and the approval of the Trustees of the Trust. Although the Fund recognizes that the size of a bank is important, this fact alone is not necessarily indicative of its creditworthiness. Investment in certificates of deposit and bankers' acceptances issued by foreign branches of domestic banks involves investment risks that are different in some respects from those associated with investment in obligations issued by domestic banks. Such investment risks include the possible imposition of withholding taxes on interest income, the possible adoption of foreign governmental restrictions which might adversely affect the payment of principal and interest on such obligations, or other adverse political or economic developments. In addition, it might be more difficult to obtain and enforce a judgment against a foreign branch of a domestic bank. The Fund may also invest in certificates of deposit issued by banks which had, at the time of their most recent annual financial statements, total assets of less than $1 billion, provided that (i) the principal amounts of such certificates of deposit are insured by an agency of the U.S. Government, (ii) at no time will the Fund hold more than $100,000 principal amount of certificates of deposit of any one such bank, and (iii) at the time of acquisition, no more than 10% of the Fund's net assets (taken at current value) are invested in certificates of deposit and bankers' acceptances of banks having total assets not in excess of $1 billion. The Fund may enter into repurchase agreements with member banks of the Federal Reserve System whose creditworthiness has been determined by the Fund Manager to be equal to that of issuers of commercial paper rated within the two highest grades. See "Repurchase Agreements" under "Special Investment Policies of the AARP Funds." AARP High Quality Tax Free Money Fund. The AARP High Quality Tax Free Money Fund is a separate series of AARP Tax Free Income Trust. From investments in high quality municipal securities, the Fund is designed to provide current income free from federal income taxes. The Fund also seeks to maintain stability and safety of principal, while offering liquidity. The Fund seeks to maintain a constant net asset value of $1.00 per share. There may be circumstances under which this goal cannot be achieved. Such securities may mature no more than 397 calendar days or less from the date the purchase is expected to be settled by the Fund, with a weighted average maturity of 90 days or less. The Fund will invest in municipal securities which are rated at the time of purchase within the two highest quality ratings of rating agencies such as: Fitch--AAA and AA, F1 and F2, or Moody's--Aaa and Aa, or within Moody's short-term municipal obligations top ratings of MIG 1 and MIG 2 and P1, or S&P-- AAA/AA and SP1+/SP1, A1+ and A1--all in such proportions as management will determine. Securities must be so rated by at least two agencies or by at least one, if only one has rated the security. Generally, the Fund will invest in securities rated in the highest quality rating by at least two of these rating agencies. In some cases, short-term municipal obligations are rated using the same categories as are used for corporate obligations. In addition, unrated municipal securities will be considered as being within the foregoing quality ratings if other equal or junior municipal securities of the same issuer are rated and their ratings are within the foregoing ratings of Fitch, Moody's or S&P. The Fund may also invest in municipal securities which are unrated if, in the opinion of the Fund Manager, such securities possess creditworthiness comparable to those rated securities in which the Fund may invest. For a description of ratings, please see "Additional Information." Shares of this fund are not insured or guaranteed by the U.S. Government. Subsequent to its purchase by the AARP High Quality Tax Free Money Fund, an issue of municipal securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. The Fund will dispose of any such security unless the Board of Trustees of the Fund determines that such disposal would not be in the best interests of the Fund. As a fundamental policy, under normal circumstances, at least 80% of the net assets of AARP High Quality Tax Free Money Fund will be invested in tax-exempt securities. Although the Fund normally intends to ensure that all income to shareholders will be exempt from federal income tax, there can be no assurance that this goal will be achieved or that income to shareholders which is federally tax exempt will be exempt from state and local taxes. From time to time on a temporary basis or for defensive purposes, the Fund may, subject to its investment restrictions, hold cash and invest in taxable investments consisting of: (1) other obligations issued by or on behalf of municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3) obligations of agencies and instrumentalities of the U.S. Government; (4) money market instruments, such as domestic bank certificates of deposit, finance company and corporate commercial paper, and banker's acceptances; and (5) repurchase agreements (agreements under which the seller agrees at the time of sale to repurchase the security at an agreed time and price) with respect to any of the obligations which the Fund is permitted to purchase. The Fund will not invest in instruments issued by banks or savings and loan associations unless at the time of investment such issuers have total assets in excess of $1 billion (as of the date of their most recently published financial statements). Commercial paper investments will be limited to commercial paper rated A1+ and A1 by S&P, Prime 1 by Moody's or F-1 by Fitch. The Fund may hold cash or invest temporarily in taxable investments due, for example, to market conditions or pending investment of proceeds of subscriptions for shares of the Fund or proceeds from the sale of portfolio securities or in anticipation of redemptions. However, the Fund expects to invest such proceeds in municipal securities as soon as practicable. Interest income from temporary investments may be taxable to shareholders as ordinary income. Maintenance of Constant Net Asset Value Per Share. The Trustees of AARP High Quality Money Fund and AARP High Quality Tax Free Money Fund have determined that it is in the best interests of the Funds and their shareholders to maintain the net asset value of the Funds' shares at a constant $1.00 per share. In order to facilitate the maintenance of a constant $1.00 net asset value per share, the AARP High Quality Money Fund and the AARP High Quality Tax Free Money Fund operate in accordance with a rule of the Securities and Exchange Commission (the "SEC"). In accordance with that rule, the assets of the Funds consist entirely of cash, cash items, and high quality U.S. dollar-denominated investments which have minimal credit risks and which have a remaining maturity date of not more than 397 days from date of purchase (except that the AARP High Quality Money Fund may invest in U.S. Government securities having maturities of up to 762 days). The average dollar-weighted maturity of each Fund is varied according to money market conditions, but may not exceed 90 days. The maturity of a portfolio security shall be the period remaining until the date stated in the security for payment of principal or such earlier date as it is called for redemption, except that a shorter period shall be used for Variable and Floating Rate Instruments in accordance with and subject to the conditions contained in the Rule. The Trustees have established procedures reasonably designed to stabilize the price per share of the Funds at $1.00, as computed for the purposes of sales, repurchases and redemptions, taking into account current market conditions and each Fund's investment objectives. Such procedures, which the Trustees review annually, include specific requirements designed to assure that issuers of the Funds' securities continue to meet high standards of creditworthiness. The procedures also establish certain requirements concerning the quality and maturity of the Fund's investments. Finally, the procedures require the determination, at such intervals as the Trustees deem appropriate and reasonable, of the extent, if any, to which a Fund's net asset value calculated by using available market quotations deviates from $1.00 per share. Market quotations and market equivalents used in making such determinations may be obtained from an independent pricing service approved by the Trustees. Such determinations will be reviewed periodically by the Trustees. If at any time it is determined that a deviation exists which may result in material dilution or other unfair results to investors or existing shareholders of a Fund, certain corrective actions may be taken, including selling portfolio instruments prior to maturity to realize capital gains or losses or to shorten average portfolio maturity; withholding part or all of dividends or payment of distributions from capital or capital gains; redeeming shares in kind; or establishing a net asset value per share by using available market quotations or equivalents. In addition, in order to stabilize the net asset value per share at $1.00 the Trustees have the authority (1) to reduce the number of outstanding shares of a Fund on a pro rata basis, and (2) to offset each shareholder's pro rata portion of the deviation between the net asset value per share and $1.00 from the shareholder's accrued dividend account or from future dividends. The Funds may hold cash for the purpose of stabilizing their net asset value per share. Holdings of cash, on which no return is earned, would tend to lower the yield on the shares of the Funds. The net income of the Funds is declared as dividends to shareholders daily and distributed monthly in shares of the Funds unless payment is requested in cash. AARP Income Funds (See "AARP GNMA and U.S. Treasury Fund," "AARP High Quality Bond Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.) Each of the Funds seeks to earn a high level of income consistent with its investment policies. AARP GNMA and U.S. Treasury Fund. AARP GNMA and U.S. Treasury 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 and to keep the price of its shares more stable than that of a long-term bond. The Fund pursues this objective by investing principally in U.S. Government-guaranteed GNMA securities and U.S. Treasury obligations. The Fund has been designed with the conservative, safety-conscious investor in mind. Of the two funds in the AARP Income Trust, the AARP GNMA and U.S. Treasury Fund is the more conservative choice. Although past performance is no guarantee of future performance, historically, this Fund offers higher yields than such short-term investments as insured savings accounts, insured six month certificates of deposit and fixed-price money market funds. The Fund invests in U.S. Treasury bills, notes and bonds; other securities issued or backed by the full faith and credit of the U.S. Government, including, but not limited to, Government National Mortgage Association ("GNMA") mortgage-backed securities, Merchant Marine Bonds guaranteed by the Maritime Administration and obligations of the Export-Import Bank; financial futures contracts with respect to such securities; options on either such securities or such financial futures contracts; and bank repurchase agreements. At least 65% of the Fund's net assets will be directly invested in U.S. Treasury obligations, including GNMA's. The Fund will make long-term investments but will also attempt to dampen its price variability in comparison to that of a long-term bond by including short-term U.S. Treasury securities in its portfolio. The Fund may also utilize hedging techniques involving limited use of financial futures contracts and the purchase and writing (selling) of put and call options on such contracts. Under certain market conditions, these strategies may reduce current income. At any time the Fund may have a substantial portion of its assets in securities of a particular type or maturity. The Fund may also write covered call options on portfolio securities and purchase "when-issued" securities. GNMA Mortgage-Backed Securities ("GNMAs"). GNMAs are mortgage-backed securities representing part ownership of a pool of mortgage loans. These loans, issued by lenders such as mortgage bankers, commercial banks and savings and loan associations, are either insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA). A "pool" or group of such mortgages is assembled and, after being approved by GNMA, is offered to investors through securities dealers. Once approved by GNMA, a Government corporation within the U.S. Department of Housing and Urban Development, the timely payment of interest and principal is guaranteed by the full faith and credit of the United States Government. This is not, however, a guarantee related to the Fund's yield or the value of your investment principal. As mortgage-backed securities, GNMAs differ from bonds in that principal is paid back by the borrower over the length of the loan rather than returned in a lump sum at maturity. GNMAs are called "pass-through" securities because both interest and principal payments including prepayments are passed through to the holder of the security (in this case, the Fund). 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 Fund Manager, 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. Some investors may view the Fund as an alternative to a bank certificate of deposit (CD). 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 CD-is not locked away for any period, may be redeemed at any time without incurring early withdrawal penalties, and may provide a higher yield. AARP High Quality Bond Fund. Consistent with investments primarily in high quality securities, the Fund seeks to provide a high level of income and to keep the value of its shares more stable than that of a long-term bond. By including short- and medium-term bonds in its portfolio, the Fund seeks to offer less share price volatility than long-term bonds or many long-term bond funds, although its yield may be lower. Due to the greater market price risk of its securities, the Fund may have a more variable share price than the AARP GNMA and U.S. Treasury Fund. It is also possible that the Fund may provide a higher level of income than the AARP GNMA and U.S. Treasury Fund. This Fund intends under normal circumstances to have at least 65% of its total assets invested in bonds which include corporate notes and bonds including high-yield issues convertible into common stock. It may also purchase any investments eligible for the AARP GNMA and U.S. Treasury Fund as well as obligations of federal agencies that are not backed by the full faith and credit of the U.S. Government, such as obligations of Federal Home Loan Bank, Farm Credit Banks and the Federal Home Loan Mortgage Corporation. In addition, it may purchase obligations of international agencies such as the International Bank for Reconstruction and Development, the Inter-American Development Bank and the Asian Development Bank. Other eligible investments include U.S. dollar-denominated foreign debt securities (such as U.S. dollar denominated debt securities issued by the Dominion of Canada and its provinces), and money market instruments such as commercial paper and bankers' acceptances and certificates of deposit issued by domestic and foreign branches of U.S. banks. The Fund invests in a broad range of short, intermediate, and long-term securities. Proportions among maturities and types of securities may vary depending upon the prospects for income related to the outlook for the economy and the securities markets, the quality of available investments, the level of interest rates, and other factors. Except for limitations in the Fund's investment restrictions, there is no limit as to the proportions of the Fund which may be invested in any of the eligible investments. However, it is a policy of the Fund that its non- governmental investments will be spread among a variety of companies and will not be concentrated in any industry. (See "Investment Restrictions", herein.) High Quality Portfolio. The policies of AARP High Quality Bond Fund are designed to provide a portfolio that combines high quality securities with investments that attempt to reduce its market price risk. The portfolio of the AARP High Quality Bond Fund is high grade . In fact, according to information provided by Morningstar, Inc., the Fund has one of the highest quality standards of any general bond Fund currently available. No purchase will be made if, as a result thereof, less than 65% of the Fund's net assets would be invested in debt obligations, including money market instruments, that (a) are issued or guaranteed by the U.S. Government, (b) are rated at the time of purchase within the two highest grades assigned by any of the nationally-recognized rating services including Moody's or S&P, or (c) if not rated, are judged at the time of purchase by the Fund Manager, subject to the Trustees' review, to be of a quality comparable to those in the two highest ratings described in (b) above. All of the debt obligations in which the Fund invests will, at the time of purchase, be rated within the three highest credit ratings or, if not rated, will be judged to be of comparable quality by the Fund Manager. (See "ADDITIONAL INFORMATION - Ratings of Corporate Bonds.") Variations of Maturity. In an attempt to capitalize on the differences in total return from securities of differing maturities, maturities may be varied according to the structure and level of interest rates, and the Fund Manager's expectations of changes therein. Foreign Securities. The AARP High Quality Bond Fund may invest, without limit, in U.S. dollar-denominated foreign debt securities (including U.S. dollar denominated debt securities issued by the Dominion of Canada and its provinces and other debt securities which meet the Fund's criteria applicable to its domestic investments), and in certificates of deposit issued by foreign branches of United States banks, to any extent deemed appropriate by the Fund Manager. AARP Insured Tax Free Income Fund (See "AARP Insured Tax Free General Bond Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.) AARP Insured Tax Free General Bond Fund. The AARP Insured Tax Free General Bond Fund is a separate series of AARP Tax Free Income Trust. From a portfolio consisting primarily of municipal securities covered by insurance, the Fund seeks to provide high income free from federal income taxes and to keep the value of its shares more stable than that of a long-term municipal bond. The Fund seeks to provide investors with the higher tax-free income that is often available from municipal securities by investing, under normal circumstances, in a high grade portfolio of bonds consisting primarily of municipal securities, with no restrictions as to maturity. Securities comprising at least 65% of the total assets held by the Fund are fully insured as to face value and interest by private insurers. While longer-term securities such as those in which the Fund may invest have in recent years had higher yields, they also experience greater price fluctuation than shorter-term securities. By including short- and medium-term bonds in its portfolio, the Fund seeks to offer less share price volatility than long-term municipal bonds or many long-term municipal bond funds, although its yield may be lower. Because the Fund may trade its securities, it is also free to attempt to take advantage of opportunities in the market to achieve higher current income. This opportunity is not available to unit investment trusts, which hold fixed portfolios of municipal securities. Under normal circumstances, at least 80% of the Fund's net assets are invested in tax-exempt securities. For this purpose, private activity bonds, the interest on which is treated as a preference item for purposes of calculating alternative minimum tax liability, will not be treated as tax exempt securities. The Fund does not intend to purchase any such private activity bonds. (See "TAXES" herein.) There can be no assurance that the objectives of the Fund will be achieved or that all income to shareholders which is exempt from federal income taxes will be exempt from state or local taxes. Shareholders may also be subject to tax on long-term and short-term capital gains (see "TAXES" herein). In addition, the market prices of municipal securities, like those of taxable debt securities, go up and down when interest rates change. Thus, the net asset value per share can be expected to fluctuate and shareholders may receive more or less than their purchase price for shares they redeem. In addition to investments in municipal obligations, as described below, the Fund may invest in short-term taxable U.S. Government securities and repurchase agreements backed by U.S. Government securities. The Fund also may invest in demand notes and tax-exempt commercial paper, financial futures contracts, and may invest in and write (sell) options related to such futures contracts. These investments are not insured or guaranteed or backed by the U.S. Government. Except for futures and options, which are not rated, the AARP Insured Tax Free General Bond Fund will only purchase securities rated within the top three ratings by Moody's and S&P, or the equivalent as determined by the Fund Manager, or repurchase agreements on such securities. To qualify as "within the top three ratings," a security must have such a rating due to the credit of the issuer or due to specific insurance on the security, whether acquired at issuance or by the Fund at the time of purchase. A security would not so qualify if its rating was solely the result of coverage under the Fund's portfolio insurance. Securities in which the Fund may invest may include: (a) a security that carries at the time of issuance, whether because of the credit of the issuer or because it is insured at issuance by an insurance company, a rating within the top three ratings; and (b) a security not rated within the top three ratings at the time of issuance but insured to maturity by the Fund at the time of purchase if, upon issuance of such insurance, the Fund Manager is able to determine that the security is now the equivalent of a security rated within the top three ratings by a nationally recognized rating agent. When, in the opinion of the Fund Manager, defensive considerations or an unusual disparity between the after-tax income on taxable investments and comparable municipal obligations make it advisable to do so, up to 20% of the Fund's net assets may be held in cash or invested in short-term investments such as U.S. Treasury notes, bills and bonds and repurchase agreements collateralized by U.S. Government securities, the interest income from which may be subject to federal income tax. Notwithstanding the foregoing, the Fund may invest more than 20% of its net assets in such taxable U.S. Treasury securities and repurchase agreements for temporary defensive purposes. Insurance. Insurance on at least 65% of the AARP Insured Tax Free General Bond Fund's total assets will be obtained from nationally recognized private insurers, including the following: Financial Guaranty Insurance Company ("FGIC") is owned by FGIC Corporation, which in turn is owned by General Electric Credit Corporation; AMBAC Indemnity Corporation; and Municipal Bond Investors Assurance Corporation, a wholly-owned subsidiary of MBIA Incorporated, the principal shareholders of which are: The Aetna Life & Casualty Company, Fireman's Fund Insurance Company, subsidiaries of the CIGNA Corporation and affiliates of the Continental Insurance Company. The Fund currently has portfolio insurance provided by FGIC pursuant to which it may insure securities mutually agreed to between the Fund and FGIC so long as the security remains in the Fund's portfolio. Pursuant to an irrevocable commitment, FGIC also provides the Fund with the option to obtain insurance for any security covered by the FGIC portfolio insurance, which insurance can continue if the security were to be sold by the Fund. The Fund may procure portfolio insurance from other insurers. At least 65% of the Fund's assets are fully insured by private insurers as to payment of face value and interest to the Fund, when due. If uninsured securities or securities not directly or indirectly backed or guaranteed by the U.S. Government are purchased and expected to be held for 60 days or more, insurance will be obtained within 30 days to ensure that 65% of the Fund's assets are insured by the issuer or arranged for by the Fund. If at least 65% of its assets are not insured securities, the Fund will obtain insurance for a portion of its U.S. Government guaranteed or backed securities so that the 65% standard is achieved. The Fund requires that insurance with respect to its securities provide for the unconditional payment of scheduled principal and interest when due. In the event of a default by the issuer, the insurer will, within 30 days of notice of such default, provide to its agent or Trustee funds needed to make any such payments. Such agent or Trustee will bear the responsibility of seeing that such funds are used to make such payments to the appropriate parties. Such insurance will not guarantee the market value of a security. Insurance on the Fund's securities will in some cases continue in the event the securities are sold by the Fund, while in other cases it may not. To the extent the Fund's insured municipal securities do not equal 65% of its total assets, the Fund will obtain insurance on such amount of its U.S. Government guaranteed or backed securities as is necessary to have 65% of the Fund's total assets insured at all times. This type of insurance will terminate when the security is sold and will involve an added cost to the Fund while not increasing the quality rating of the security. Insurance on individual securities, whether obtained by the issuer or the Fund, is non-cancelable and runs for the life of the security. Securities covered under the Fund's portfolio insurance are insured only so long as they are held by the Fund, though the Fund has the option to procure individual secondary market insurance which would continue to cover any such security after its sale by the Fund. Such guaranteed renewable insurance continues so long as premiums are paid by the Fund and, in the judgment of the Fund Manager, coverage should be continued. Non-payment of premiums on the portfolio insurance will, under certain circumstances result in the cancellation of such insurance and will also permit FGIC to take action against the Fund to recover premiums due it. In the case of securities which are individually insured, default by the issuer is not expected to affect the market value of the security relative to other insured securities of the same maturity value and coupon and covered by the same insurer. In the case of a security covered by the Fund's portfolio insurance, the market value of such a security in the event of such default might be less unless the Fund elected to purchase secondary market insurance for it. It is the intention of the Fund Manager either to procure individual secondary market insurance for, or retain in the Fund's portfolio, securities which are insured by the Fund under portfolio insurance and which are in default or significant risk of default in the payment of principal or interest. Any such securities retained by the Fund would be held until the default has been cured or the principal and interest have been paid by the issuer or the insurer. Premiums for individual insurance may be payable in advance or may be paid periodically over the term of the security by the party then owning the security, and the costs will be reflected in the price of the security. The cost of insurance for longer-term securities, expressed in terms of income on the security, is likely to reduce such income by from 10 to 60 basis points. Thus, a security yielding 10% might have a net insured yield of 9.9% to 9.4%. The impact of the cost of the Fund's portfolio insurance on the Fund's net yield is somewhat less. The cost of insurance for shorter-term securities, which are generally lower-yielding, is expected to be less. It should be noted that insurance raises the rating of a municipal security. Lower rated securities generally pay a higher rate of interest than higher rated securities. Thus, while there is no assurance that this will always be the case, the Fund may purchase lower rated securities which, when insured, will bear a higher rating, and may pay a higher net rate of interest than other equivalently rated securities which are not insured. Insurers have certain eligibility standards as to municipal securities they will insure. Such standards may be more or less strict than standards which would be applied for purchase of a security for the Fund. To the extent the insurers apply stricter standards, the Fund will be restricted by such standards in the purchase and retention of municipal securities. The Internal Revenue Service has issued revenue rulings indicating that (a) the fact that municipal obligations are insured will not affect their tax-exempt status and (b) insurance proceeds representing maturing interest on defaulted municipal obligations paid to certain municipal bond funds will be excludable from federal gross income under Section 103(a) of the Internal Revenue Code. While operation of the Fund and the terms of the insurance policies on the Fund's securities may differ somewhat from those addressed by the revenue rulings, the Fund does not anticipate that any differences will be material or change the result with respect to the Fund. Insurers of the Fund's municipal securities are subject to regulation by the department of insurance in each state in which they are qualified to do business. Such regulation, however, is no guarantee that an insurer will be able to perform on its contract of insurance in the event a claim should be made thereunder at some time in the future. The Fund Manager reviews the financial condition of each insurer of their securities at least annually, and in the event of any material development, with respect to its continuing ability to meet its commitments to any contract of bond or portfolio insurance. Management Strategies. In pursuit of its investment objectives the Fund purchases securities that it believes are attractive and competitive values in terms of quality, and relationship of current price to market value. However, recognizing the dynamics of municipal bond prices in response to changes in general economic conditions, fiscal and monetary policies, interest levels and market forces such as supply and demand for various bond issues, the Fund Manager manages the Fund continuously, attempting to achieve a high level of tax-free income. The primary strategies employed in the management of the Fund are: Variations of Maturity. In an attempt to capitalize on the differences in total return from municipal securities of differing maturities, maturities may be varied according to the structure and level of interest rates, and the Fund Manager's expectations of changes therein. Emphasis on Relative Valuation. The interest rate (and hence price) relationships between different categories of municipal securities of the same or generally similar maturity tend to change constantly in reaction to broad swings in interest rates and factors affecting relative supply and demand. These temporary disparities in normal yield relationships may afford opportunities to invest in more attractive market sectors or specific issues by trading securities currently held by the Fund. Market Trading Opportunities. In addition to the above, the Fund may engage in short-term trading (selling securities held for brief periods of time, usually less than 3 months) if the Fund believes that such transactions, net of costs, would further the attainment of that Fund's objectives. The needs of different classes of lenders and borrowers and their changing preferences and circumstances have in the past caused market dislocations unrelated to Fundamental creditworthiness and trends in interest rates which have presented market trading opportunities. There can be no assurance that such dislocations will occur in the future or that the Funds will be able to take advantage of them. The Fund will limit its voluntary short-term trading to the extent necessary to qualify as a "regulated investment company" under the Internal Revenue Code. Special Considerations: Income Level and Credit Risk. To the extent that AARP Insured Tax Free General Bond Fund holds insured municipal obligations, the income earned on its shares will tend to be less than for an uninsured portfolio of the same securities. The fund will amortize as income, over the life of the respective security issues, any original issue discount on debt obligations (even where these are acquired in the after-market), and market discount on short-term U.S. Government securities. The Fund will elect to amortize the premium paid on acquisition of any premium coupon obligations. Since such discounts and premiums will be recognized in the Fund's accounts over the life of the respective security issues and included in the regular monthly income distributions to shareholders, they will not give rise to taxable capital gains or losses. However, a capital gain may be realized upon the sale or maturity and payment of certain obligations purchased at a market discount. AARP Growth Funds (See "AARP Balanced Stock and Bond Fund," "AARP Growth and Income Fund," "AARP Capital Growth Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.) AARP Balanced Stock and Bond Fund. The AARP Balanced Stock and Bond Fund's investment objective is to seek to provide long-term growth of capital and income while attempting to keep the value of its shares more stable than other balanced mutual funds. The Fund pursues these objectives by investing in a combination of stocks, bonds, and cash reserves. The Fund is intended to provide--through a single investment--access to a wide variety of income-oriented stocks and investment-grade bond investments. Common stocks and other equity investments provide long-term growth potential to help offset the effect 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 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. At least 30% of the Fund's assets will be in fixed- income securities, with the remainder of its net assets in common stocks and securities convertible into common stocks. For temporary defensive purposes, the Fund may invest without limit in cash and in other money market and short-term instruments. The Fund will, on occasion, adjust its mix of investments among equity securities, bonds, and cash reserves. In reallocating investments, the Fund Manager weighs the relative values of different asset classes and expectations for future returns. In doing so, the Fund Manager analyzes, on a global basis, the level and direction of interest rates, capital flows, inflation expectations, anticipated growth of corporate profits, monetary and fiscal policies around the world, and other related factors. The Fund does not take extreme investment positions as part of an effort to "time the market." Shifts between stocks and fixed-income investments are expected to occur in generally small increments within the guidelines adopted in the prospectus and this Statement of Additional Information. The Fund is designed as a conservative long-term investment. While the Fund emphasizes U.S. equity and debt securities, it may invest without limit in foreign securities, including depositary receipts. The Fund's foreign holdings will meet the criteria applicable to its domestic investments. Foreign securities are 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 write (sell) covered call options on the equity securities it holds to enhance investment return and may purchase and sell options on stock indices for hedging purposes. Subject to applicable regulatory guidelines and solely to protect against adverse effects of changes in interest rates, the Fund may make limited use of financial futures contracts. Equity investments. The Fund can invest up to 70% of its net assets in equity securities. The Fund's equity investments consist of common stocks, preferred stocks and securities convertible into common stocks, of companies that, in the Fund Manager's judgment, will offer the opportunity for capital growth and growth of earnings while providing dividends. The Fund pursues these objectives by investing primarily in common stocks and securities convertible into common stocks. Over time, a stock which produces continued earnings growth tends to produce higher dividends and stock values. The Fund invests in a variety of industries and companies. Changes in the Fund's portfolio securities are made on the basis of investment considerations and not for trading purposes. Fixed-income investments. To enhance income and stability, the Fund will have at least 30% of its net assets invested in fixed-income securities. The Fund can invest in a broad range of corporate bonds and notes, convertible bonds, and preferred and convertible preferred securities. It may also purchase U.S. Government securities and obligations of federal agencies and instrumentalities that are not backed by the full faith and credit of the U.S. Government, such as obligations of the Federal Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage Corporation. The Fund may also invest in obligations of international agencies, foreign debt securities (both U.S. and non-U.S. dollar denominated), mortgage-backed and other asset-backed securities, municipal obligations, zero coupon securities, and restricted securities issued in private placements. For liquidity and defensive purposes, the Fund may invest in money market securities such as commercial paper, bankers' acceptances, and certificates of deposit issued by domestic and foreign branches of U.S. banks. The Fund may also enter into repurchase agreements with respect to U.S. Government securities. All of the Fund's debt securities will be investment grade, that is, rated Baa or above by Moody's or BBB by S&P. Moreover, at least 75% of these securities will be high grade, that is, rated within the three highest quality ratings of Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or, if unrated, judged to be of equivalent quality as determined by the Fund Manager at the time of purchase. Securities must also meet credit standards applied by the Fund Manager. Moreover, the Fund does not purchase debt securities rated below Baa by Moody's or BBB by S&P. Should the rating of a portfolio security be downgraded the Fund Manager will determine whether it is in the best interest of the Fund to retain or dispose of the security. AARP Growth and Income Fund. From investments primarily in common stocks and securities convertible into common stocks, the Fund seeks to provide long- term capital growth and income, and to keep the value of its shares more stable than other growth and income mutual funds. The Fund invests primarily in common stocks and securities convertible into common stocks. It also may invest in rights to purchase common stocks of companies offering the prospect for capital growth and growth of earnings while paying current dividends. The Fund may also invest in preferred stocks consistent with the Fund's objective. Over time, continued growth of earnings tends to produce higher dividends and to enhance capital value. In addition, since 1945, the overall performance of common stocks has exceeded the rate of inflation. For temporary defensive purposes when market and economic conditions warran t, the Fund may also purchase high-quality money market securities (such as U.S. Treasury bills, commercial paper, certificates of deposit and bankers' acceptances) and repurchase agreements. AARP Capital Growth Fund. From investments primarily in common stocks and securities convertible into common stocks, the Fund seeks to provide long-term capital growth, and to keep the value of its shares more stable than other capital growth mutual funds. Through a broadly diversified portfolio consisting primarily of high quality, medium- to large-sized companies with strong competitive positions in their industries, and relatively low portfolio turnover, the Fund seeks to offer less share price volatility than many growth funds. 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. The securities in which the Fund may invest are described under "AARP Capital Growth Fund" in the Prospectus. 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. However, the Fund reserves the right to invest up to 25% of its total assets (taken at market value) in any one industry. The Fund may regularly invest in repurchase agreements. The Fund may invest in high-quality money market instruments (including U.S. Treasury bills, commercial paper, certificates of deposit, and bankers' acceptances), repurchase agreements and other debt securities for temporary defensive purposes when market and economic conditions warrant. Special Investment Policies of the AARP Funds (See "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.) U.S. Government Securities. U.S. Treasury securities, backed by the full faith and credit of the U.S. Government, include a variety of securities which differ in their interest rates, maturities and times of issuance. Treasury bills have original maturities of one year or less. Treasury notes have original maturities of one to ten years and Treasury bonds generally have original maturities of greater than ten years. U.S. Government agencies and instrumentalities which issue or guarantee securities include, for example, the Export-Import Bank of the United States, the Farmers Home Administration, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Small Business Administration and the Federal Farm Credit Bank. Obligations of some of these agencies and instrumentalities, such as the Export-Import Bank, are supported by the full faith and credit of the United States; others, such as the securities of the Federal Home Loan Bank, by the ability of the issuer to borrow from the Treasury; while still others, such as the securities of the Federal Farm Credit Bank, are supported only by the credit of the issuer. No assurance can be given that the U.S. Government would provide financial support to the latter group of U.S. Government instrumentalities, as it is not obligated to do so. Interest rates on U.S. Government obligations which the AARP Funds may purchase may be fixed or variable. Interest rates on variable rate obligations are adjusted at regular intervals, at least annually, according to a formula reflecting then current specified standard rates, such as 91-day U.S. Treasury bill rates. These adjustments tend to reduce fluctuations in the market value of the securities. Municipal Obligations. Municipal obligations held by AARP High Quality Tax Free Money Fund and AARP Insured Tax Free General Bond Fund are issued by or on behalf of states, territories and possessions of the United States 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". Municipal notes are generally used to provide for short-term capital needs and generally have maturities of one year or less. Municipal notes include: Tax Anticipation Notes; Revenue Anticipation Notes; Bond Anticipation Notes; and Construction Loan Notes. Tax Anticipation Notes are sold to finance working capital needs of municipalities. They are generally payable from specific tax revenues expected to be received at a future date. Revenue Anticipation Notes are issued in expectation of receipt of other types of revenue. Tax Anticipation Notes and Revenue Anticipation Notes are generally issued in anticipation of various seasonal revenue such as income, sales, use and business taxes. Bond Anticipation Notes are sold to provide interim financing and Construction Loan Notes are sold to provide construction financing. These notes are generally issued in anticipation of long-term financing in the market. In most cases, these monies provide for the repayment of the notes. After the projects are successfully completed and accepted, many projects receive permanent financing through the FHA under "Fannie Mae" (the Federal National Mortgage Association) or GNMA. There are, of course, a number of other types of notes issued for different purposes and secured differently than those described above. Municipal bonds, which meet longer-term capital needs and generally have maturities of more than one year when issued, have two principal classifications: "general obligation" bonds and "revenue" bonds. Issuers of general obligation bonds include states, counties, cities, towns and regional districts. The proceeds of these obligations are used to fund a wide range of public projects including the construction or improvement of schools, highways and roads, water and sewer systems and a variety of other public purposes. The basic security of general obligation bonds is the issuer's pledge of its full faith, credit, and taxing power for the payment of principal and interest. The taxes that can be levied for the payment of debt service may be limited or unlimited as to rate or amount or special assessments. The principal security for a revenue bond is generally the net revenues derived from a particular facility or group of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Revenue bonds have been issued to fund a wide variety of capital projects including: electric, gas, water and sewer systems; highways, bridges and tunnels; port and airport facilities; colleges and universities; and hospitals. Although the principal security behind these bonds varies widely, many provide additional security in the form of a debt service reserve fund whose monies may also be used to make principal and interest payments on the issuer's obligations. Housing finance authorities have a wide range of security including partially or fully-insured, rent-subsidized and/or collateralized mortgages, and/or the net revenues from housing or other public projects. In addition to a debt service reserve fund some authorities provide further security in the form of a state's ability (without obligation) to make up deficiencies in the debt reserve fund. Lease rental bonds issued by a state or local authority for capital projects are secured by annual lease rental payments from the state or locality to the authority sufficient to cover debt service on the authority's obligations. Some issues of municipal bonds are payable from United States Treasury bonds and notes held in escrow by a Trustee, frequently a commercial bank. The interest and principal on these U.S. Government securities are sufficient to pay all interest and principal requirements of the municipal securities when due. Some escrowed Treasury securities are used to retire municipal bonds at their earliest call date, while others are used to retire municipal bonds at their maturity. Private activity bonds, although nominally issued by municipal authorities, are generally not secured by the taxing power of the municipality but are secured by the revenues of the authority derived from payments by an industrial or other non-governmental user. Securities purchased for either Fund may include variable/floating rate instruments, variable mode instruments, put bonds, and other obligations which have a specified maturity date but also are payable before maturity after notice by the holder ("demand obligations"). Demand obligations are considered for the AARP Funds' purposes to mature at the demand date. There are, in addition, a variety of hybrid and special types of municipal obligations as well as numerous differences in the security of municipal obligations both within and between the two principal classifications (i.e., notes and bonds) discussed above. An entire issue of municipal obligations may be purchased by one or a small number of institutional investors such as the AARP Funds. Thus, such an issue may not be said to be publicly offered. Unlike securities which must be registered under the Securities Act of 1933 prior to offer and sale unless an exemption from such registration is available, municipal obligations which are not publicly offered may nevertheless be readily marketable. A secondary market exists for municipal obligations which have not been publicly offered initially. Obligations purchased for a Fund are subject to the limitations on holdings of securities which are not readily marketable based on whether it may be sold in a reasonable time consistent with the customs of the municipal markets (usually seven days) at a price (or interest rate) which accurately reflects its recorded value. The AARP Funds believe that the quality standards applicable to their investments enhance marketability. In addition, stand-by commitments, participation interests and demand obligations also enhance marketability. For the purpose of the AARP Funds' investment restrictions, the identification of the "issuer" of municipal obligations which are not general obligation bonds is made by the Fund Manager on the basis of the characteristics of the obligation as described above, the most significant of which is the source of funds for the payment of principal and interest on such obligations. Municipal Lease Obligations and Participation Interests. Participation interests represent undivided interests in municipal leases, installment purchase contracts, conditional sales contracts or other instruments. These are typically issued by a Trust or other entity which has received an assignment of the payments to be made by the state or political subdivision under such leases or contracts. Each AARP Tax Free Fund may purchase from banks participation interests in all or part of specific holdings of municipal obligations, provided the participation interest is fully insured. Each participation is backed by an irrevocable letter of credit or guarantee of the selling bank that the AARP Funds' investment adviser has determined meets the prescribed quality standards of the Fund. Thus either the credit of the issuer of the municipal obligation or the selling bank, or both, will meet the quality standards of the particular Fund. Each Fund has the right to sell the participation back to the bank after seven days' notice for the full principal amount of the Fund's interest in the municipal obligation plus accrued interest, but only (1) as required to provide liquidity to the Fund, (2) to maintain a high quality investment portfolio or (3) upon a default under the terms of the municipal obligation. The selling bank will receive a fee from the Fund in connection with the arrangement. Neither Fund will purchase participation interests unless it receives an opinion of counsel or a ruling of the Internal Revenue Service satisfactory to the Trustees that interest earned by that Fund on municipal obligations on which it holds participation interests is exempt from Federal income tax. A municipal lease obligation may take the form of a lease, installment purchase contract or conditional sales contract which is issued by a state or local government and authorities to acquire land, equipment and facilities. Income from such obligations is generally exempt from state and local taxes in the state of issuance. Municipal lease obligations frequently involve special risks not normally associated with general obligations or revenue bonds. Leases and installment purchase or conditional sale contracts (which normally provide for title in the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental issuers to acquire property and equipment without meeting the constitutional and statutory requirements for the issuance of debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion in many leases or contracts of "non-appropriation" clauses that relieve the governmental issuer of any obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis. In addition, such leases or contracts may be subject to the temporary abatement of payments in the event the issuer is prevented from maintaining occupancy of the leased premises or utilizing the leased equipment. Although the obligations may be secured by the leased equipment or facilities, the disposition of the property in the event of nonappropriation or foreclosure might prove difficult, time consuming and costly, and result in a delay in recovery or the failure to fully recover a Fund's original investment. Certain municipal lease obligations and participation interests may be deemed illiquid for the purpose of a Fund's limitation on investments in illiquid securities. Other municipal lease obligations and participation interests acquired by a Fund may be determined by the Fund Manager to be liquid securities for the purpose of such limitation. In determining the liquidity of municipal lease obligations and participation interests, the Fund Manager will consider a variety of factors including: (1) the willingness of dealers to bid for the security; (2) the number of dealers willing to purchase or sell the obligation and the number of other potential buyers; (3) the frequency of trades or quotes for the obligation; and (4) the nature of the marketplace trades. In addition, the Fund Manager will consider factors unique to particular lease obligations and participation interests affecting the marketability thereof. These include the general creditworthiness of the issuer, the importance to the issuer of the property covered by the lease and the likelihood that the marketability of the obligation will be maintained throughout the time the obligation is held by a Fund. A Fund may purchase participation interests in municipal lease obligations held by a commercial bank or other financial institution. Such participations provide a Fund with the right to a pro rata undivided interest in the underlying municipal lease obligations. In addition, such participations generally provide a Fund with the right to demand payment, on not more than seven days' notice, of all or any part of such Fund's participation interest in the underlying municipal lease obligation, plus accrued interest. Each Fund will only invest in such participations if, in the opinion of bond counsel, counsel for the issuers of such participations or counsel selected by the Fund Manager, the interest from such participations is exempt from regular federal income tax and state income tax for each state specific fund. Stand-by Commitments. Pursuant to an exemptive order from the SEC, each AARP Tax Free Fund may acquire "stand-by commitments," which will enable the Fund to improve its portfolio liquidity by making available same-day settlements on sales of its securities. A stand-by commitment is a right acquired by a Fund, when it purchases a municipal obligation from a broker, dealer or other financial institution ("seller"), to sell up to the same principal amount of such securities back to the seller, at the Fund's option, at a specified price. Stand-by commitments are also known as "puts". Each Fund's investment policies permit the acquisition of stand-by commitments solely to facilitate portfolio liquidity and not to protect against changes in the market price of the Fund's portfolio securities. The exercise by a Fund of a stand-by commitment is subject to the ability of the other party to fulfill its contractual commitment. Stand-by commitments acquired by a Fund will have the following features: (1) they will be in writing and will be physically held by the Fund's custodian; (2) a Fund's right to exercise them will be unconditional and unqualified; (3) they will be entered into only with sellers which in the Fund Manager's opinion present a minimal risk of default; (4) although stand-by commitments will not be transferable, municipal obligations purchased subject to such commitments may be sold to a third party at any time, even though the commitment is outstanding; and (5) their exercise price will be (i) the Fund's acquisition cost (excluding any accrued interest which the Fund paid on their acquisition), less any amortized market premium or plus any amortized original issue discount during the period the Fund owned the securities, plus (ii) all interest accrued on the securities since the last interest payment date. Each Fund expects that stand-by commitments generally will be available without the payment of any direct or indirect consideration. However, if necessary or advisable, a Fund will pay for stand-by commitments, either separately in cash or by paying a higher price for portfolio securities which are acquired subject to the commitments. As a matter of policy, the total amount "paid" by a Fund in either manner for outstanding stand-by commitments will not exceed 1/2 of 1% of the value of its total assets calculated immediately after any stand-by commitment is acquired. It is difficult to evaluate the likelihood of use or the potential benefit of a stand-by commitment. Therefore, it is expected that the Trustees will determine that stand-by commitments ordinarily have a "fair value" of zero, regardless of whether any direct or indirect consideration was paid. However, if the market price of the security subject to the stand-by commitment is less than the exercise price of the stand-by commitment, such security will ordinarily be valued at such exercise price. Where a Fund has paid for a stand-by commitment, its cost will be reflected as unrealized depreciation for the period during which the commitment is held. There is no assurance that stand-by commitments will be available to a Fund nor does either Fund assume that such commitments would continue to be available under all market conditions. Third Party Puts. The AARP Tax Free Funds may also purchase long-term fixed rate bonds that have been coupled with an option granted by a third party financial institution allowing a Fund at specified intervals (not exceeding 397 calendar days in the case of AARP High Quality Tax Free Money Fund) to tender (or "put") the bonds to the institution and receive the face value thereof (plus accrued interest). These third party puts are available in several different forms, may be represented by custodial receipts or Trust certificates and may be combined with other features such as interest rate swaps. The Fund receives a short-term rate of interest (which is periodically reset), and the interest rate differential between that rate and the fixed rate on the bond is retained by the financial institution. The financial institution granting the option does not provide credit enhancement, and in the event that there is a default in the payment of principal or interest, or downgrading of a bond to below investment grade, or a loss of the bond's tax-exempt status, the put option will terminate automatically, the risk to the Fund will be that of holding such a long-term bond and the weighted average maturity of the Fund's portfolio would be adversely affected. These bonds coupled with puts may present the same tax issues as are associated with Stand-By Commitments discussed above. As with any Stand-By Commitments acquired by the Funds, each Fund intends to take the position that it is the owner of any municipal obligation acquired subject to a third-party put, and that tax-exempt interest earned with respect to such municipal obligations will be tax-exempt in its hands. There is no assurance that the Internal Revenue Service will agree with such position in any particular case. Additionally, the federal income tax treatment of certain other aspects of these investments, including the treatment of tender fees and swap payments, in relation to various regulated investment company tax provisions is unclear. However, the Fund Manager intends to manage the Funds' portfolios in a manner designed to minimize any adverse impact from these investments. Repurchase Agreements. Each of the AARP Funds may enter into repurchase agreements with any member bank of the Federal Reserve System and any broker-dealers which are recognized as a reporting government securities dealer, whose creditworthiness has been determined by the Fund Manager to be at least equal to that of issuers of commercial paper rated within the two highest grades assigned by any of the nationally-recognized rating services including Moody's and S&P, two of the most widely recognized rating services for the types of securities in which a Fund invests. A repurchase agreement, which provides a means for a Fund to earn income on monies for periods as short as overnight, is an arrangement under which the purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller agrees, at the time of sale, to repurchase the Obligation at a specified time and price. The repurchase price may be higher than the purchase price, the difference being income to the Fund, or the purchase and repurchase prices may be the same, with interest at a stated rate due to the Fund at the time of repurchase. In either case, the income to the Fund is unrelated to the interest rate on the Obligation itself. For purposes of the Investment Company Act of 1940, a repurchase agreement is deemed to be a loan to the seller of the Obligation and is therefore covered by each Fund's investment restriction applicable to loans. Each repurchase agreement entered into by a Fund requires that if the market value of the Obligation becomes less than the repurchase price (including interest), a Fund will direct the seller of the Obligation, on a daily basis to deliver additional securities so that the market value of all securities subject to the repurchase agreement will equal or exceed the repurchase price. In the event that a Fund is unsuccessful in seeking to enforce the contractual obligation to deliver additional securities, and the seller defaults on its obligation to repurchase, the Fund bears the risk of any drop in market value of the Obligation(s). In the event that bankruptcy or insolvency proceedings were commenced with respect to a bank or broker-dealer before its repurchase of the Obligation, a 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. In the case of repurchase agreements, it is not clear whether a court would consider a repurchase agreement as being owned by the particular Fund or as being collateral for a loan by the Fund. If a court were to characterize the transaction as a loan and the Fund had not perfected a security interest in the Obligation, the Fund could be required to return the Obligation to the bank's estate and be treated as an unsecured creditor. As an unsecured creditor, the Fund would be at the risk of losing some or all of the principal and income involved in that transaction. The Fund Manager seeks to minimize the risk of loss through repurchase agreements by analyzing the creditworthiness of the obligor, in this case the seller of the Obligations. Securities subject to a repurchase agreement are held in a segregated account, and the amount of such securities is adjusted so as to provide a market value at least equal to the repurchase price on a daily basis. Each of the AARP Income Funds has adopted a policy, which may be changed without the vote of the shareholders of those funds, not to invest more than 50% of its total assets in repurchase agreements. In addition, none of the AARP Funds may invest more than 10% of its total assets in repurchase agreements maturing in more than seven days. (See "Investment Restrictions", herein, regarding requirements for a majority vote.) Loans of Portfolio Securities. Each Fund may lend its portfolio securities provided: (1) the loan is secured continuously by collateral consisting of U.S. Government securities or cash or cash equivalents adjusted daily to have a market value at least equal to the current market value of the securities loaned; (2) the Fund may at any time call the loan and regain the securities loaned; (3) the Fund will receive any interest or dividends paid on the loaned securities; and (4) the aggregate market value of securities loaned will not at any time exceed one-third of the total assets of the Fund. In addition, it is anticipated that the Fund may share with the borrower some of the income received on the collateral for the loan or that it will be paid a premium for the loan. In determining whether to lend securities, the Fund's investment adviser considers all relevant factors and circumstances including the creditworthiness of the borrower. The AARP Funds have no current intention of lending their portfolio securities. Securities Purchased on a "Forward Delivery" or "When-Issued" Basis. Debt securities, including municipal obligations when originally issued, are frequently offered on a "forward delivery" or "when-issued" basis and may be purchased on this basis by the AARP Money, Income and Tax Free Funds, and the AARP Balanced Stock and Bond Fund. When so offered, the price, which may be expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment for the when-issued securities take place at a later date. Normally, the settlement date occurs within one month of the purchase of U.S. Government obligations. During the period between purchase and settlement, no payment is made on behalf of the Fund and no interest accrues to the Fund. To the extent that assets of the Fund are not invested prior to the settlement of a purchase of securities, the Fund will earn no income; however, it is the intention of each Fund to be fully invested to the extent practicable, subject to the policies stated above. While securities purchased on a forward delivery or when-issued basis may be sold prior to the settlement date, each of the above Funds intends to purchase such securities with the purpose of actually acquiring them for its portfolio unless a sale appears desirable for investment reasons. At the time the commitment to purchase a debt security on a forward delivery or when-issued basis is made, the transaction will be recorded and the value of the security will be reflected in determining its net asset value. The market value of the when-issued or forward delivery securities may be more or less than the purchase price payable at settlement date. The Funds do not believe that their net asset value or income will be adversely affected by their purchase of debt securities on a when-issued or forward delivery basis. Each Fund will establish with its custodian a segregated account in which it will maintain cash, U.S. Government securities and other high-quality debt obligations equal in value to commitments for when-issued or forward delivery securities. Such segregated securities either will mature or, if necessary, be sold on or before the settlement date. Futures Contracts. The AARP Income Funds, the AARP Insured Tax-Free General Bond Fund, and the AARP Balanced Stock and Bond Fund may each enter into financial futures contracts. Such contracts may be either based on indices of particular groups or varieties of securities ("Index Futures Contracts") or be for the purchase or sale of debt obligations ("Debt Futures Contracts"). Such futures contracts are traded on exchanges licensed and regulated by the Commodity Futures Trading Commission. Each Fund enters into futures contracts to gain a degree of protection against anticipated changes in interest rates that would otherwise have an adverse effect upon the economic interests of the Fund. However, the costs of and possible losses from futures transactions reduce the Funds' yield from interest on its holdings of debt securities. Income from futures transactions constitutes taxable gain. For each Fund, the custodian places cash, U.S. government securities and other high grade debt obligations into a segregated account in an amount equal to the value of the total assets committed to the consummation of futures positions. If the value of the securities placed in the segregated account declines, additional cash or securities are required to be placed in the account on a daily basis so that the value of the account equals the amount of a Fund's commitments with respect to such contracts. Alternatively, a Fund may cover such positions by purchasing offsetting positions, or covering such positions partly with cash, U.S. government securities and other high grade debt obligations, and partly with offsetting positions. An Index Futures Contract is a contract to buy or sell units of a particular index of securities at a specified future date at a price agreed upon when the contract is made. Index Futures Contracts typically specify that no delivery of the actual securities making up the index takes place. Instead, upon termination of the contract, final settlement is made in cash based on the difference between the contract price and the actual price on the termination date of the units of the index. A Debt Futures Contract is a binding contractual commitment which, if held to maturity, requires a Fund to make or accept delivery, during a particular month, of obligations having a standardized face value and rate of return. By purchasing a Debt Futures Contract, a Fund legally obligates itself to accept delivery of the underlying security and to pay the agreed price; by selling a Debt Futures Contract it legally obligates itself to make delivery of the security against payment of the agreed price. However, positions taken in the futures markets are not normally held to maturity. Instead they are liquidated through offsetting transactions which may result in a profit or loss. While Debt Futures Contract positions taken by a Fund are usually liquidated in this manner, a Fund may instead make or take delivery of the underlying securities whenever it appears economically advantageous. A clearing corporation, associated with the exchange on which futures contracts are traded, assumes responsibility for close-outs of such contracts and guarantees that the sale or purchase, if still open, is performed on the settlement date. By entering into futures contracts, a Fund seeks to establish more certainly than would otherwise be possible the effective rate of return on its portfolio securities. A Fund may, for example, take a "short" position in the futures markets by selling a Debt Futures Contract for the future delivery of securities held by the Fund in order to hedge against an anticipated rise in interest rates that would adversely affect the value of such securities. Or it might sell an Index Futures Contract based on a group of securities whose price trends show a significant correlation with those of securities held by the Fund. When hedging of this character is successful, any depreciation in the value of portfolio securities is substantially offset by appreciation in the value of the futures position. On other occasions a Fund may take a "long" position by purchasing futures contracts. This is done when the Fund is not fully invested or expects to receive substantial proceeds from the sale of portfolio securities or of Fund shares, and anticipates the future purchase of particular securities but expects the rate of return then available in the securities markets to be less favorable than rates that are currently available in the futures markets. The Funds expect that, in the normal course, securities will be purchased upon termination of the long futures position, but under unusual market conditions, a long futures position may be terminated without a corresponding purchase of securities. Debt Futures Contracts, however, currently involve only taxable obligations and do not encompass municipal securities. The value of Debt Futures Contracts on taxable securities, as well as Index Futures Contracts, may not vary in direct proportion with the value of a Fund's securities, limiting the ability of the Fund to hedge effectively against interest rate risk. Presently the only available index futures contract in which the AARP Insured Tax Free General Bond Fund might invest is the Bond Buyer Municipal Bond Index. The Fund might sell a contract based on this index in anticipation of an increase in interest rates, to attempt to offset the decrease in market value of its portfolio securities which could result. Or the Fund might purchase such a contract in the anticipation of a significant decrease in interest rates to offset the increased cost of securities it hopes to purchase in the future. No index futures contracts have yet been developed which are suitable for investment by the Funds in the AARP Income Trust. The investment restriction concerning futures contracts does not specify the types of index-based futures contracts into which the Funds may enter because it is impossible to foresee what particular indices may be developed and traded or may prove useful to the Funds in implementing their overall risk management strategies. For example, price trends for a particular index-based futures contract may show a significant correlation with price trends in the securities held by the Funds, or either of them, even though the securities comprising the index are not necessarily identical to those held by such Fund or Funds. In any event, the Funds would not enter into a particular index-based futures contract unless the Adviser determined that such a correlation existed. Index Futures Contracts and Debt Futures Contracts currently are actively traded on the Chicago Board of Trade and the International Monetary Market at the Chicago Mercantile Exchange. Options on Futures Contracts. To attempt to gain additional protection against the effects of interest rate fluctuations, each of the AARP Income Funds, the AARP Insured Tax Free General Bond Fund and the AARP Balanced Stock and Bond Fund may purchase and write (sell) put and call options on futures contracts that are traded on a U.S. exchange or board of trade and enter into related closing transactions. There can be no assurance that such closing transactions will be available at all times. In return for the premium paid, such an option gives the purchaser the right to assume a position in a futures contract at any time during the option period for a specified exercise price. A Fund may purchase put options on futures contracts in lieu of, and for the same purpose as, sale of a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. The purchase of call options on futures contracts is intended to serve the same purpose as the actual purchase of the futures contracts. A Fund may purchase call options on futures contracts in anticipation of a market advance when it is not fully invested. A Fund may write (sell) a call option on a futures contract in order to hedge against a decline in the prices of the index or debt securities underlying the futures contracts. If the price of the futures contract at expiration is below the exercise price, the Fund would retain the option premium, which would offset, in part, any decline in the value of its portfolio securities. The writing (selling) of a put option on a futures contract is similar to the purchase of the futures contracts, except that, if market price declines, a Fund would pay more than the market price for the underlying securities or index units. The net cost to that Fund would be reduced, however, by the premium received on the sale of the put, less any transactions costs. Limitations on Futures Contracts and Options on Futures Contracts. A Fund will not engage in transactions in futures contracts or related options for speculation but only as a hedge against changes resulting from market conditions in the values of debt securities held in its portfolio or which it intends to purchase and where the transactions are appropriate to the reduction of the Fund's risks. The Trustees have adopted policies (which are not Fundamental and may be modified by the Trustees without a shareholder vote) that, immediately after the purchase for a Fund of a futures contract or a related option, the value of the aggregate initial margin deposits with respect to all futures contracts (both for receipt and delivery), and premiums paid on related options, entered into on behalf of the Fund will not exceed 5% of the fair market value of the Fund's total assets. Additionally, the value of the aggregate premiums paid for all put and call options held by a Fund will not exceed 20% of its net assets. Futures contracts and put options written (sold) by a Fund will be offset by assets of the Fund held in a segregated account in an amount sufficient to satisfy obligations under such contracts and options. Each Fund has received from the CFTC an interpretative letter confirming its opinion that it is not a "commodity pool" as defined under the Commodity Exchange Act. To ensure that its futures transactions meet this definition, each Fund will enter into them for the purposes and with the hedging intent specified in CFTC regulations. It will further determine that the price fluctuations in the futures contracts used for hedging are substantially related to price fluctuations in securities held by the Fund or which it expects to purchase, though there can be no assurance this result will be achieved. The Funds' futures transactions will be entered into for traditional hedging purposes -- that is, futures contracts will be sold (or related put options purchased) to protect against a decline in the price of securities that a Fund owns, or futures contracts (or related call options) will be purchased to protect the Fund against an increase in the price of securities it intends to purchase. As evidence of this hedging intent, each Fund expects that approximately 75% of its long futures positions (purchases of futures contracts or call options on futures contracts) will be "completed"; that is, upon sale (or other termination) of these long contracts, the Fund will have purchased, or will be in the process of, purchasing, equivalent amounts of related securities in the cash market. However, under unusual market conditions, a long futures position may be terminated without the corresponding purchase of securities. Covered Call Options. Each of the AARP Growth Funds and each of the AARP Income Funds may write (sell) covered call options on their portfolio securities in an attempt to enhance investment performance. The writing of covered call options by each Fund is subject to limitations imposed by certain state securities authorities. The Funds have been advised that, under the most restrictive of such limitations currently in effect, no more than 25% of a Fund's net assets may be subject to covered options. Further, such states advise that, unless an exception is granted with respect to certain transactions in debt securities and related options, such options and the securities underlying the call must both be listed on national securities exchanges. When a Fund writes (sells) a covered call option, it gives the purchaser of the option the right to buy the underlying security at the price specified in the option (the "exercise price") at any time during the option period, generally ranging up to nine months. If the option expires unexercised, the Fund will realize gain to the extent of the amount received for the option (the "premium") less any commission paid. If the option is exercised, a decision over which the Fund has no control, the Fund must sell the underlying security to the option holder at the exercise price. By writing a covered option, the Fund forgoes, in exchange for the premium less the commission ("net premium"), the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price. When a Fund sells an option, an amount equal to the net premium received by the Fund is included in the liability section of the Fund's Statement of Assets and Liabilities as a deferred credit. The amount of the deferred credit will be subsequently marked-to-market to reflect the current market value of the option written. The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. If an option expires on its stipulated expiration date or if the Fund enters into a closing purchase transaction (i.e., the Fund terminates its obligation as the writer of the option by purchasing a call option on the same security with the same exercise price and expiration date as the option previously written), the Fund will realize a gain (or loss if the cost of a closing purchase transaction exceeds the net premium received when the option was sold) and the deferred credit related to such option will be eliminated. If an option is exercised, the Fund will realize a long-term or short-term gain or loss from the sale of the underlying security and the proceeds of the sale will be increased by the net premium originally received. The writing of covered options may be deemed to involve the pledge of the securities against which the option is being written. Securities against which options are written will be segregated on the books of the Fund's custodian. Purchasing Options on Stock Indices. To protect the value of their portfolios against declining stock prices, each of the AARP Growth Funds may purchase put options on stock indices. To protect against an increase in the value of securities that it wants to purchase, a Fund may purchase call options on stock indices. A stock index (such as the Standard & Poor's 500) assigns relative values to the common stocks included in the index and the index fluctuates with the changes in the market values of the common stocks so included. Options on stock indices are similar to options on stock except that, rather than giving the purchaser the right to take delivery of stock at a specified price, an option on a stock index gives the purchaser the right to receive cash. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars, times a specified multiple (the "multiplier"). The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Gain or loss with respect to options on stock indices depends on price movements in the stock market generally rather than price movements in individual stocks. The multiplier for an index option performs a function similar to the unit of trading for a stock option. It determines the total dollar value per contract of each point in the difference between the exercise price of an option and the current level of the underlying index. A multiplier of 100 means that a one-point difference will yield $100. Options on different indices may have different multipliers. Because the value of a stock index option depends upon movements in the level of the stock index rather than the price of a particular stock, whether a Fund will realize a gain or loss on the purchase of a put or call option on a stock index depends upon movements in the level of stock prices in the stock market generally or in an industry or market segment rather than movements in the price of a particular stock. Accordingly, successful use by a Fund of both put and call options on stock indices will be subject to the Fund Manager's ability to accurately predict movements in the direction of the stock market generally or of a particular industry. In cases where the Fund Manager's prediction proves to be inaccurate, a Fund will lose the premium paid to purchase the option and it will have failed to realize any gain. In addition, a Fund's ability to hedge effectively all or a portion of its securities through transactions in options on stock indices (and therefore the extent of its gain or loss on such transactions) depends on the degree to which price movements in the underlying index correlate with price movements in the Fund's securities. Inasmuch as such securities will not duplicate the components of an index, the correlation probably will not be perfect. Consequently, a Fund will bear the risk that the prices of the securities being hedged will not move in the same amount as the option. This risk will increase as the composition of a Fund's portfolio diverges from the composition of the index. Over-the-counter options ("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. A Fund will only sell OTC options (other than OTC currency options) that are subject to a buy-back provision permitting a Fund to require the Counterparty to sell the option back to the Fund at a formula price within seven days. A 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 a Fund or fails to make a cash settlement payment due in accordance with the terms of that option, the Fund will lose any premium it paid for the option as well as any anticipated benefit of the transaction. Accordingly, the Fund Manager 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. A Fund will engage in OTC option transactions only with United States 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 other nationally recognized statistical rating organization ("NRSRO"). The staff of the SEC currently takes the position that OTC options purchased by a Fund, and portfolio securities "covering" the amount of a 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 a Fund's limitation on investing no more than 10% of its assets in illiquid securities. OTC options entered into by a 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 Fund sells these instruments it will only segregate an amount of assets equal to its accrued net obligations, as there is no requirement for payment or delivery of amounts in excess of the net amount. These amounts will equal 100% of the exercise price in the case of a non cash-settled put, the same as an OCC guaranteed listed option sold by the 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 a Fund sells a call option on an index at a time when the in-the-money amount exceeds the exercise price, the 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 Fund other than those above generally settle with physical delivery, and the Fund will segregate an amount of assets equal to the full value of the option. OTC options settling with physical delivery, or with an election of either physical delivery or cash settlement will be treated the same as other options settling with physical delivery. Risks of Futures and Options Investments. A Fund will incur brokerage fees in connection with its futures and options transactions, and it will be required to segregate Funds for the benefit of brokers as margin to guarantee performance of its futures and options contracts. In addition, while such contracts will be entered into to reduce certain risks, trading in these contracts entails certain other risks. Thus, while a Fund may benefit from the use of futures contracts and related options, unanticipated changes in interest rates may result in a poorer overall performance for that Fund than if it had not entered into any such contracts. Additionally, the skills required to invest successfully in futures and options may differ from skills required for managing other assets in the Fund's portfolio. The AARP Growth Funds may engage in over-the-counter options transactions with broker-dealers who make markets in these options. The Fund Manager will consider risk factors such as their creditworthiness when determining a broker-dealer with which to engage in options transactions. The ability to terminate over-the-counter option positions is more limited than with exchange-traded option positions because the predominant market is the issuing broker rather than an exchange, and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. Certain over-the-counter options may be deemed to be illiquid securities and may not be readily marketable. The Fund Manager will monitor the creditworthiness of dealers with whom the Funds enter into such options transactions under the general supervision of the Funds' Trustees. Convertible Securities. Convertible securities include convertible bonds, notes and debentures, convertible preferred stocks, and other securities that give the holder the right to exchange the security for a specific number of shares of common stock. Convertible securities entail less credit risk than the issuer's common stock because they are considered to be "senior" to common stock. Convertible securities generally offer lower interest or dividend yields than non-convertible debt securities of similar quality. They may also reflect changes in value of the underlying common stock. Foreign Securities. All the Funds in the AARP Growth Trust may invest without limit in foreign securities. The AARP High Quality Bond Fund may invest without limit in U.S. dollar denominated foreign securities. The AARP Money Funds may currently invest in U.S. dollar-denominated certificates of deposit and bankers' acceptances of foreign branches of large U.S. banks. Investors should recognize that investing in foreign securities involves certain special considerations, including those set forth below, which are not typically associated with investing in United States securities and which may favorably or unfavorably affect the Funds' 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 United States and, at times, volatility of price can be greater than in the United States. Fixed commissions on some foreign securities exchanges and bid to asked spreads in foreign bond markets are generally higher than commissions on bid to asked spreads on U.S. markets, although the Funds will endeavor to achieve the most favorable net results on their portfolio transactions. There is generally less government supervision and regulation of securities exchanges, brokers and listed companies than in the United States. It may be more difficult for the Funds' agents to keep currently informed about corporate actions which may affect the prices of portfolio securities. Communications between the United States and foreign countries may be less reliable than within the United States, 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 United States investments in those countries. Investments in foreign securities may also entail certain risks such as possible currency blockages or transfer restrictions, and the difficulty of enforcing rights in other countries. Moreover, individual foreign economies may differ favorably or unfavorably from the United States economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Further, to the extent investments in foreign securities involve currencies of foreign countries, the Funds may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations and may incur costs in connection with conversion between currencies. Investments in companies domiciled in developing countries may be subject to potentially greater risks than investments in developed countries. The possibility of revolution and the dependence on foreign economic assistance may be greater in these countries than in developed countries. The management of each Fund seeks to mitigate the risks associated with these considerations through diversification and active professional management. Forward Foreign Currency Exchange Contracts. Each of the AARP Growth Funds may enter into forward foreign currency exchange contracts in connection with its investments in foreign securities. A forward foreign currency exchange contract ("forward contract") involves an obligation to purchase or sell 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. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. The maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in a given month, and forward contracts may be in any amount agreed upon by the parties rather than predetermined amounts. Also, forward contracts are traded directly between banks or currency dealers so that no intermediary is required. A forward contract generally requires no margin or other deposit. Closing transactions with respect to forward contracts are effected with the currency trader who is a party to the original forward contract. The Funds may enter into foreign currency futures contracts in several circumstances. First, when the Funds enter into a contract for the purchase or sale of a security denominated in a foreign currency, or when the Funds anticipates the receipt in a foreign currency of interest and dividend payments on such a security which it holds, the Funds may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of such interest and dividend payment, as the case may be. By entering into a forward contract for the purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign currency involved in the underlying transactions, the Funds will attempt to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend payment is declared, and the date on which such payments are made or received. The Funds' activities involving forward contracts may be limited by the requirements of Subchapter M of the Internal Revenue Code for qualification as a regulated investment company. General Investment Policies of the AARP Funds Changes in portfolio securities are made on the basis of investment considerations and it is against the policy of management to make changes for trading purposes. The AARP Funds have no present intention of acquiring restricted securities, though they have limited authority to do so (see "Investment Restrictions"). The AARP Funds cannot guarantee a gain or eliminate the risk of loss. The net asset value of a non-money market Fund's shares will increase or decrease with changes in the market prices of the Fund's investments and there is no assurance that a Fund's objective(s) will be achieved. Except where otherwise indicated, the objectives and policies stated above may be changed by the Trustees without a vote of the shareholders. Investment Restrictions The following restrictions may not be changed with respect to a Fund without the approval of a majority of the outstanding voting securities of such Fund which, under the Investment Company Act of 1940 ("the 1940 Act") and the rules thereunder and as used in this Statement of Additional Information, means the lesser of (1) 67% of the shares of such Fund present at a meeting if the holders of more than 50% of the outstanding shares of such Fund are present in person or by proxy, or (2) more than 50% of the outstanding shares of such Fund. (A) None of the Funds may: (1) borrow money, except for temporary or emergency purposes and not for investment purposes or except in connection with reverse repurchase agreements; provided that a Fund maintains asset coverage of 300% for all borrowings; (2) underwrite any securities issued by other persons, except that it may be deemed an underwriter in connection with the disposition of portfolio securities of the Fund; (3) purchase or sell real estate, but this shall not prevent a Fund from investing in (i) securities of companies which deal in real estate or mortgages, and (ii) securities secured by real estate or interests therein, and that the Fund reserves freedom of action to hold and to sell real estate acquired as a result of the Fund's ownership of securities; (4) purchase or sell physical commodities, or contracts relating to physical commodities; (5) make loans to other persons, except (i) loans of portfolio securities, and (ii) except to the extent that the entry into repurchase agreements and the purchase of debt securities in accordance with its investment objective and investment policies may be deemed to be loans; (6) issue senior securities except as appropriate to evidence indebtedness which it is permitted to incur and except for shares of the separate classes or series of the Trust, provided that collateral arrangements with respect to currency-related contracts, futures contracts, option or other permitted investments, including deposits of initial and variation margin, are not considered to be the issuance of senior securities for purposes of this restriction; (7) with respect to 75% of each Fund's total net assets, purchase more than 10% of the voting securities of any one issuer or invest more than 5% of the value of the total assets of the Fund in the securities of any one issuer (except for investments in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and except securities of other investment companies); (B) Neither the AARP High Quality Money Fund, the AARP GNMA and U.S. Treasury Fund, the AARP High Quality Bond Fund, the AARP Growth and Income Fund nor the AARP Capital Growth Fund may: (1) purchase any securities which would cause more than 25% of the market value of the total assets of the Fund at the time of such purchase to be invested in the securities of one or more issuers having their principal business activities in the same industry (for this purpose, telephone companies are considered to be a separate industry from gas and electric public utilities, and wholly-owned finance companies are considered to be in the industry of their parents if their activities are primarily related to financing the activities of the parents), provided that there is no limitation in respect to investments in the U.S. Government or its agencies or instrumentalities or, in the case of AARP High Quality Money Fund, in certificates of deposit or bankers' acceptances or, in the case of the AARP Growth and Income Funds, to municipal securities other than pollution control and industrial development bonds. (C) Neither the AARP High Quality Tax Free Money Fund nor the AARP Insured Tax Free General Bond Fund may: (1) purchase (i) private activity bonds or (ii) securities which are neither municipal bonds nor securities of the U.S. Government, its agencies or instrumentalities, if in either case the purchase would cause more than 25% of the market value of its total assets at the time of such purchase to be invested in the securities of one or more issuers having their principal business activities in the same industry. For this purpose, telephone companies are considered to be a separate industry from gas and electric public utilities and wholly- owned finance companies are considered to be in the industry of their parents if their activities are primarily related to financing the activities of their parents provided that, in the case of the AARP High Quality Tax Free Money Fund, there is no limitation in respect to investments in the U.S. Government or its agencies or instrumentalities, or in certificates of deposit or bankers' acceptances. (D) AARP High Quality Tax Free Money Fund may not: (1) purchase securities which are not municipal obligations if such purchase would cause more than 20% of the Fund's total assets to be invested in such securities, except, for temporary defensive purposes, that the Fund may invest more than 20% of its total assets in such securities prior to the time normal operating conditions have been achieved and during other than normal market conditions. The following restrictions are not Fundamental and may be changed by a Fund without shareholder approval, in compliance with applicable law, regulation or regulatory policy. None of the Funds may: (a) make short sales of securities or purchase any securities on margin, except for such short-term credits as are necessary for the clearance of transactions; and, in the case of the AARP Income Funds and AARP Insured Tax Free General Bond Fund in connection with entering into futures contracts and related options; (b) purchase or retain for a Fund the securities of any issuer if those officers and Trustees of a Trust, or partners and officers of its investment adviser, who individually own more than 1/2 of 1% of the outstanding securities of such issuer, together own more than 5% of such outstanding securities; (c) purchase from or sell to any of the officers and Trustees of a Trust, its investment adviser, its principal underwriter or the officers, directors, and partners of its investment adviser or principal underwriter, portfolio securities of a Fund; (d) purchase restricted securities (for these purposes restricted security means a security with a legal or contractual restriction on resale in the principal market in which the security is traded), including repurchase agreements maturing in more than seven days and securities which are not readily marketable if as a result more than 10% of the net assets (valued at market at purchase) would be invested in such securities; (e) purchase securities of any issuer with a record of less than three years continuous operation, including predecessors, and equity securities of issuers that are not readily marketable, except obligations issued or guaranteed by the U.S. Government or its agencies (or, in the case of the AARP Tax-Free Income Funds, municipal securities rated by a recognized municipal bond rating service), if such purchase would cause the investments of that Fund in all such issuers to exceed 5% of the value of the total assets of that Fund; (f) invest its assets in securities of other open-end investment companies, but may invest in closed-end investment companies when such purchases are made in the open market where no commission or profit to a sponsor or dealer result from such purchase other than the customary broker's commission, if after such purchase (a) a Fund would own no more than 3% of the total outstanding voting stock of such investment company, (b) no more than 5% of a Fund's total assets would be invested in the securities of any single investment company, (c) no more than 10% of a Fund's total assets would be invested in the securities of investment companies in the aggregate, or (d) all the investment companies advised by the Fund Manager would own no more than 10% of the total outstanding voting stock of any closed-end company; provided that this restriction shall not preclude acquisition of investment company securities by dividend, exchange offer or reorganization. To the extent that a Fund invests in shares of other investment companies, additional fees and expenses may be deducted from such investments in addition to those incurred by a Fund. Except in the case of the AARP Insured Tax-Free Income Funds, for purposes of this limitation, foreign banks or their agencies or subsidiaries are not considered investment companies; (g) invest in other companies for the purpose of exercising control or management; (h) purchase or sell real estate and real estate limited partnership interests, but this shall not prevent a Fund from investing in securities secured by real estate or interest therein; and (i) purchase or sell commodities, commodities contracts (except, in the case of the AARP income Funds and the AARP Insured Tax Free General Bond Fund, contracts for the future delivery of debt obligations and contracts based on debt indices) or oil, gas or other mineral exploration or development programs or leases (although it may invest in issuers which own or invest in such interests); AARP High Quality Money Fund may not: (j) purchase or sell any put or call options or any combination thereof; or (k) purchase warrants, unless attached to other securities in which the Fund is permitted to invest. Although not a Fundamental policy of the Fund, the Fund has agreed with certain state authorities that the Fund will not invest more than 5% of the value of the Fund's total net assets in securities subject to legal or contractual restrictions on resale. Neither the AARP High Quality Money Fund nor the AARP High Quality Tax Free Money Fund may: (l) pledge, mortgage or hypothecate its assets, except that, to secure borrowings permitted by subparagraph (A) (1) above, it may pledge securities having a value at the time of pledge not exceeding 15% of the cost of the Fund's total assets. Neither of the AARP income Funds may: (m) purchase warrants of any issuer, except that AARP High Quality Bond Fund can purchase warrants on a limited basis. As a result of such purchases by the Fund, no more than 2% of the value of the total assets of the Fund may be invested in warrants which are not listed on the New York Stock Exchange or the American Stock Exchange, and no more than 5% of the value of the total assets of the Fund may be invested in warrants whether or not so listed, such warrants in each case to be valued at the lesser of cost or market, but assigning no value to warrants acquired by the Fund in units with or attached to debt securities; (n) purchase or sell any put or call options or any combination thereof, except that the Fund may write and sell national exchange-listed covered call option contracts on national exchange-listed securities and, to the extent permitted by applicable state regulatory limits, on other debt securities owned by the Fund up to, but not in excess of, 25% of the value of the Fund's net assets at the time such option contracts are written. The Fund may also purchase call options for the purpose of terminating its outstanding obligations with respect to securities upon which covered call option contracts have been written (i.e., "closing purchase transaction"). In connection with the writing of covered call options, the Fund may pledge assets to an extent not greater than 25% of the value of its net assets at the time such options are written. The Fund also may purchase and write options on futures contracts in the manner described under "The Funds' Investment Objectives and Policies"; AARP High Quality Bond Fund has adopted a non-Fundamental policy that it will not underwrite securities issued by entities regulated under Part II of the Federal Power Act. Neither the AARP GNMA and U.S. Treasury Fund nor the AARP High Quality Bond Fund may: (o) pledge, mortgage or hypothecate its assets, (a) except to the extent that the writing of covered call options may be deemed to involve the pledge of securities against which the option is being written, (b) except to the extent that margin deposits on futures contracts and related options may be deemed to involve a pledge of assets to guarantee the performance of the futures obligations, and (c) except to secure borrowings permitted by subparagraph (A) (1) above, it may pledge securities having a value at the time of pledge not exceeding 15% of the cost of the Fund's total assets. Neither AARP Insured Tax Free General Bond Fund nor AARP High Quality Tax Free Money Fund may: (p) purchase or sell any put or call options or combinations thereof, except to the extent that the acquisition of Stand-by Commitments or Participation Interests may be considered the purchase or sale of a put option and except that the AARP Insured Tax Free General Bond Fund may purchase and write options on futures contracts in the manner and to the extent described herein; (q) underwrite securities issued by entities regulated under Part II of the Federal Power Act, provided that, for this purpose private activity bonds the interest on which is exempt from tax under Section 103 of the Internal Revenue Code of 1986 will be treated as obligations of the municipal authority or other governmental unit issuing the bonds. AARP Insured Tax Free General Bond Fund may not: (r) hold for a period of more than 30 days any municipal securities maturing in 60 or more days from purchase by a Fund which are not fully insured or guaranteed directly or indirectly by the U.S. Treasury. (s) pledge, mortgage or hypothecate its assets, except to the extent that margin deposits on futures contracts and related options may be deemed to be a pledge of assets to guarantee performance of such obligations, and except that, to secure borrowings permitted by subparagraph (A) (1) above, it may pledge securities having a value at the time of the pledge not exceeding 15% of the cost of the Fund's total assets; None of the AARP Growth Funds may: (t) purchase or sell any put or call options or any combination thereof, except that the AARP Growth Funds may each purchase and sell options on stock indices in accordance with the requirements of applicable regulations. The AARP Growth Funds may write (sell) covered call option contracts on securities owned by the Fund up to, but not in excess of, 25% of the value of the Fund's net assets at the time such option contracts are written. The AARP Growth Funds may also purchase call options for the purpose of terminating their outstanding obligations with respect to securities upon which covered call option contracts have been written (i.e., "closing purchase transactions"). In connection with the writing of covered call options, the AARP Growth Funds may pledge assets to an extent not greater than 25% of the value of its net assets at the time such options are written; (u) purchase warrants of any issuer if, as a result more than 2% of the value of the total assets of the Fund would be invested in warrants which are not listed on the New York Stock Exchange or the American Stock Exchange, or more than 5% of the value of the total assets of the Fund would be invested in warrants acquired by the Fund in units with or attached to debt securities. (v) purchase securities if, as a result thereof, more than 5% of the value of the net assets would be invested in restricted securities (for these purposes restricted security means a security with a legal or contractual restriction on resale in the principal market in which the security is traded). Neither the AARP Growth and Income Fund nor the AARP Capital Growth Fund may: (w) pledge, mortgage or hypothecate its assets, except as provided in subparagraph (t), above, and except that, to secure borrowings permitted by subparagraph (A) (1) above, it may pledge an amount not exceeding 15% of the Fund's total assets taken at cost; "Value" for the purposes of the above Fundamental and non-Fundamental investment policies shall mean the value used in determining a Fund's net asset value. 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, the restricted activity or, in the case of AARP High Quality Money Fund and the AARP Income Funds, an acquisition or encumbrance of securities or assets of, or borrowings by, the Fund. PURCHASES (See "OPENING AN ACCOUNT" and "ADDING TO YOUR INVESTMENT" in the Prospectus.) General Information Confirmations of each transaction will be sent following the transaction by Scudder Investor Services, Inc., as the AARP Funds' agent. By retaining year-to-date confirmations, an investor will have an historical record of the account activity. Checks A certified check is not necessary, but checks are accepted subject to collection at full face value in United States Funds and must be drawn on a United States financial institution. If shares are purchased by a check which proves to be uncollectible, the Trusts reserve the right to cancel the purchase immediately and the purchaser will be responsible for any loss incurred by the Fund or the principal underwriter by reason of such cancellation. Each Trust has the authority, as agent of the shareholder, to redeem shares in the account to reimburse the Fund or the principal underwriter for any loss incurred. Investors whose orders have been canceled may be prohibited from or restricted in placing future orders in any of the Funds in the Program or in other Funds advised by the AARP Funds' investment adviser or an affiliate. Share Price Accepted purchases for shares in all the AARP Funds will be filled at the net asset value next computed after receipt of payment by check or other means. Each Fund's net asset value per share is currently determined once daily, as of the close of regular trading on the New York Stock Exchange (the "Exchange") (usually 4:00 p.m. Eastern time), on each day the Exchange is open for trading. (See "NET ASSET VALUE," herein for additional information on how the Fund's net asset value is calculated.) Orders received after the close of regular trading will be filled at the next day's net asset value per share for the relevant Fund. There is no sales charge in connection with purchase of shares of any of the AARP Funds. Share Certificates In order to afford ease of redemption, ownership in the AARP Funds is on a non-certified basis. Share certificates now in a shareholder's possession may be sent to the AARP Funds' transfer agent for cancellation and credit to such shareholder's account. Shareholders who prefer may hold the certificates now in their possession until they wish to exchange or redeem such shares. See "EXCHANGING" and "ACCESS TO YOUR INVESTMENT" in the Funds' Prospectus. Direct Deposit Program Investors can have social security or other checks from the U.S. Government or any other regular income checks such as pension, dividends, and even payroll checks automatically deposited directly to their accounts. Investors may allocate a minimum of 25% of their income checks into any AARP Fund. Information may be obtained by contacting the AARP Investment Program from Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll free, 1-800-253-2277. Wire Transfers In the case of wire purchases, failure to receive timely and complete account information will delay investment and subsequent accrual of dividends and will result in the federal funds being returned to the sender on the day following receipt by State Street Bank and Trust Company (the "custodian"). Unlike shareholders subscribing by check, purchasers who wire funds will be able to redeem shares so purchased by any method without any limitation as to the period of time such shares have been on a Fund's books. The bank sending federal funds by bank wire may charge for the service. Presently, Scudder Investor Services, Inc. or the AARP Funds pay a fee for receipt by the custodian of "wired funds," but the right to charge investors for this service is reserved. Holidays Boston banks are closed on certain holidays although the Exchange may be open. These holidays include Martin Luther King, Jr. Day (the 3rd Monday in January), 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 Fund. Other Information All purchase payments will be invested in full and fractional shares. The Trusts and Scudder Investor Services, Inc., the AARP Funds' principal underwriter, each have the right to limit the amount of shares purchased of a Fund, to reject any purchase and to refuse to sell shares to any person. It should be noted that if purchases are made through a member of the National Association of Securities Dealers other than Scudder Investor Services, Inc., that member may, in its discretion, charge a fee for this service. It is the responsibility of the broker, not the AARP Funds, to place the purchase order by the time as of which the net asset value of the Funds is next determined. The Trusts 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 Investment Company Act of 1940. REDEMPTIONS (See "ACCESS TO YOUR INVESTMENT" in the Prospectus.) General Information If a shareholder redeems all shares in an account, the shareholder will receive, in addition to the net asset value thereof, all declared but unpaid dividends thereon. The AARP Funds do not impose a redemption charge. The proceeds of redemption transactions are normally available to be mailed or wired to the designated bank account within one business day, and in any event will be available within seven calendar days, following receipt of a redemption request in good order. A shareholder's right to redeem shares of a Fund and to receive payment therefore may be suspended at times (a) when the Exchange is closed, other than customary weekend and holiday closings, (b) when trading on the Exchange is restricted for any reason, (c) when an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or (d) when the SEC permits a suspension of the right 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. The Trustees may suspend or terminate the offering of shares of a Fund at any time. Redemption by Telephone Redemption by telephone is not available for shares for which share certificates have been issued. Redemptions of such shares must be requested by mail as explained in the section entitled "Redemption by Mail" below. For other investors, the following procedures are available. TO ADDRESS OF RECORD: New investors automatically receive the option, without having to elect it, to redeem by telephone to their address of record for any amount up to $50,000 per Fund. Telephone Redemption to Address of Record may be used as long as the account registration address has not changed within the last 30 days. In order to decline this feature, the shareholder must notify the Program in writing. Any shareholder who refuses Telephone Redemption to Address of Record can later establish the feature with a signature guaranteed written request. This request must be done prior to utilizing this service for the first time. TO YOUR BANK--BY MAIL OR BY WIRE: In order to request redemptions by telephone to their bank, shareholders must have completed the telephone redemption authorization included in the enrollment form and have sent the authorization to the Program. This authorization requires designation of a bank account to which the redemption payment is to be sent. The proceeds will be mailed or wired only to the designated bank account. (a) NEW INVESTORS wishing to establish telephone redemption to a predesignated bank account must complete the appropriate section on the enrollment form, and send it to the Program. (b) EXISTING SHAREHOLDERS who wish to establish telephone redemption to a predesignated bank account or who want to change the bank account previously designated to receive redemption payments should either enter the new information on the "Telephone Option Form" which may be obtained by calling the Program, or send a signature guaranteed letter identifying the account and specifying the exact information to be changed. In each case, the letter must be signed exactly as the shareholder's name(s) appears on the account. All requests for telephone redemption should be accompanied by a voided check from the designated bank account. All signatures will require a guarantee, which can be obtained from most banks, credit unions or savings associations, or from broker/dealers, government securities broker/dealers, national securities exchanges, registered securities associations, or clearing agencies deemed eligible by the SEC. An original signature and an original signature guarantee are required for each person in whose name the account is registered. Signature guarantees by notaries public are not acceptable. In addition, if shares to be redeemed were purchased by check, mailing of the redemption proceeds may be delayed long enough to assure that the purchase check has cleared. If a request for redemption to a shareholder's bank account is made by telephone or fax, payment will be by Federal Reserve wire to the bank account designated on the application form unless a request is made that the redemption be mailed to the designated bank account. For each wire redemption, the program charges a $5.00 fee which is deducted from the proceeds of the redemption. Note: Investors designating a savings bank to receive their telephone redemption proceeds are advised that if the savings bank is not a participant in the Federal Reserve System, redemption proceeds must be wired through a commercial bank which is a correspondent of the savings bank. As this may delay receipt by the shareholder's account, it is suggested that investors wishing to use a savings bank discuss wire procedures with their bank and submit any special wire transfer information with the telephone redemption authorization. If appropriate wire information is not supplied, redemption proceeds will be mailed to the designated bank. The Trusts and their agents each reserve the right to suspend or terminate the telephone redemption privilege upon written notice to shareholders. A shareholder may cancel the telephone redemption authorization upon written notice. Each Trust employs procedures including recording telephone calls, testing a caller's identity, and sending written confirmation of telephone transactions, designed to give reasonable assurance that instructions communicated by telephone are genuine, and to discourage fraud. To the extent that the Corporation does not follow such procedures, it may be liable for acting upon instructions communicated by telephone that it reasonably believes to be genuine. Redemption by Mail or Fax Any shareholder may redeem his or her shares by writing to the Program. All written requests must be signed by at least one person on the account's registration exactly as registered. In addition, for the protection of the shareholder and to prevent fraudulent redemptions, a signature guarantee is required on all written redemption requests for over $50,000. A signature guarantee is also required on written redemption requests for any amount if the check is made payable to someone other than the registered shareholder, if the proceeds are to be forwarded to an address other than the address of record, or if the address of record has changed in the last 30 days. In order to ensure proper authorization before redeeming shares, the Program may request additional documents such as, but not restricted to, stock powers, Trust instruments, certificates of death, appointments as executor, certificates of corporate authority and waivers of tax required in some states when settling estates. Redemption to Address of Record for up to $50,000 without a signature guarantee is an automatic feature of any AARP Fund account unless it has been declined by the shareholder in writing. Any shareholder who refuses this feature can later establish it with a written request containing a signature guarantee. This request must be made prior to utilizing the feature for the first time. 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 the signature(s) guaranteed as explained above. It is suggested that the shareholders holding certificated shares or shares registered in other than individual names contact the Program prior to requesting a redemption to ensure that all necessary documents accompany the request. When shares are held in the name of a corporation, trust, fiduciary 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 help ensure prompt payment. Redemption requests must not be conditional as to date or price of the redemption. Proceeds of a redemption will be sent within seven (7) days after receipt of a request for redemption that complies with the above requirements. Delays of more than seven (7) days for payment for shares tendered for repurchase or redemption may result but only until the purchase check has cleared. Redemption by Checkwriting All new investors in the AARP Money Funds and existing shareholders of these Funds who apply to State Street Bank and Trust Company for checks may use them to pay any person, provided that each check is for at least $100 and not more than $1,000,000. By using one of these checks, the shareholder will receive daily dividend credit on his or her shares in either Fund until the check has cleared the banking system. Investors who purchased shares by check may write checks against those shares only after they have been on the Fund's books for 7 days. Shareholders who use this service may also use other redemption procedures. Both Funds pay the bank charges for this service. However, each Fund will review the cost of operation periodically and it reserves the right to determine if direct charges to the persons who avail themselves of this service would be appropriate. An account cannot be closed using the "free Checkwriting" privilege. The Trusts, the transfer agent and the custodian each reserve the right at any time to suspend or terminate the "free Checkwriting" procedure. Redemption-in-Kind The AARP Growth Trust reserves the right to permit the AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, and the AARP Capital Growth Fund, 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 Fund and valued as they are for purposes of computing the Fund'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 AARP Growth Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of which each Fund of the Trust is obligated to redeem shares, with respect to any one shareholder during any 90 day period, solely in cash up to the lesser of $250,000 or 1% of the net asset value of such Fund at the beginning of the period. Other Information 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 Funds do not impose a redemption or repurchase charge. Redemptions of shares, including redemptions undertaken to effect an exchange for shares of another Fund in the Program, 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 Retirement Plans (see "RETIREMENT PLANS," below) should contact the Trustee or custodian of the Plan for information on proper procedures. The Trustees have established certain amount size requirements. For an account established prior to September 1, 1989 in a particular Fund, the minimum investment is $250. For accounts established on or after September 1, 1989 in a particular Fund, the minimum investment is $500, except that in the case of the AARP High Quality Tax Free Money Fund accounts opened on or after August 1, 1991 the minimum is $2,500. Each Trust reserves the right to adopt a policy that if transactions at any time reduce a shareholder's account in a Fund to below the applicable minimum, the shareholder will be notified that, unless the account is brought up to at least the applicable minimum the Fund will redeem all shares and close the account by making payment to the shareholder. The shareholder has sixty days to bring the account up to the applicable minimum before any action will be taken by the Fund. Reductions in value that result solely from market activity will not trigger an involuntary redemption. No transfer from an existing to a new account may be for less than $500 ($2,500 for AARP High Quality Tax Free Money Fund); otherwise the new account may be redeemed as described above. (This policy applies to accounts of new shareholders in a particular Fund, but does not apply to Retirement Plan Accounts.) The Trustees have the authority to increase the minimum account size. EXCHANGES The procedure for exchanging shares from one AARP Fund to another AARP Fund in the Program, when the account in the new AARP Fund is established with the same registration, telephone option, dividend option and address as the present account, is set forth under "EXCHANGING" in the Prospectus. If the registration data for the account receiving the proceeds of the exchange is to be different in any respect from the account from which shares are to be exchanged, the exchange request must be in writing and must contain a signature guarantee as described under "SIGNATURE GUARANTEES" in the Prospectus. If an exchange involves an initial investment in the Fund being acquired, the amount to be exchanged must be at least $500 ($2,500 for AARP High Quality Tax Free Money Fund) for non-retirement plan accounts. For IRA and Keogh Plan accounts the amount must be $250. If the exchange is made into an existing account, there is no minimum requirement. Only exchange orders received between 8:00 a.m. and 4:00 p.m. Eastern time on any business day will ordinarily be accomplished at respective net asset values determined on that day. Exchange orders received after 4:00 p.m. are processed on the next business day. Investors may also request, at no extra charge, to have exchanges automatically executed on a predetermined schedule from one AARP Fund to an existing account in another AARP Fund through the AARP Funds' Automatic Exchange Program. Exchanges must be for a minimum of $50. Shareholders may add this free feature over the phone or in writing. Automatic Exchanges will continue until the shareholder requests by phone or in writing to have the feature removed, or until the originating account is depleted. The Trusts and the Transfer Agent each reserve 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. An exchange from any AARP Fund other than the AARP Money Funds is likely to result in recognition of gain or loss to the shareholder. Investors currently receive the exchange privilege automatically without having to elect it. The Trusts and the AARP Funds' distributor, Scudder Investor Services, Inc., reserve the right to suspend or terminate the exchange privilege at any time. Telephone exchange may be initiated by anyone able to identify the registration of an account, but the proceeds will only be invested in another AARP Fund with the same registration. The AARP Funds employ procedures to give reasonable assurance that telephone instructions are genuine, including recording telephone calls, testing a caller's identity and sending written confirmation of such transactions. If an AARP Fund does not follow such procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions. All the AARP Funds in the Program into which investors may make an exchange are described in the combined Prospectus and in this Statement of Additional Information. Before making an exchange, shareholders should read the information in the Prospectus regarding the Fund into which the exchange is being contemplated. TRANSACT BY PHONE (See "INVESTOR SERVICES--TRANSACT BY PHONE" in the Prospectus.) Shareholders, whose bank of record is a member of the Automated Clearing House Network (ACH) and who have enrolled in the "Transact by Phone" option, may purchase or redeem shares by telephone. Shareholders may purchase shares valued at up to $10,000 but not less than $250. Shareholders may redeem shares in an amount not less than $250. In order to utilize the Transact by Phone service, shareholders must have completed the Transact by Phone authorization. This authorization requires designation of a bank account from which the purchase payment will be debited or to which the redemption payment will be credited. New investors wishing to establish the Transact by Phone service can do so by completing the appropriate section on the enrollment form. Existing shareholders who wish to establish Transact by Phone will need to complete a Transact by Phone Enrollment Form. If a shareholder has previously elected the "Telephone Redemption to Bank of Record" and/or the "Automatic Investment Plan" services, the banking information must be identical for all of these services for each of the shareholder's Funds. After sending in their enrollment forms, shareholders should allow 15 days for the service to be activated. Purchasing Shares by Transact by Phone To purchase shares by Transact by Phone, a shareholder should call our service people before 3:00 p.m. Eastern time. Shares will be purchased at the next business day's closing share price. The shareholder's bank account will be debited on the second business day following the purchase request. Redeeming Shares by Transact by Phone To redeem shares by Transact by Phone, a shareholder should call our service people before 4:00 p.m. Eastern time. The redemption will be effected at that night's closing price per share. The shareholder's bank account will be credited with redemption proceeds on the second or third business day following the redemption request. The AARP Funds employ procedures to give reasonable assurance that telephone instructions are genuine, including recording telephone calls, testing a caller's identity and sending written confirmation of such transactions. If an AARP Fund does not follow such procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions. FEATURES AND SERVICES OFFERED BY THE FUNDS (See "STATEMENTS AND REPORTS," "EXCHANGING" and "INVESTOR SERVICES" in the Prospectus.) Automatic Dividend Reinvestment Investors may elect on their enrollment form whether they wish to receive any dividends from net investment income or any distributions from realized capital gains in cash or to reinvest such dividends and distributions in additional shares of the Fund paying the dividend or distribution. They may also elect to have these payments invested in shares of any other AARP Fund in the Program in which they have an account. If no election is made, dividends and distributions will be reinvested in additional shares. A change of instructions for the method of payment may be given to the Program at any time prior to a record date. Each distribution, whether by check or reinvested in a Fund, will include a brief explanation of the source of the distribution. Distributions Direct Investors may also have dividends and distributions automatically deposited to their predesignated bank account through the AARP Funds' DistributionsDirect Program. Shareholders who elect to participate in the DistributionsDirect Program, and whose predesignated checking account of record is with a member bank of the Automated Clearing House Network (ACH) can have income and capital gain distributions automatically deposited to their personal bank account usually within three business days after the Fund pays its distribution. A DistributionsDirect request form can be obtained by calling 1-800-253-2277. Confirmation statements will be mailed to shareholders as notification that distributions have been deposited. Reports to Shareholders The AARP Funds send to shareholders at least semiannually financial statements, which are examined at least annually by independent accountants, including a list of investments held and statements of assets and liabilities, operations, changes in net assets, supplementary information, and selected per share data and capital changes. Investors receive a brochure entitled Your Guide to Simplified Investment Decisions when they order an investment kit for the seven AARP Funds which also contains a prospectus. The Shareholder's Handbook is sent to all new shareholders to help answer any questions they may have about investing. An IRA Handbook is sent to all new IRA shareholders. Every month, shareholders will be sent the newsletter, Financial Focus. Retirement plan shareholders will be sent a special edition of Financial Focus on a quarterly basis. The newsletters are designed to help you keep up to date on economic and investment developments, and any new financial services and features of the Program. Consolidated Statements Shareholders with investments in two or more AARP Funds will receive, without charge, a convenient monthly Consolidated Statement. IRA and Keogh Plan accounts receive Consolidated Statements quarterly. This statement contains the market value of all holdings, a complete listing of transactions for the statement period and a summary of the shareholder's investment program for the statement period and for the year to date. Information may be obtained by contacting the AARP Investment Program from Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll free, 1-800-253-2277. RETIREMENT PLANS Shares of AARP High Quality Money Fund, AARP GNMA and U.S. Treasury Fund, AARP High Quality Bond Fund, AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP Capital Growth Fund ("Eligible Funds") may be purchased in connection with several types of tax-deferred retirement plans. These plans were created for members of AARP. Each plan is briefly described below. The plans provide convenient ways for AARP members to make investments which may be tax-deductible for their retirement and have taxes on any income from their investment deferred until their retirement, when they may be in a lower tax bracket. Additional information on each plan may be obtained by contacting the AARP Investment Program from Scudder, P.O. Box 2540, Boston, Massachusetts, 02208-2540, or by calling toll free, 1-800-253-2277. Investment professionals and retirement-benefits experts estimate that prospective retirees will need 70% to 80% of their current salaries during each year of their retirement, with adjustment for changes in prices during retirement, to maintain their current life-style. Investment professionals recommend diversifying investments among stock, bonds and cash-equivalents when building retirement reserves. It is advisable for an investor considering any of the plans described below to consult with an attorney or tax advisor with respect to the terms, suitability requirements and tax aspects of the plan. AARP No-Fee Individual Retirement Account (" AARP No-Fee IRA") Shares of the Eligible Funds may be purchased as the underlying investment for an AARP No-Fee IRA which meets the requirements of Section 408(a) of the Internal Revenue Code. Any AARP member with earned income or wages is eligible to make annual contributions to the AARP No-Fee IRA before the year the member attains age 70 1/2. An individual may establish an AARP No- Fee IRA whether or not he or she is an active participant in another tax-qualified retirement plan, including a tax-sheltered annuity or government plan. AARP No-Fee IRA participants may generally contribute to an AARP No-Fee IRA up to the lesser of $2,000 or 100% of their compensation or earned income. If both a husband and wife work, each may set up an AARP No- Fee IRA before the year they attain age 70 1/2, permitting a potential maximum contribution of $4,000 per year for both persons. If one spouse has no earnings, each spouse may have an AARP No-Fee IRA and the total maximum contributions will be $2,250 with no more than $2,000 going to either AARP No-Fee IRA. An individual will be allowed a full deduction for contributions to an AARP No-Fee IRA only if (1) neither the individual, nor his or her spouse, if they file a joint return, is an active participant in an employer-maintained retirement plan, or (2) the individual (and his or her spouse, if applicable) has an adjusted gross income below a certain level ($25,050 for a single individual, with a phase-out of the deduction for adjusted gross income between $25,050 and $35,000; $40,050 for married individuals filing a joint return, with a phase-out of the deduction for adjusted gross income between $40,050 and $50,000). However, an individual not permitted to make a deductible contribution may nonetheless make a nondeductible contribution to an AARP No-Fee IRA. Any AARP member who is entitled to receive a qualifying distribution from a qualified retirement plan (including a tax-sheltered annuity plan) or another IRA may make a rollover contribution of all or any portion of the distribution to the AARP No-Fee IRA, either in a direct rollover or within 60 days after receipt of the distribution, whether or not the member has attained age 70 1/2. If a qualified rollover contribution is made, the distribution will not be subject to Federal income tax until distributed from the AARP No-Fee IRA; however, distributions not directly rolled over might be subject to automatic 20% federal tax withholding. AARP Mutual Fund Representatives are available to help you transfer your IRA to the AARP No-Fee IRA. You pay no transfer fees for this service. An AARP Mutual Fund Representative can help you with the paperwork, contact your present IRA custodian, help to transfer your funds to the AARP No-Fee IRA, and send you a confirmation when your transfer is complete. Earnings on the AARP No-Fee IRA are not subject to current Federal income tax until distributed; distributions are taxed as ordinary income. Withdrawals attributable to nondeductible contributions are not taxable (however, early withdrawals of such amounts are subject to penalty). The assets in an AARP No-Fee IRA may be withdrawn without penalty after the participant reaches age 59 1/2 or becomes disabled, and must begin to be withdrawn by April 1st following the taxable year in which the participant reaches age 70 1/2. The table below shows how much individuals would accumulate in a fully tax- deductible IRA by age 65 (before any distributions) if they contribute $2,000 at the beginning of each year, assuming average annual returns of 5, 10, and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65 Assuming $2,000 Deductible Annual Contribution Starting Age of Annual Rate of Return Contributions 5% 10% 15% - ------------- ---- ---- ---- 25 $253,680 $973,704 $4,091,908 35 139,522 361,887 999,914 45 69,439 126,005 235,620 55 26,414 35,062 46,699
AARP Keogh Plan Shares of the Eligible Funds may be purchased for the AARP Keogh Plan. The AARP Keogh Plan (the "Plan") is designed as a tax-qualified retirement plan consisting of a profit sharing plan and a money purchase pension plan which can be adopted by self-employed persons who are members of AARP and by corporations whose principal shareholders are members of AARP. Self-employed persons may make annual tax-deductible contributions to the Plan equal to the lesser of $30,000 or 20% of their earned income. An adopting corporation may contribute for each employee the lesser of $30,000 or 25% of the employee's taxable compensation. No more than $150,000 (as adjusted) of earned income or taxable compensation may be taken into account, however. If the Plan is "top heavy," a minimum contribution may be required for certain employees. Additional information on contributions to the Plan is found in Your Guide to the AARP Keogh Plan. The Plan provides that contributions may continue to be made on behalf of participants after they have reached the age of 70 1/2 if they are still working. Lump sum distributions from the Plan may be eligible to be taxed for Federal income tax purposes according to a favorable 5-year averaging (or 10-year averaging for individuals who reached age 50 before 1986) method not available to IRA distributions. If members eligible to join this Plan choose to roll over pension and profit-sharing distributions from other tax-qualified retirement plans, they will retain the right to use the averaging method for such distributions. The Plans are prototype plans approved by the Internal Revenue Service. In general, distributions from all tax-qualified retirement programs, including IRAs and tax-sheltered annuity programs, must begin by April 1st in the year following the year in which the participant reaches age 70 1/2, whether or not he or she continues to be employed. Excise taxes will apply to premature distributions, and to taxpayers who are required, but fail, to receive a distribution after reaching age 70 1/2. An additional excise tax may apply to certain excess retirement accumulations. Special favorable tax treatment for certain distributions is reduced or phased out, except where grandfathering provisions apply. Shares of the Eligible Funds may be purchased also as an investment for an IRA or tax-qualified retirement plan (including a tax-sheltered annuity plan) other than those described above, if permitted by the provisions of the relevant plan. OTHER PLANS (See "INVESTOR SERVICES" in the Prospectus.) Automatic Investment Shareholders may arrange to make periodic investments 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 a Fund account for less than $500 if they agree to increase their investment to $500 within a 10 month period. This feature is only available to Gifts to Minors Account investors. Automatic Withdrawal Plan Shareholders who own or purchase $10,000 or more of shares of a AARP Fund may establish an Automatic Withdrawal Plan with that Fund. The investor can then receive monthly, quarterly or periodic redemptions from his or her account for any designated amount of $50 or more. Payments are mailed at the end of each month. The check amounts may be based on the redemption of a fixed dollar amount, fixed share amount or percent of account value or declining balance. The Automatic Withdrawal Plan provides for income dividends and capital gains distributions, if any, to be reinvested in additional shares. Shares are then liquidated as necessary to provide for withdrawal payments. Since the withdrawals are in amounts selected by the investor and have no relationship to yield or income, payments received cannot be considered as yield or income on the investment and the resulting liquidations may deplete or possibly extinguish the initial investment and any reinvested dividends and capital gains distributions. Requests for increases in withdrawal amounts or to change the payee must be submitted in writing, signed exactly as the account is registered, and contain signature guarantee(s) as described under "SIGNATURE GUARANTEES" in the Prospectus. Any such request must be received by the AARP Fund's transfer agent by the 15th of the month in which such change is to take effect. An Automatic Withdrawal Plan may be terminated at any time by the shareholder, the AARP Funds or their agents on written notice, and will be terminated when all shares of the Funds under the Plan have been liquidated or upon receipt by the Funds of notice of death of the shareholder. For more information concerning this plan, write to the AARP Investment Program from Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free, 1-800-253-2277. Direct Payment of Regular Fixed Bills Shareholders who own or purchase $10,000 or more of shares of an AARP Fund may arrange to have regular fixed bills such as rent, mortgage or other payments of more than $50 made directly from their account. The arrangements are virtually the same as for an Automatic Withdrawal Plan (see above). For more information concerning this plan, write to the AARP Investment Program from Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free, 1-800-253-2277. DIVIDENDS AND YIELD (See "UNDERSTANDING FUND PERFORMANCE" in the Prospectus.) Each AARP Fund intends to follow the practice of distributing substantially all of its investment company taxable income (which includes, for example, interest, dividends and any excess of net realized short-term capital gains over net realized long-term capital losses, less deductible expenses), and its net tax-exempt interest income, if any. Each AARP Fund also intends to follow the practice of distributing any excess of net realized long-term capital gains over net realized short-term capital losses after reduction for any capital loss carryforwards. However, if it appears to be in the best interests of a Fund and its shareholders, the Fund may retain all or part of such gain for reinvestment. AARP Balanced Stock and Bond Fund and AARP Growth and Income Fund intend to pay dividends in March, June, September and December of each year and any net realized capital gains after the September 30 fiscal year end. The AARP Capital Growth Fund intends to pay dividends and any realized capital gains over net realized short-term capital losses after reduction for any capital loss carryforwards in December after its September 30 fiscal year end. See "TAXES." Both types of distributions will be made in shares of the respective AARP Fund and confirmations will be mailed to each shareholder unless a shareholder has elected to receive cash, in which case a check will be sent. The net income of each AARP Money Fund, each of the AARP Income Funds and the AARP Insured Tax Free General Bond Fund, is determined as of the close of trading on the Exchange (usually 4:00 p.m. Eastern time) on each day on which the Exchange is open for business. All of the net income so determined normally will be declared as a dividend daily to shareholders of record as of 4:00 p.m. on the preceding day, and distributed monthly. Dividends commence on the next business day after purchase. Dividends which are not paid by check will be reinvested in additional shares of the particular Fund at the net asset value per share determined as of a day selected within five days of the last business day of the month. Checks will be mailed to shareholders no later than the fourth business day of the following month, and consolidated statements confirming the month's dividends will be mailed to shareholders electing to invest dividends in additional shares. Dividends will ordinarily be invested on the last business day of each month at the net asset value per share determined as of the close of regular trading on the Exchange. Should the AARP Money Funds incur or anticipate any unusual or unexpected significant expense, depreciation or loss which would affect disproportionately the Fund's income for a particular period, the Trustees of such Fund or the Executive Committee of the Trustees may at that time consider whether to adhere to the dividend policy described above or to revise it in the light of the then prevailing circumstances in order to ameliorate to the extent possible the disproportionate effect of such expense or loss on then existing shareholders. Such expenses may nevertheless result in a shareholder's receiving no dividends for the period during which the shares are held and in receiving upon redemption a price per share lower than that which was paid. Similarly, should the AARP High Quality Money Fund incur or anticipate any unusual or unexpected significant income, appreciation or gain which would affect disproportionately the Fund's income for a particular period, the Trustees or the Executive Committee of the Trustees may consider whether to adhere to the dividend policy described above or to revise it in the light of the then prevailing circumstances in order to ameliorate to the extent possible the disproportionate effect of such income, appreciation or gain on the dividend received by existing shareholders. Such actions may reduce the amount of the daily dividend received by existing shareholders. Performance Information: Computation of Yields and Total Return a) The AARP Money Funds From time to time, quotations of an AARP Money Fund's yield may be included in advertisements, sales literature or shareholder reports. These yield figures are calculated in the following manner: The current yield is the net annualized yield based on a specified 7 calendar-days calculated at simple interest rates. Current yield is calculated by determining the net change, exclusive of capital changes, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period and dividing such change by the value of the account at the beginning of the base period to obtain the base-period return. The base-period return is then annualized by multiplying it by 365/7; the resultant product equals net annualized current yield. The current yield figure is stated to the nearest hundredth of one percent. The current yield of the AARP High Quality Money Fund and the AARP High Quality Tax Free Money Fund for the seven-day period ended September 30, 1994 respectively, were 3.94% and 2.64%. The effective yield is the net annualized yield for a specified 7 calendar-days assuming a reinvestment in Fund shares of all dividends during the period, i.e., compounding. Effective yield is calculated by using the same base-period return used in the calculation of current yield except that the base-period return is compounded by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result, according to the following formula: Effective Yield = [(Base Period Return + 1)^(365/7)] - 1. The effective yield of the AARP High Quality Money Fund and the AARP High Quality Tax Free Money Fund for the seven-day period ended September 30, 1994 respectively, were 4.02% and 2.68%. As described above, current yield and effective yield are based on historical earnings, show the performance of a hypothetical investment and are not intended to indicate future performance. Current yield and effective yield will vary based on changes in market conditions and the level of Fund expenses. In connection with communicating its current yield and effective yield to current or prospective shareholders, a Fund also may compare these figures to the performance of other mutual Funds tracked by mutual Fund rating services or to other unmanaged indices which may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs. b) The AARP Money Funds, AARP Income Funds, AARP Growth Funds and AARP Insured Tax Free General Bond Fund From time to time, quotations of a Fund's total return may be included in advertisements, sales literature or shareholder reports. This total return figure is calculated in the following manner: The total return is the average annualized compound rate of return for, where applicable, the periods of one year, five years and ten years, all ended on the last day of a recent calendar quarter. Total return quotations reflect changes in the price of a Fund's shares and assume that all dividends and capital gains distributions during the respective periods were reinvested in Fund shares. Total return is calculated by finding the average annualized compound rates of return of a hypothetical investment over such periods, according to the following formula (total return is then expressed as a percentage): T = (ERV/P)^(1/n) - 1 Where: T = average annualized compound total rate of return P = a hypothetical initial investment of $1,000 n = number of years ERV = ending redeemable value: ERV is the value at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period.
Total Return ------------------------------------------------- One Year Ended Five Years Ended Life of the Fund 09/30/94 09/30/94 Fund(1) -------------- ---------------- ---------------- AARP High Quality Money Fund 2.84 % 4.56 % 5.47 % AARP High Quality Tax Free Money Fund 1.76 3.60 * 4.48 * AARP GNMA and U.S. Treasury -1.90 7.49 8.54 AARP High Quality Bond -5.55 7.44 8.45 AARP Insured Tax Free General Bond -4.48 7.48 8.35 AARP Balanced Stock and Bond Fund n.a. n.a. -1.99 AARP Growth and Income 7.99 10.44 14.27 AARP Capital Growth -4.70 5.18 13.46 (1) For the period November 30, 1984 (commencement of operations) to September 30, 1994 for each of the above listed Funds except the AARP money Funds; For the period July 22, 1985 (commencement of operations) to September 30, 1994, for the AARP High Quality Money Fund and for the period November 30, 1984 (commencement of operations) to September 30, 1994, for the AARP High Quality Tax Free Money Fund. * Prior to August 1, 1991, the AARP High Quality Tax Free Money Fund operated as the AARP Insured Tax Free Short Term Fund. The total return figures for the life of the Fund and for the five years ended September 30, 1994 for the AARP High Quality Tax Free Money Fund are representative of the Fund prior to its conversion date except that the figures have been adjusted to reflect its conversion to a money market Fund.
In addition to total return described above, the Funds may quote nonstandard "cumulative total return." The cumulative total return is the 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 Fund's shares and assume that all dividends and capital gains distributions during the period were reinvested in Fund shares. Cumulative total return is calculated by finding the 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 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 ------------------------------------------------ One Year Ended Five Years Ended Life of the Fund 09/30/94 09/30/94 Fund(1) ------------- --------------- --------------- AARP Balanced Stock and Bond Fund n.a. n.a. -1.99 AARP Growth and Income 7.99% 64.30% 267.13% AARP Capital Growth -4.70 28.71 242.58 (1) For the period November 30, 1984 (commencement of operations) to September 30, 1994.
c) The AARP Income Funds and AARP Insured Tax Free General Bond Fund From time to time, quotations of an AARP Fund's yield may be included in advertisements, sales literature or shareholder reports. This yield is calculated in the following manner. The yield is the net annualized yield based on a specified 30-day (or one month) period assuming semiannual compounding of income. Yield is calculated by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula: YIELD = 2[((a-b)/cd + 1)^6 - 1] Where: a = dividends and interest earned during the period, including (except for mortgage or receivable-backed obligations) the amortization of market premium or accretion of market discount. For mortgage or receivables-backed obligations, this amount includes realized gains or losses based on historic cost for principal repayments received. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = the maximum offering price per share on the last day of the period.
Yield for the 30-day period Fund ended September 30, 1994 ----------------------------- ------------------------------ AARP GNMA and U.S. Treasury 6.76% AARP High Quality Bond 6.31 AARP Insured Tax Free General Bond 5.01
d) AARP Insured Tax Free General Bond and AARP High Quality Tax Free Money Fund The tax equivalent yield is the net annualized after-tax yield based on a specified seven day period for money market funds or on a specified 30-day (one month) period for non-money market funds assuming a reinvestment of all dividends paid during the period, i.e., compounding. Tax equivalent yield is calculated by dividing that portion of the Fund's yield (as computed in the yield description above) which is tax-exempt by one minus a stated income tax rate and adding the product to that portion, if any, of the yield of the Fund that is not tax-exempt.
Equivalent Taxable Yields period ending September 30, 1994 ----------------------------------- Fund Tax Bracket: 28% 31% AARP High Quality Tax 3.67% 3.83% Free Money AARP Insured Tax Free 6.96% 7.26% General Bond
(e) General Performance Information Quotations of an AARP Fund's performance are based on historical earnings and are not intended to indicate future performance of the Fund. 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 Fund's expenses. In periods of declining interest rates a Fund's quoted yield and 30-day current yield will tend to be somewhat higher than prevailing market rates, and in periods of rising interest rates a Fund's quoted yield and 30-day current yield will tend to be somewhat lower. Comparison of non-standard performance data of 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 effect of the methods used to calculate performance when comparing performance of a Fund with performance quoted with respect to other investment companies or types of investments. From time to time, in marketing and other AARP Fund literature, these AARP Funds' performances may be compared to the performance of broad groups of mutual funds with similar investment goals, as tracked by independent organizations, such as Lipper Analytical Services, Inc. ("Lipper"), Investment Company Data, Inc. ("ICD"), CDA Investment Technologies, Inc. ("CDA"), Value Line Mutual Fund Survey, Morningstar, Inc. and other independent organizations. For instance, AARP Growth Funds will be compared to funds in the growth fund category; and so on. In similar fashion, the performance of the AARP GNMA and U.S. Treasury Fund will be compared to that of certificates of deposit. Evaluations of AARP Fund performance made by independent sources or independent experts may also be used in advertisements concerning the AARP Funds, including reprints of, or selections from, editorials or articles about these Funds. In connection with communicating its performance to current or prospective shareholders, the Fund also may compare these figures to unmanaged indices which may assume reinvestment of dividends or interest but generally do not reflect deductions for administrative and management costs. Indices with which the Fund may be compared include but are not limited to, the following: Standard & Poor's 500 Stock Index (S&P 500), The Europe/Australia/Far East (EAFE) Index, Morgan Stanley Capital International World Index, J.P. Morgan Global Traded Bond Index, Salomon Brothers World Government Bond Index. 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. Evaluation of Fund performance made by independent sources may also be used in advertisements concerning the Funds, including reprints of, or selections from, editorials or articles about these Funds. Sources for AARP Fund performance information and articles about the AARP Funds may include, but are not limited to, the following: American Association of Individual Investors' Journal, a monthly publication of the AAII that includes articles on investment analysis techniques. Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S. mutual funds investing internationally. Banxquote, an on-line source of national averages for leading money market and bank CD interest rates, published on a weekly basis by MasterFund, Inc. of Wilmington, Delaware. Barron's, a Dow Jones and Company, Inc. business and financial weekly that periodically reviews mutual fund performance data. Business Week, a national business weekly that periodically reports the performance rankings and ratings of a variety of mutual funds investing abroad. CDA Investment Technologies, Inc., an organization which provides performance and ranking information through examining the dollar results of hypothetical mutual fund investments and comparing these results against appropriate market indices. Changing Times, The Kiplinger Magazine, a monthly investment advisory publication that periodically features the performance of a variety of securities. Consumer Digest, a monthly business/financial magazine that includes a "Money Watch" section featuring financial news. Federal Reserve Bulletin, a monthly publication that reports domestic and international financial statistics, including short-term certificate of deposit interest rates. Financial Times, Europe's business newspaper, which features from time to time articles on international or country-specific funds. Financial World, a general business/financial magazine that includes a "Market Watch" department reporting on activities in the mutual fund industry. Forbes, a national business publication that from time to time reports the performance of specific investment companies in the mutual fund industry. Fortune, a national business publication that periodically rates the performance of a variety of mutual funds. The Frank Russell Company, a West-Coast investment management firm that periodically evaluates international stock markets and compares foreign equity market performance to U.S. stock market performance. Global Investor, a European publication that periodically reviews the performance of U.S. mutual funds investing internationally. IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue Organization, Inc., of Holliston, Massachusetts, reporting on the performance of the nation's money market funds, summarizing money market fund activity, and including certain averages as performance benchmarks, specifically "Donoghue's Money Fund Average," and "Donoghue's Government Money Fund Average." Ibbotson Associates, Inc., a company specializing in investment research and data. Investment Company Data, Inc., an independent organization which provides performance ranking information for broad classes of mutual funds. Investor's Daily, a daily newspaper that features financial, economic, and business news. Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly publication of industry-wide mutual fund averages by type of fund. Money, a monthly magazine that from time to time features both specific funds and the mutual fund industry as a whole. Morgan Stanley International, an integrated investment banking firm that compiles statistical information. Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides ratings of mutual funds based on fund performance, risk and portfolio characteristics. The New York Times, a nationally distributed newspaper which regularly covers financial news. The No-Load Fund Investor, a monthly newsletter published by Sheldon Jacobs that includes mutual fund performance data and recommendations for the mutual Fund investor. No-Load Fund X, a monthly newsletter published by DAL Investment Company, Inc. that reports on mutual fund performance, rates funds, and discusses investment strategies for the mutual fund investor. Personal Investing News, a monthly news publication that often reports on investment opportunities and market conditions. Personal Investor, a monthly investment advisory publication that includes a "Mutual Funds Outlook" section reporting on mutual fund performance measures, yields, indices and portfolio holdings. Success, a monthly magazine targeted to the world of entrepreneurs and growing business, often featuring mutual fund performance data. United Mutual Fund Selector, a semi-monthly investment newsletter published by Babson United Investment Advisors that includes mutual fund performance data and reviews of mutual fund portfolios and investment strategies. USA Today, a leading national daily newspaper. U.S. News and World Report, a national business weekly that periodically reports mutual fund performance data. Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly covers financial news. Wiesenberger Investment Companies Services, an annual compendium of information about mutual funds and other investment companies, including comparative data on funds' backgrounds, management policies, salient features, management results, income and dividend records, and price ranges. Working Women, a monthly publication that features a "Financial Workshop" section reporting on the mutual fund/financial industry. TRUST ORGANIZATION (See "FUND ORGANIZATION" in the Prospectus.) Each of the AARP Funds is a separate series of a Massachusetts business trust. AARP GNMA and U.S. Treasury Fund and AARP High Quality Bond Fund are series of AARP Income Trust. AARP High Quality Tax Free Money Fund and AARP Insured Tax Free General Bond Fund are series of AARP Tax Free Income Trust which changed its name from AARP Insured Tax Free Income Trust on August 1, 1991. AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP Capital Growth Fund are series of AARP Growth Trust. Each of the above Trusts was established under a separate Declaration of Trust dated June 8, 1984. AARP High Quality Money Fund is a separate series of the AARP Cash Investment Funds, which was established under a Declaration of Trust dated January 20, 1983. The original name of AARP Cash Investment Funds was Master Investment Services Fund. That name was changed to AARP Money Fund Trust on February 6, 1985, and to its present name on May 24, 1985. Each Trust's shares of beneficial interest of $.01 (AARP High Quality Tax Free Money Fund $.001) par value per share are issued in separate series. AARP Cash Investment Funds has three series in addition to AARP High Quality Money Fund that are not currently offered. None of the other Trusts has an existing series which is not currently being offered. Other series may be established and/or offered by the Trusts in the future. Each share of a series represents an interest in that series which is equal to each other share of that series. The assets received for the issue or sale of the shares of each series and all income, earnings, profits and proceeds thereof, subject only to the rights of creditors, are specifically allocated to that series and constitute the underlying assets of that series. The underlying assets of each series are segregated on the books of account of the Trust, and are to be charged with the liabilities of that series. The Trustees have determined that expenses with respect to all series in a Trust are to be allocated in proportion to the net asset value, or such other reasonable basis, of the respective series in that Trust except where allocations of direct expenses can otherwise be more fairly made. The officers of each Trust, subject to the general supervision of the Trustees, have the power to determine which liabilities are allocable to all the series in a Trust. Each Trust's Declaration of Trust provides that allocations so made to each series shall be binding on all persons. While each Declaration of Trust provides that liabilities of a series may be satisfied only out of the assets of that series, it is possible that if a series were unable to meet its obligations, a court might find that the assets of other series in the Trust should satisfy such obligations. In the event of the dissolution or liquidation of a Trust, the holders of the shares of each series are entitled to receive as a class the underlying assets of that series available for distribution to shareholders. Shareholders are entitled to one vote per share. Separate votes are taken by each series on all matters except where the Investment Company Act of 1940 requires that a matter be decided by the vote of shareholders of all series of a Trust voting together or where a matter affects only one of the series, in which case only shareholders of that series shall vote thereon. For example, a change in investment policy for a series would be voted upon only by shareholders of the series involved. Additionally, approval of each Trust's investment advisory agreement is a matter to be determined separately by each series in that Trust. Approval of the agreement by the shareholders of one series in a Trust is effective as to that series whether or not enough votes are received from the shareholders of other series in the Trust to approve such agreement as to the other series. The Trustees of each Trust have the authority to establish additional series and to designate the relative rights and preferences as between the series. All shares issued and outstanding of each series that is offered by a Trust will be fully paid and non-assessable by the Trust, and redeemable as described in this Statement of Additional Information and in the Prospectus. Each Declaration of Trust 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 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 of Trust 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 any of the Declarations of Trust 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, or reckless disregard of the duties involved in the conduct of his office. MANAGEMENT OF THE FUNDS (See "FUND ORGANIZATION" in the Prospectus.) Each Trust has retained Scudder, Stevens & Clark, Inc., a Delaware corporation (the "Fund Manager"), to perform management and investment advisory services for the Funds pursuant to Investment Management and Advisory Agreements with each Trust ("Management Agreement") dated February 1, 1994. Each Management Agreement provides that the Fund Manager will regularly provide, or cause to be provided, to the AARP Funds investment research, advice and supervision and furnish continuously an investment program for the AARP Funds consistent with each Fund's investment objective and policies. The Fund Manager assumes responsibility for the compensation and expenses of all officers and executive employees of each Trust and makes available or causes to be made available, without expense to the Trusts, the services of such of its partners, directors, officers and employees as may duly be elected officers or Trustees of a Trust, subject to their individual consent to serve and to any limitations imposed by law, and pays the Trusts' office rent and provides, or causes to be provided, investment advisory, research and statistical facilities and related clerical services. For these services the AARP Funds pay the Fund Manager a monthly fee consisting of a base fee and an individual Fund fee. The base fee is based on average daily net assets of all Funds in the AARP Investment Program, as follows:
Program Assets Annual Rate at Each (Billions) Asset Level - ------------------- ------------------- First $2 0.35% Next $2 0.33 Next $2 0.30 Next $2 0.28 Next $3 0.26 Next $3 0.25 Over $14 0.24
Total program assets as of September 30, 1994 were approximately $12 billion. All AARP Funds pay a flat individual Fund fee based on the net assets of that Fund. The individual Fund fees are as follows: AARP High Quality Money Fund, 10/1200 of 1% (or approximately .10 of 1% on an annual basis); AARP GNMA and U.S. Treasury Fund, 12/1200 of 1% (or approximately .12 of 1% on an annual basis); AARP High Quality Bond Fund, 19/1200 of 1% (or approximately .19 of 1% on an annual basis); AARP High Quality Tax Free Money Fund, 10/1200 of 1% (or approximately .10 of 1% on an annual basis); AARP Insured Tax Free General Bond Fund, 19/1200 of 1% (or approximately .19 of 1% on an annual basis); AARP Balanced Stock and Bond Fund, 19/1200 of 1% (or approximately .19 of 1% on an annual basis); AARP Growth and Income Fund, 19/1200 of 1% (or approximately .19 of 1% on an annual basis); AARP Capital Growth Fund, 32/1200 of 1% (or approximately .32 of 1% on an annual basis); The advisory fees for the fiscal years ended September 30, 1992, 1993 and up to January 31, 1994 under the previous Investment Management and Advisory Agreements and under the present Investment Management Agreement from February 1, 1994 to September 30, 1994 were as follows:
1992 1993 1994 ------------ ------------ ------------- AARP High Quality Money Fund $1,696,363 $1,358,702 $1,244,322 AARP GNMA and U.S. Treasury Fund 18,362,296 26,404,563 26,198,841 AARP High Quality Bond Fund 1,368,152 2,344,628 2,952,999 AARP High Quality Tax Free Money Fund 623,633 637,451 568,107 AARP Insured Tax Free General Bond Fund 6,185,276 8,631,469 9,944,429 AARP Balanced Stock and Bond Fund* * * 365,435 AARP Growth and Income Fund 2,728,603 5,405,394 9,533,476 AARP Capital Growth Fund 2,096,199 3,176,921 4,184,437
Each Management Agreement provides that the Fund Manager will reimburse the AARP Funds or the Trust for annual expenses in excess of the lowest expense limitation imposed by the states in which the Funds of the particular Trust are at the time offering their shares for sale, although no payments are required to be made by the Fund Manager pursuant to this reimbursement provision in excess of the annual fee paid by the funds of a Trust to the Fund Manager. Management has been advised that the lowest such limitation is currently 2 1/2% of the first $30,000,000 of such net assets, 2% of the next $70,000,000 of such net assets and 1 1/2% of such net assets in excess of $100,000,000. Certain expenses such as brokerage commissions, taxes, extraordinary expenses and interest are excluded from such limitation. The Fund Manager has agreed that its obligation to reimburse the Funds will not be restricted to the amounts of the management fees. Such agreement may be modified or withdrawn without shareholder approval. The expense ratios, net of voluntary and statutory fee waivers and reimbursements of expenses, for the periods ended September 30, 1992, 1993 and 1994 were as follows:
1992 1993 1994 ------------ ------------ ------------- AARP High Quality Money Fund 1.15% 1.31% 1.13% AARP GNMA and U.S. Treasury Fund .72 .70 .66 AARP High Quality Bond Fund 1.13 1.01 .95 AARP High Quality Tax Free Money Fund .95 .93 .90 AARP Insured Tax Free General Bond Fund .74 .72 .68 AARP Balanced Stock and Bond Fund* * * 1.31 AARP Growth and Income Fund .91 .84 .76 AARP Capital Growth Fund 1.13 1.05 .97
For the fiscal years ended September 30, 1992, 1993 and 1994, the reimbursements by the Fund Manager based on the expense limitation then in effect were as follows:
1992 1993 1994 ------------ ------------ ------------- AARP High Quality Money Fund $139,576 -- -- AARP GNMA and U.S. Treasury Fund -- -- -- AARP High Quality Bond Fund -- -- -- AARP High Quality Tax Free Money Fund 231,118 $ 278,471 $ 8,083 AARP Insured Tax Free General Bond Fund -- -- -- AARP Balanced Stock and Bond Fund* * * -- AARP Growth and Income Fund -- -- -- AARP Capital Growth Fund -- -- --
*AARP Balanced Stock and Bond Fund commenced operations on February 1, 1994. If reimbursement is required, it will be made as promptly as practicable after the end of each Trust's fiscal year. However, no fee payment will be made to the Fund Manager during any fiscal year which will cause year-to-date expenses to exceed the cumulative pro rata expense limitation at the time of such payment. The amortization of organizational costs is described herein under "ADDITIONAL INFORMATION - Other Information." Under the Management Agreements, each Trust is responsible for all of its other expenses including organizational expenses; clerical salaries; fees and expenses incurred in connection with membership in investment company organizations; brokers' commissions; any fees for portfolio pricing paid to a pricing agent; legal, auditing and accounting expenses; taxes and governmental fees; the fees and expenses of the transfer agent; the cost of preparing share certificates, if any, and any other expenses including clerical expenses of issue, redemption or repurchase of shares; the expenses and fees for registering or qualifying securities for sale; the fees and expenses of the Trustees of the Trust who are not affiliated with the Fund Manager, Scudder, Stevens & Clark, Inc., AARP Financial Services Corporation or AARP; the cost of preparing and distributing reports and notices to shareholders; and the fees and disbursements of custodians. Each Trust may arrange to have third parties assume all or part of the expenses of sale, underwriting and distribution of shares of the Trust. Each Trust is also responsible for its expenses incurred in connection with litigation, proceedings and claims and the legal obligation it may have to indemnify its officers and Trustees with respect thereto. The custodian agreement for each Trust provides that the custodian shall compute the net asset value for that Trust. The Fund Manager has voluntarily agreed to waive management fees or reimburse the AARP High Quality Tax Free Money Fund to the extent necessary so that the total annualized expenses of the Fund do not exceed 0.90% of the average daily net assets until February 1, 1996. The Fund Manager retains the ability to be repaid by the Fund if expenses fall below the specified limit prior to the end of the fiscal year. These expense limitation arrangements can decrease the Fund's expenses and improve its performance. During the fiscal year ended September 30, 1994, these agreements resulted in a reduction of management fees paid by the Fund of $8,083. Each Management Agreement provides that the Fund Manager shall not be required to pay expenses of distribution of the Funds' shares to the extent that (i) such distribution expenses are, pursuant to a written contract, to be borne by a principal underwriter of the Trust ("Scudder Investor Services, Inc." is principal underwriter for the AARP Trusts), (ii) the Trust shall have adopted a plan in conformity with Rule 12b-1 under the Investment Company Act of 1940, as amended ("Rule 12b-1 plan") providing for the Trust (or the Funds or some other party) to assume some or all of such expenses, or (iii) such expenses are required to be paid by Scudder, Stevens & Clark, Inc. To the extent such expenses of distribution are not to be borne by a principal underwriter, or are not permitted to be paid by the Trust (or a Fund or such other party) pursuant to a Rule 12b-1 plan, they are to be assumed by the Fund Manager. (The adoption of a Rule 12b-1 plan by a Trust would require the approval of the Trustees, including a majority of those Trustees who are not interested persons of the Trust, and of a majority of the outstanding voting securities of each Fund.) Each Management Agreement will remain in effect until August 31, 1995 and from year to year thereafter only if its continuance is specifically approved at least annually by the vote of a majority of those Trustees who are not parties to such Agreement or "interested persons" of the Fund Manager, Scudder, Stevens & Clark, Inc. or the particular Trust cast in person at a meeting called for the purpose of voting on such approval and either by vote of a majority of the Trustees or, with respect to each Fund, by a majority of the outstanding voting securities of that Fund. In the event a Management Agreement is approved by the shareholders of one of the Funds but not by the shareholders of the other Fund, the Management Agreement will continue in effect as to the former Fund but not the latter. The Management Agreements were last approved by the Trustees (including a majority of the Trustees who are not "interested persons") on November 15, 1993 and by the shareholders on January 13, 1994. Each 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. Scudder, Stevens & Clark, Inc. is one of the most experienced investment management firms in the United States. 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, Scudder introduced Scudder International Fund, the first Fund available in the U.S., investing internationally in securities of issuers in several foreign countries. The principal source of the Fund Manager's income is professional fees received from providing continuous investment advice, and the firm derives no income from banking, brokerage or underwriting of securities. Today, it provides investment counsel for many individuals and institutions, including insurance companies, colleges, industrial corporations, and financial and banking organizations. In addition, it manages Montgomery Street Income Securities, Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder Development Fund, Scudder Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder Institutional Fund, Inc., Scudder International Fund, Inc., Scudder Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder Portfolio Trust, Scudder State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund, Scudder World Income Opportunities Fund, Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The First Iberian Fund, Inc., The Korea Fund, Inc., The Japan Fund, Inc., and The Latin America Dollar Income Fund, Inc. Some of the foregoing companies or trusts have two or more series. The Fund Manager maintains a large research department, which conducts continuous studies of the factors that affect the condition of various industries, companies and individual securities. In this work, the Fund Manager utilizes certain reports and statistics from a wide variety of sources, including brokers and dealers who may execute portfolio transactions for the Fund and for clients of the Fund Manager, but conclusions are based primarily on investigations and critical analyses by its own research specialists. Certain investments may be appropriate for more than one Fund and also for other clients advised by the Fund Manager. Investment decisions for each Fund and for 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 Fund or client or in different amounts and at different times for more than one but less than all Funds or other clients. Likewise, a particular security may be bought for one or more Funds or clients when one or more other Funds or clients are selling the security. In addition, purchases or sales of the same security may be made for two or more Funds or clients on the same date. In such event such transactions will be allocated among the Funds and/or clients in a manner believed by the Fund Manager 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 Funds or clients of the Fund Manager in the interest of most favorable net results to the particular Fund. Each Management Agreement provides that the Fund Manager shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Funds in connection with matters to which the respective agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Fund Manager in the performance of its duties or from reckless disregard by the Fund Manager of its obligations and duties under the respective agreement. In reviewing the terms of each Management Agreement and in discussions with the Fund Manager concerning such agreements, the Trustees of each Trust who are not "interested persons" of that Trust have been represented by independent counsel at the Trust's expense. Dechert Price & Rhoads acts as general counsel for the Trusts. Pursuant to a Member Services Agreement with the Fund Manager, dated February 1, 1994, AARP Financial Services Corp. ("AFSC") provides the Fund Manager with nondistribution related service and advice primarily concerning designing and tailoring the AARP Investment Program from Scudder and its Funds to meet the needs of AARP's members on an ongoing basis. AARP Financial Services Corp. receives, as compensation for its services, a Monthly Member Services fee. The fee paid to AFSC is calculated on a daily basis and depends on the level of total assets of the AARP Investment Program. The fee rate decreases as the level of total assets increases. The fee rate for each level of assets is .07 of 1% for the first $6 billion, .06 of 1% for the next $10 billion and .05 of 1% thereafter. The Member Services Agreement will remain in effect until August 31, 1995 and from year to year thereafter only if its continuance is specifically approved at least annually by the vote of a majority of those Trustees who are not "interested persons" of the Fund Manager, AFSC, or the Funds cast in person at a meeting called for the purpose of voting on such approval and either by vote of a majority of the Trustees or, with respect to each Fund, by a majority of the outstanding voting securities of that Fund. The continuance of the Member Services Agreement was last approved by the Trustees (including a majority of the Trustees who are not such "interested persons") on November 15, 1993 and by shareholders on January 13, 1994. The Member Services Agreement may be terminated at any time without payment of penalty by the Funds on sixty days' written notice, or by AFSC upon six months' notice to the Funds and to the Fund Manager, and automatically terminates in the event of its assignment or the assignment of the Management Agreement. Pursuant to a Service Mark License Agreement, dated November 30, 1984 (February 18, 1985 in the case of AARP Cash Investment Funds), among the Trusts, the Fund Manager and AARP, use of the AARP service marks by a Trust and its Funds will be terminated, unless otherwise agreed to by AARP, upon termination of that Trust's Management Agreement. Officers and employees of the Fund Manager from time to time may have transactions with various banks, including the AARP Funds' custodian bank. It is the Fund Manager's opinion that the terms and conditions of those transactions which have occurred were not influenced by existing or potential custodial or other Fund relationships. None of the officers or Trustees of a Trust may have dealings with that Trust as principals in the purchase or sale of securities, except as individual subscribers or holders of shares of the Funds.
TRUSTEES AND OFFICERS Position with Position Principal Underwriter, Name and Address with Trusts Occupation** Scudder Investor - ---------------- ---------- ------------ Services, Inc. ------------------- -- Cuyler W. Findlay#* Chairman of the Managing Director Senior Vice Board and of Scudder, President and Trustee Stevens & Clark, Director Inc. Horace B. Deets+* Vice Chairman Executive - and Trustee Director, American Association of Retired Persons Linda Coughlin#* President and Managing Director Director Trustee of Scudder, Stevens & Clark, Inc. Adelaide Attard Trustee Gerontology - 270-28N Grand Central ( 1, 2,4) Consultant; Parkway formerly Floral Park, NY Commissioner, County of Nassau, New York, Dept. of Senior Citizen Affairs (1971- 1991); formerly Chairperson, Federal Council on Aging (1981-1986) Cyril F. Brickfield+* Trustee (2,3,4), Honorary President - Honorary Trustee and Special (1) Counsel, American Association of Retired Persons Robert N. Butler, Trustee (2,4) Brookdale - M.D. Professor of 211 Central Park West Geriatrics and Apt. 7F Adult Development, New York, NY Mount Sinai School of Medicine (1982 to present); Director, National Institute on Aging, National Institute of Health (1976-1982) Mary Johnston Evans Trustee (1,3,4) Corporate - 920 Fifth Ave. Director, Senior New York, NY Member of The Conference Board, Inc. Edgar R. Fiedler Trustee (1,2,3) Vice President and - 845 Third Ave. Economic New York, NY Counsellor, The Conference Board, Inc. Lt. Gen. Eugene P. Trustee (2,3) International - Forrester Trade Consultant 1101 S. Arlington (1983 to present); Ridge Rd. Lt. General Arlington, VA (Retired), U.S. Army; Corporate Director Wayne F. Haefer* Trustee (2,3,4) Director, - Membership Division of AARP; Secretary, Employee's Pension and Welfare Trusts of AARP and Retired Persons Services, Inc. William B. Macomber Trustee (3,4) Formerly Teacher, - 27 Monomoy Rd. History and Nantucket, MA Government, Nantucket H.S., Nantucket, MA; formerly President, The Metropolitan Museum of Art and U.S. Ambassador to Turkey and Jordan George L. Maddox, Jr. Trustee (2,3) Chairman, Duke - P.0. Box 2920 University Council Duke Univ. Medical on Aging and Human Center Development; Durham, NC Professor of Sociology, Departments of Sociology and Psychiatry, Duke University Robert J. Myers Trustee (1,2,4) Actuarial - 9610 Wire Ave. Consultant (1983 - Silver Spring, MD present); formerly Chairman, Commission on Railroad Retirement Reform (1988-90); Deputy Commissioner, U.S. Social Security Administration (1981-1982); Member, National Commission on Social Security (1978-1981); formerly Executive Director, National Commission on Social Security Reform (1982-1983); Director, NASL Series Fund, Inc.; Director North American Funds Joseph S. Perkins+ Trustee Director, American - Association of Retired Persons; Corporate Retirement Manager, Polaroid Company James H. Schulz Trustee (2,3,4) Professor of - 163 Scruton Pond Road Economics and Barrington, NH 03825 Kirstein Professor of Aging Policy, Policy Center on Aging, Florence Heller School, Brandeis University Gordon Shillinglaw Trustee (1,3,4) Professor Emeritus - 196 Villard Ave. of Accounting, Hastings-on-Hudson, Columbia NY University Graduate School of Business Edward V. Creed## Vice President Principal of - Scudder, Stevens & Clark, Inc. Thomas W. Joseph## Vice President Principal of Vice President, Scudder, Stevens & Director, Treasurer Clark, Inc. and Assistant Clerk David S. Lee## Vice President Managing Director President, and Assistant of Scudder, Assistant Treasurer Treasurer Stevens & Clark, and Director Inc. Douglas M. Loudon# Vice President Managing Director - of Scudder, Stevens & Clark, Inc. Thomas F. McDonough## Vice President Principal of Clerk and Assistant Scudder, Stevens & Secretary Clark, Inc. Pamela A. McGrath## Vice President Principal of - and Treasurer Scudder, Stevens & Clark, Inc. Edward J. O'Connell# Vice President Principal of Assistant Treasurer and Assistant Scudder, Stevens & Treasurer Clark, Inc. Kathryn L. Quirk# Vice President Managing Director Vice President and Secretary of Scudder, Stevens & Clark, Inc. Howard Schneider# Vice President Managing - Director of Scudder, Stevens & Clark, Inc. Cornelia M. Small# Vice President Managing Director - of Scudder, Stevens & Clark, Inc. 1) AARP Cash Investment Funds 3) AARP Tax Free Income Trust 2) AARP Income Trust 4) AARP Growth Trust * Messrs. Brickfield, Deets, Findlay, Haefer, Perkins and Ms. Coughlin are Trustees of each of the Trusts and are considered by the Trusts and their counsel to be persons who are "interested persons" of the Trusts (within the meaning of the Investment Company Act of 1940, as amended). ** Unless otherwise stated, all the Trustees and officers have been associated with their respective companies for more than five years, but not necessarily in the same capacity. # Address: 345 Park Avenue, New York, New York ## Address: Two International Place, Boston, Massachusetts + Address: 601 E Street, N.W., Washington, D.C. As of December 31, 1994 , all Trustees and officers of the Funds as a group owned beneficially (as that term is defined under Section 13(d) of the Securities Exchange Act) less than 1% of the outstanding shares of each Fund. To the best of the Trusts' knowledge as of December 31, 1994 no other person owned beneficially more than 5% of the outstanding shares of any of the Trusts except that the American Association of Retired Persons held 19,000,000 shares in the AARP High Quality Money Fund, 5.84% of the outstanding shares. REMUNERATION Several of the officers and Trustees of the Trusts may be officers or employees of Scudder, Stevens & Clark, Inc., Scudder Service Corporation, Scudder Investor Services, Inc., or Scudder Trust Company and will participate in the fees received by such entities. No individual affiliated with AARP will participate directly in any such fees. The Trusts pay no direct remuneration to any officer of the Trusts. However, each of the Trustees who is not affiliated with Scudder, Stevens & Clark, Inc. or AARP will be paid by the Trust(s) for which he or she serves as Trustee. Each of these unaffiliated Trustees will receive an annual fee of $2000 from each Fund for which he or she serves plus $270 for each Trustees' meeting and $200 for each audit committee meeting or meeting held for the purpose of considering arrangements between the Fund and the Fund Manager or any of its affiliates attended. Each unaffiliated Trustee also receives $100 per committee meeting, other than an audit committee meeting, attended. If any such meetings are held jointly with meetings of one or more mutual funds advised by the Fund Manager, a maximum fee of $800 for meetings of the Board, meetings of the unaffiliated members of the Board for the purpose of considering arrangements between the Fund and the Fund Manager or any of its affiliates or the audit committees of such Funds, and $400 for all other committee meetings or meetings of the unaffiliated members of the Board is paid, to be divided equally among the Funds. For the year ended September 30, 1994, the Trustees' fees and expenses for six of the Funds , and for the period from February 1, 1994 (commencement of operations) to September 30, 1994 for the AARP Balanced Stock and Bond Fund, were as follows:
AARP High Quality Money Fund $20,362 AARP GNMA and U.S. Treasury Fund 30,128 AARP High Quality Bond Fund 30,128 AARP High Quality Tax Free Money 30,653 Fund AARP Insured Tax Free General Bond 30,653 Fund AARP Balanced Stock and Bond Fund 18,050 AARP Growth and Income Fund 28,587 AARP Capital Growth Fund 28,587
The following Compensation Table provides, in tabular form, the following data: Column (1): all Trustees who receive compensation from the Trusts. Column (2): aggregate compensation received by a Trustee from all the series of a Trust. Columns (3) and (4): pension or retirement benefits accrued or proposed be paid by the Trusts. The AARP Trusts do not pay their Trustees such benefits. Column (5): total compensation received by a Trustee from the Trusts, plus compensation received from all Funds that are advised by the Fund Manager (the "Fund Complex") for which a Trustee serves. The total number of Funds from which a Trustee receives such compensation is also provided.
Compensation Table for the year ended December 31, 1994 - -------------------------------------------------------------------------------------------------------- (1) (2) (3) (4) (5) Aggregate Compensation from (c) AARP Tax Free (d) (b) Income AARP Growth AARP Trust Trust Income consisting consisting Trust of two of three (a) consisting Funds: Funds: AARP AARP Cash of two AARP High Balanced Investment Funds: Quality Stock and Fund AARP GNMA Tax Free Bond Fund, Pension or Total consisting and U.S. Money Fund AARP Growth Retirement Compensation of one Treasury and AARP and Income Benefits Estimated from the Fund: AARP Fund and Insured Fund and Accrued as Annual AARP Trusts High AARP High Tax Free AARP Part of Benefits and Fund Name of Person, Quality Quality General Capital Fund Upon Complex Paid Position Money Fund Bond Fund Bond Fund Growth Fund Expenses Retirement to Trustee - ------------------ ---------- ---------- ---------- ----------- ---------- ---------- ----------- Adelaide Attard, - $ 7,750 - $ 13,640 N/A N/A $ 21,390 Trustee (5 funds) Robert N. Butler, - $ 7,290 - $ 11,750 N/A N/A $ 19,040 Trustee (5 funds) Mary Johnston $ 3,893 - $ 7,187 $ 12,420 N/A N/A $ 35,000 Evans, Trustee (7 funds) Edgar R. Fiedler, $ 3,740 $ 7,610 $ 7,280 - N/A N/A $ 51,750 Trustee (6 funds) Eugene P. - $ 8,030 $ 8,500 - N/A N/A $ 16,530 Forrester, Trustee (4 funds) William B. - - $ 7,792 $ 12,398 N/A N/A $ 20,190 Macomber, Trustee (5 funds) George L. Maddox, - $ 8,030 $ 8,500 - N/A N/A $ 16,530 Jr., Trustee (4 funds) Robert J. Myers, $ 3,594 $ 7,369 - $ 11,787 N/A N/A $22,750 Trustee (6 funds) James H. Schulz, - - $ 7,392 $ 12,998 N/A N/A $ 20,390 Trustee (5 funds) Gordon $ 3,959 - $ 7,719 $ 12,892 N/A N/A $ 89,570 Shillinglaw, (14 funds) Trustee
DISTRIBUTOR Each of the Trusts has an underwriting agreement with Scudder Investor Services, Inc. (the "Distributor"), a Massachusetts corporation, which is wholly-owned by Scudder, Stevens & Clark, Inc., a Delaware corporation. The underwriting agreements dated September 4, 1985 will remain in effect until August 31, 1995 and from year to year thereafter only if their continuance is approved annually by a majority of the members of the Board of Trustees of each Trust 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 of each Trust or a majority of the outstanding voting securities of each Trust. Under each Trust's principal underwriting agreement, the Trust is 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; the fees and expenses of preparing, printing and mailing prospectuses (see below for expenses relating to prospectuses paid by the Distributor), notices, proxy statements, reports or other communications (including newsletters) to shareholders of the Trust; the cost of printing and mailing confirmations of purchases of shares and the prospectuses accompanying such confirmations; any issue taxes or any initial transfer taxes; a portion of shareholder toll-free telephone charges; the cost of wiring funds for share purchases and redemptions (unless paid by the shareholder who initiates the transaction); and the cost of printing and postage of business reply envelopes. The Distributor will pay for printing and distributing prospectuses or reports prepared for its use in connection with the offering of shares of the Funds to the public and preparing, printing and mailing any other literature or advertising in connection with the offering of shares of the Funds 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 customer service representatives, a portion of the cost of computer terminals, and of any activity which is primarily intended to result in the sale of shares issued by each Trust. Note: Although each Trust does not currently have a Rule 12b-1 Plan and shareholder approval would be required in order to adopt one, the underwriting agreements provide that the Trust will also pay those fees and expenses permitted to be paid or assumed by that Trust pursuant to a Rule 12b-1 Plan, if any, adopted by each Trust, notwithstanding any other provision to the contrary in the underwriting agreement and each Trust or a third party will pay those fees and expenses not specifically allocated to the Distributor in the underwriting agreement. As agent, the Distributor currently offers shares of the Funds to investors in all states. Each underwriting agreement provides that the Distributor accepts orders for shares at net asset value because no sales commission or load is charged the investor. The Distributor has made no firm commitment to acquire shares of any of the Funds. TAXES (See "ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES" in the Prospectus.) Each AARP Fund has qualified and elected to be taxed as a regulated investment company under Subchapter M of the United States Internal Revenue Code (the "Code"), as amended, since its inception and intends to continue to so qualify. (Such qualification does not involve supervision of management or investment practices or policies by a government agency.) In any year in which a Fund so qualifies and distributes at least 90% of its investment company taxable income, and at least 90% of its net tax-exempt income, if any, the Fund generally is not subject to Federal income tax to the extent that it distributes to shareholders its investment company taxable income and net realized capital gains in the manner required under the Code. Each AARP Fund must distribute its taxable income according to a prescribed formula and will be subject to a 4% nondeductible excise tax on amounts not so distributed. The formula requires a Fund to distribute each calendar year at least 98% of its ordinary income (excluding tax-exempt 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 of such year, and any ordinary income and capital gains for prior years that was not previously distributed. To qualify under Subchapter M, gains from the sale of stock, securities and certain options, futures and forward contracts held for less than three months must be limited to less than 30% of each Fund's annual gross income. Moreover, short-term gains (i.e., gains from the sale of securities held for one year or less) are taxed as ordinary income when distributed to shareholders. Options, futures and forward activities of the AARP Funds may increase the amount of the short-term gains and gains that are subject to the 30% limitation. The determination of the nature and amount of investment company taxable income of a Fund will be based solely on the transactions in, and on the income received and expenses incurred by or allocated to, the Fund. Each AARP Fund intends to offset any realized net capital gains against any capital loss carryforward before making capital gains distributions to shareholders. Distributions of any investment company taxable income (which includes interest, dividends and the excess of net short-term capital gain over net long-term capital loss, less expenses) are taxable to shareholders as ordinary income. Generally, each Fund will distribute any net capital gains (the excess of its net realized long-term capital gain over its net realized short-term capital loss). If a Fund retains its net capital gains for investment, requiring Federal income tax to be paid thereon by the Fund, the Fund intends to elect to treat such capital gains as having been distributed to its shareholders. As a result, shareholders (a) will be required to include in income for Federal income tax purposes, as long-term capital gains, their proportionate share of such undistributed amounts and (b) will be entitled to credit their proportionate share of the Federal income tax paid thereon by the Fund against their Federal income tax liability. In the case of shareholders whose long-term capital gains would be taxed at a lower rate, the amount of the credit for tax paid by a Fund in excess of the shareholder's actual tax on capital gains may be applied to reduce the net amount of tax otherwise payable by such shareholders in respect of their other income or, if no tax is payable, the excess may be refunded. For Federal income tax purposes, the tax basis of shares owned by a shareholder of a Fund will be increased by an amount equal to the difference between its pro rata share of such gains and its tax credit. If a Fund retains net capital gains, it may not be treated as having met the excise tax distribution requirement. Distributions of net capital gains are taxable to shareholders as long-term capital gain, regardless of the length of time the shares of the Fund have been held by such shareholders. 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 by a Fund will be taxable as described above, whether made 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 received equal to the net asset value of a share of the Fund on the reinvestment date. Distributions by a Fund reduce the net asset value of the Fund's shares. Should a distribution reduce the net asset value below a shareholder's cost basis, such distribution nevertheless would 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 be careful to 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 return of capital upon distribution which will nevertheless be taxable to them. Shareholders who redeem, sell or exchange shares of a Fund may realize gain or loss if the proceeds are more or less than the shareholder's purchase price. Such gain or loss generally will be a capital gain or loss if the Fund shares were capital assets in the hands of the shareholder, and generally will be long- or short-term, depending on the length of time the Fund shares were held. However, if a shareholder realizes a loss on the sale of a share held at the time of sale for six months or less, such loss will be treated as long-term capital loss to the extent of any amounts treated as distributions of long-term capital gain during such six-month period. A gain realized on a redemption, sale or exchange will not be affected by a reacquisition of shares. A loss realized on a redemption, sale or exchange, however, will be disallowed to the extent the shares disposed of are replaced within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Equity options (including options on stock and options on narrow-based stock indexes) and over-the-counter options on debt securities written or purchased by a Fund will be subject to tax under Section 1234 of the Code. In general, no loss is recognized by a Fund upon payment of a premium in connection with the purchase of a put or call option. The character of any gain or loss recognized (i.e., long-term or short-term) will generally depend in the case of a lapse or sale of the option on the Fund's holding period for the option and in the case of an exercise of a put option on the Fund's holding period for the underlying security. The purchase of a put option may constitute a short sale for federal income tax purposes, causing an adjustment in the holding period of the underlying security or a substantially identical security of the Fund. If a Fund writes a put or call option, no gain is recognized upon its receipt of a premium. If the option lapses or is closed out, any gain or loss is treated as a short-term capital gain or loss. If a call option written by a Fund is exercised, the character of the gain or loss depends on the holding period of the underlying security. The exercise of a put option written by a Fund is not a taxable transaction for the Fund. Many futures contracts, certain foreign currency forward contracts and all listed nonequity options (including options on debt securities, options on futures contracts, options on securities indices and options on broad-based stock indices) will constitute "section 1256 contracts." Absent a tax election to the contrary, gain or loss attributable to the lapse, exercise or closing out of any such position generally will be treated as 60% long-term and 40% short-term capital gain or losses. Also, section 1256 contracts held by the Funds at the end of each taxable year (and, for purposes of the 4% excise tax, on October 31) are "marked to market" with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as 60% long-term and 40% short-term capital gain or loss. Under Section 988 of the Code, discussed below, foreign currency gain or loss from foreign currency-related forward contracts, certain futures and options, and similar financial instruments entered into or acquired by a Fund will be treated as ordinary income. Positions of a Fund which consist of at least one stock and at least one stock option or other position with respect to a related security which substantially diminishes the Fund's risk of loss with respect to such stock could be treated as a "straddle" which is governed by Section 1092 of the Code, the operation of which may cause deferral of losses, adjustments in the holding periods of stock or securities and conversion of short-term capital losses into long-term capital losses. An exception to these straddle rules exists for any "qualified covered call options" on stock written by a Fund. Positions of a Fund which consist of at least one position not governed by Section 1256 and at least one futures contract, foreign currency forward contract or nonequity option governed by Section 1256 which substantially diminishes the Fund's risk of loss with respect to such other position will be treated as a "mixed straddle." Although mixed straddles are subject to the straddle rules of Section 1092 of the Code, certain tax elections exist for them which reduce or eliminate the operation of these rules. Each Fund will monitor its transactions in options and futures and may make certain tax elections in connection with these investments. Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time a Fund accrues receivables or liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain futures contracts, forward contracts and options, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date of disposition are also treated as ordinary gain or loss. These gains or losses, referred to under the Code as "Section 988" gains or losses, may increase or decrease the amount of a Fund's investment company taxable income to be distributed to its shareholders as ordinary income. If a Fund invests in stock of certain foreign investment companies, the Fund may be subject to U.S. federal income taxation on a portion of any "excess distribution" with respect to, or gain from the disposition of, such stock. The tax would be determined by allocating such distribution or gain ratably to each day of the Fund's holding period for the stock. The distribution or gain so allocated to any taxable year of the Fund, other than the taxable year of the excess distribution or disposition, would be taxed to the Fund at the highest ordinary income rate in effect for such year, and the tax would be further increased by an interest charge to reflect the value of the tax deferral deemed to have resulted from the ownership of the foreign company's stock. Any amount of distribution or gain allocated to the taxable year of the distribution or disposition would be included in the Fund's investment company taxable income and, accordingly, would not be taxable to the Fund to the extent distributed by the Fund as a dividend to its shareholders. Proposed regulations have been issued which may allow the Fund to make an election to mark to market its shares of these foreign investment companies in lieu of being subject to U.S. federal income taxation. At the end of each taxable year to which the election applies, the Fund would report as ordinary income the amount by which the fair market value of the foreign company's stock exceeds the Fund's adjusted basis in these shares. No mark to market losses may be recognized. The effect of the election would be to treat excess distributions and gain on dispositions as ordinary income which is not subject to a Fund level tax when distributed to shareholders as a dividend. Alternatively, the Fund may elect to include as income and gain its share of the ordinary earnings and net capital gain of certain foreign investment companies in lieu of being taxed in the manner described above. Income received by a Fund from sources within foreign countries may be subject to withholding and other taxes imposed by those countries. Certain of the debt securities acquired by the Funds may be treated as debt securities that were originally issued at a discount. Original issue discount represents interest for Federal income tax purposes and can generally be defined as the difference between the price at which a security was issued and its stated redemption price at maturity. Although no cash income is actually received by the Funds, original issue discount earned in a given year generally is treated for Federal income tax purposes as income earned by the Funds, and therefore is subject to the distribution requirements of the Code. The amount of income earned by the Funds is determined on the basis of a constant yield to maturity which takes into account at least semi-annual or annual compounding (depending on the date of the security) of accrued interest. In addition, some of the debt securities may be purchased by the Funds at a discount which exceeds the original issue discount on such debt securities, if any. This additional discount represents market discount for Federal income tax purposes. The gain realized on the disposition of many debt securities, including tax-exempt securities having market discount will be treated as ordinary income to the extent it does not exceed the accrued market discount on such debt security. Generally, market discount accrues on a daily basis for each day the debt security is held by the Funds at a constant rate over the time remaining to the debt security's maturity or, at the election of the Funds, at a constant yield to maturity which takes into account the semi-annual compounding of interest. The Funds will be required to report to the Internal Revenue Service all distributions of taxable income and capital gains as well as gross proceeds from the redemption or exchange of Fund shares, except in the case of certain exempt shareholders. All such distributions and proceeds 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 Funds with their taxpayer identification numbers and with required certifications regarding their status under Federal income tax laws. Withholding may also be required if a Fund 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 or proceeds, whether taken in cash or reinvested in additional shares, will be reduced by the amounts required to be withheld. Investors may wish to consult their tax advisers about the applicability of the backup withholding provisions. In addition to Federal taxes, shareholders of the Funds may be subject to state and local taxes on distributions from the Funds. Under the laws of certain states, distributions of investment company taxable income are taxable to shareholders as dividend income even though a substantial portion of such distributions may be derived from interest on U.S. Government obligations which, if received directly by the resident of such state, would be exempt from such state's income tax. Shareholders should consult their own tax advisers with respect to the tax status of distributions from the Funds in their own state and localities. The foregoing discussion relates solely to U.S. Federal income tax law as applicable 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 consult his or her tax adviser regarding the U.S. and foreign tax consequences of ownership of shares of the Fund, including the likelihood that such a shareholder would be subject to a U.S. withholding tax at a rate of 31% (or at a lower rate under a tax treaty) on amounts constituting ordinary income to him or her. Special Information Regarding AARP High Quality Tax Free Money Fund and AARP Insured Tax Free General Bond Fund: Each of the AARP Tax Free Income Funds intends to qualify to pay "exempt-interest dividends" to its shareholders. Each Fund will be so qualified if, at the close of each quarter of its taxable year, at least 50% of the value of its total assets consists of securities of states, U.S. possessions, their political subdivisions, and the District of Columbia, the interest on which is exempt from Federal tax. To the extent that the Funds' dividends distributed to shareholders are derived from earnings on interest income exempt from Federal tax and are designated as "exempt-interest dividends" by the Funds, they will be excludable from a shareholder's gross income for Federal income tax purposes. "Exempt-interest dividends," however, must be taken into account by shareholders in determining whether their total incomes are large enough to result in taxation of up to 85% of their social security benefits. In addition, interest on certain municipal obligations (private activity bonds) will be treated as a preference item for purposes of calculating the alternative minimum tax for individuals and for corporations. Similarly, income distributed by the Funds, including exempt-interest dividends, may constitute an adjustment to alternative minimum taxable income of corporate shareholders. The Funds do not intend to purchase any private activity bonds. The Funds will inform shareholders annually as to the portion of the distributions from the Funds which constituted "exempt-interest dividends." To the extent that the Funds' dividends are derived from interest on their temporary taxable investments or from an excess of net short-term capital gain over net long-term capital loss, they are considered ordinary taxable income for Federal income tax purposes. Distributions, if any, of net long-term capital gains from the sale of securities are taxable at long-term capital gain rates regardless of the length of time the shareholder has owned Fund shares. However, if a shareholder realizes a loss on the sale of a share held at the time of sale for six months or less, such loss will be treated as long-term capital loss to the extent of any amounts treated as distributions of long-term capital gain during such six-month period. Furthermore, a loss realized by a shareholder on the sale of shares of the Funds with respect to which exempt-interest dividends have been paid will be disallowed if such shares have been held by the shareholder for six months or less (to the extent of exempt-interest dividends paid). Under the Code, a shareholder's interest expense deductions with respect to indebtedness incurred or continued to purchase or carry shares of an investment company paying exempt-interest dividends, such as either of the AARP Tax-Free Funds, may be limited. In addition, under rules issued by the Internal Revenue Service for determining when borrowed Funds are considered used for the purposes of purchasing or carrying particular assets, the purchase of shares may be considered to have been made with borrowed Funds even though the borrowed Funds are not directly traceable to the purchase of shares. Opinions relating to the validity of municipal securities and the exemption of interest thereon from Federal income tax are rendered by bond counsel to the issuer. Neither AARP, the Fund Manager, nor Counsel to the Funds makes any review of proceedings relating to the issuer of municipal securities or the bases of such opinions. The foregoing description regarding the AARP Tax-Free Funds relates only to Federal income tax law. Investors should consult with their tax advisers as to exemption from other state or local law. Persons who may be "substantial users" (or "related persons" of substantial users) of facilities financed by industrial development bonds should consult their tax advisers before purchasing shares of the Funds. BROKERAGE AND PORTFOLIO TURNOVER Brokerage To the maximum extent feasible the AARP Funds' investment adviser will place orders for portfolio transactions through the Distributor, which in turn will place orders on behalf of the AARP Funds with other brokers and dealers. The Distributor receives no commission, fees or other remuneration from the Funds for this service. Allocation of brokerage is supervised by the Fund Manager. Purchases and sales of fixed-income securities for the AARP Funds are generally placed by the Fund Manager with primary market makers for these securities on a net basis, without any brokerage commission being paid by a Fund. Trading does, however, involve transaction costs. Transactions with dealers serving as primary market makers reflect the spread between the bid and asked prices. Purchases of underwritten issues may be made which will include an underwriting fee paid to the underwriter. The primary objective of the Fund Manager in placing orders for the purchase and sale of assets for the AARP Funds' portfolios is to obtain the most favorable net results, taking into account such factors as price, commission (which is negotiable in the case of national securities exchange transactions), size of order, difficulty of execution and skill required of the executing broker/dealer. The Fund Manager seeks to evaluate the overall reasonableness of brokerage commissions paid through the familiarity of the Distributor with commissions charged on comparable transactions, as well as by comparing commissions paid by the AARP Funds to reported commissions paid by others. The Fund Manager reviews on a routine basis commission rates, execution and settlement services performed, making internal and external comparisons. When it can be done consistently with the policy of obtaining the most favorable net results, it is the Fund Manager's practice to place such orders with brokers and dealers who supply market quotations to the custodian of the AARP Funds for appraisal purposes, or who supply research, market and statistical information to the Funds or the Fund Manager. The term "research, market and statistical information" includes advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities, and furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and concerning the performance of accounts. The Fund Manager is not authorized, when placing portfolio transactions for the AARP Funds, to pay a brokerage commission in excess of that which another broker might have charged for executing the same transaction solely on account of the receipt of research, market or statistical information. The Fund Manager will not place orders with brokers or dealers on the basis that the broker or dealer has or has not sold shares of the Funds. Except for implementing the policy stated above, there is no intention to place portfolio transactions with particular brokers or dealers or groups thereof. In effecting transactions in over-the-counter securities, orders are placed with the principal market makers for the security being traded unless, after exercising care, it appears that more favorable results are available otherwise. Subject to obtaining the most favorable results, the Fund Manager may place particular transactions through the Distributor, with the net commission or fee being credited against the fee payable to the Fund Manager. The Distributor, however, does not intend to engage in a general brokerage business. Also subject to obtaining the most favorable net results, the Fund Manager may place brokerage transactions with Bear, Stearns & Co. A credit against the custodian fee due to State Street Bank and Trust Company equal to one-half of the commission on any such transaction will be given on any such transaction. The Fund did not enter into any such transactions during its fiscal year. Although certain research, market and statistical information from brokers and dealers can be useful to the AARP Funds and to the Fund Manager, it is the opinion of the Fund Manager that such information is only supplementary to its own research effort since the information must still be analyzed, weighed, and reviewed by the Fund Manager's staff. Such information may be useful to the Fund Manager in providing services to clients other than the AARP Funds, and not all such information is used by the Fund Manager in connection with the AARP Funds. Conversely, such information provided to the Fund Manager by brokers and dealers through whom other clients of the Fund Manager effect securities transactions may be useful to the Fund Manager in providing services to the AARP Funds. For the fiscal years ended September 30, 1992, 1993 and 1994, the AARP Growth and Income Fund paid brokerage commissions of $812,540, $1,369,243 and $2,319,113 and the AARP Capital Growth Fund paid brokerage commissions of $832,983, $1,154,049 and $1,156,320, both respectively. For the period ending September 30, 1994, the AARP Balanced Stock and Bond Fund paid brokerage commissions of $152,376 . In the fiscal year ended September 30, 1994, $2,198,322 (95%) of the total brokerage commissions paid by AARP Growth and Income Fund and $1,061,196 (92%) by AARP Capital Growth Fund resulted from orders placed, consistent with the policy of obtaining the most favorable net results, with brokers and dealers who provided supplementary research information to the Funds or the Fund Manager. The amount of such transactions aggregated $621,824,800 for the AARP Capital Growth Fund, (92% of all brokerage transactions) and $1,400,204,341 (94% of all brokerage transactions) for the AARP Growth and Income Fund. The balance of such brokerage was not allocated to any particular broker or dealer or with regard to the above-mentioned or other special factors. For the period ended September 30, 1994, $138,142 (91%) of the total brokerage commissions paid by AARP Balanced Stock and Bond Fund resulted from orders placed, consistent with the policy of obtaining the most favorable net results, with brokers and dealers who provided supplementary research information to the Funds or the Fund Manager. The amount of such transactions aggregated $84,089,916 for AARP Balanced Stock and Bond Fund, ( 85% of all brokerage transactions). The balance of such brokerage was not allocated to any particular broker or dealer or with regard to the above-mentioned or other special factors. The Trustees review from time to time whether the recapture for the benefit of the Funds of some portion of the brokerage commissions or similar fees paid by the Funds on portfolio transactions is legally permissible and advisable. To date, no recapture has been effected. Portfolio Turnover Fund securities may be sold to take advantage of investment opportunities arising from changing market levels or yield relationships. Although such transactions involve additional costs in the form of spreads or commissions, they will be undertaken in an effort to improve the overall investment return of a Fund, consistent with that Fund's objectives. The portfolio turnover rate of a Fund is defined in a Rule of the SEC as the lesser of the value of securities purchased or securities sold during the year, excluding all securities whose maturities at the time of acquisition were one year or less, divided by the average monthly value of such securities owned during the year. The average annual portfolio turnover rates for the fiscal years ended September 30, 1992, 1993 and 1994, for five of the non-money market Funds were: AARP GNMA and U.S. Treasury Fund, 74.33%, 105.49% and 114.54%; AARP High Quality Bond Fund, 63.00%, 100.98% and 63.75%; AARP Insured Tax Free General Bond Fund, 62.45%, 47.96% and 38.39%; AARP Growth and Income Fund, 36.40%, 17.44% and 31.82%; AARP Capital Growth Fund, 89.20%, 100.63% and 79.65%, all respectively. The average annual portfolio turnover rate for the period ending September 30, 1994 for the AARP Balanced Stock and Bond Fund was 49.32%. NET ASSET VALUE AARP Money Funds The net asset value per share of the Fund is computed twice daily as of twelve o'clock noon and the close of regular trading on the Exchange, normally 4 p.m. eastern time, on each day when the Exchange is open for trading. The Exchange is normally closed on the following national holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas. Net asset value is determined by dividing the total assets of the Fund, less all of its liabilities, by the total number of shares of the Fund outstanding. The Fund uses the penny-rounding method of security valuation as permitted under Rule 2a-7 under the 1940 Act. Under this method, portfolio securities for which market quotations are readily available and which have remaining maturities of more than 60 days from the date of valuation are valued at the mean between the over-the-counter bid and asked prices. Securities which have remaining maturities of 60 days or less are valued by the amortized cost method; if acquired with remaining maturities of 61 days or more, the cost thereof for purposes of valuation is deemed to be the value on the 61st day prior to maturity. Other securities are appraised at fair value as determined in good faith by or on behalf of the Trustees of the Fund. For example, securities with remaining maturities of more than 60 days for which market quotations are not readily available are valued on the basis of market quotations for securities of comparable maturity, quality and type. Determinations of net asset value per share for the Fund made other than as of the close of the Exchange may employ adjustments for changes in interest rates and other market factors. AARP Non-Money Market Funds The net asset value of shares of the Fund 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, 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 the Fund, less all liabilities, by the total number of shares outstanding. An exchange-traded equity security is valued at its most recent sale price. Lacking any sales, the security is valued at the calculated mean between the most recent bid quotation and the most recent asked quotation (the "Calculated Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid quotation. An equity security which is traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") system is valued at its most recent sale price. Lacking any sales, the security is valued at the high or "inside" bid quotation. The value of an equity security not quoted on the NASDAQ System, but traded in another over-the-counter market, is its most recent sale price. Lacking any sales, the security is valued at the Calculated Mean. Lacking a Calculated Mean, the security is valued at the most recent bid quotation. Debt securities, other than short-term securities, are valued at prices supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied valuations and electronic data processing techniques. Short-term securities with remaining maturities of sixty days or less are valued by the amortized cost method, which the Board believes approximates market value. If it is not possible to value a particular debt security pursuant to these valuation methods, the value of such security is the most recent bid quotation supplied by a bona fide marketmaker. If it is not possible to value a particular debt security pursuant to the above methods, the Adviser may calculate the price of that debt security, subject to limitations established by the Board. An exchange traded options contract on securities, currencies, futures and other financial instruments is valued at its most recent sale price on such exchange. Lacking any sales, the options contract is valued at the Calculated Mean. Lacking any Calculated Mean, the options contract is valued at the most recent bid quotation in the case of a purchased options contract, or the most recent asked quotation in the case of a written options contract. An options contract on securities, currencies and other financial instruments traded over- the-counter is valued at the most recent bid quotation in the case of a purchased options contract and at the most recent asked quotation in the case of a written options contract. Futures contracts are valued at the most recent settlement price. Foreign currency exchange forward contracts are valued at the value of the underlying currency at the prevailing exchange rate. If a security is traded on more than one exchange, or upon one or more exchanges and in the over-the-counter market, quotations are taken from the market in which the security is traded most extensively. If, in the opinion of the Fund'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 the Fund 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. Following the valuations of securities or other portfolio assets in terms of the currency in which the market quotation used is expressed ("Local Currency"), the value of these portfolio assets in terms of U.S. dollars is calculated by converting the Local Currency into U.S. dollars at the prevailing currency exchange rate on the valuation date. ADDITIONAL INFORMATION Experts The financial statements of the AARP Funds included in the Annual Report to shareholders dated September 30, 1994, are attached to this Statement of Additional Information, have been examined by Price Waterhouse LLP , independent accountants, and are incorporated by reference into this Statement of Additional Information in reliance upon the accompanying report of said firm, which report is given upon their authority as experts in accounting and auditing. Shareholder Indemnification Each of the Trusts 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. Each Declaration of Trust contains an express disclaimer of shareholder liability in connection with the Trust property or the acts, obligations or affairs of the Trust. Each Declaration of Trust also provides for indemnification out of the Trust property of any shareholder held personally liable for the claims and liabilities to 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 Trust itself would be unable to meet its obligations. No series of one Trust is liable for the obligations of another series in the AARP Complex. Ratings of Corporate Bonds The three highest ratings of Moody's for corporate bonds are Aaa, Aa and A. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds 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. Moody's states that Aa bonds are rated lower than the best bonds because margins of protection or other elements make long-term risks appear somewhat larger than for Aaa securities. Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Although factors giving security to principal and interest on bonds rated A are adequate, other elements may be present which suggest a susceptibility to impairment sometime in the future. The three highest ratings of S&P for corporate bonds are AAA (Prime), AA (High-grade) and A. Bonds rated AAA have the highest rating assigned by S&P to a debt obligation. Capacity to pay interest and repay principal is extremely strong. Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rating issues only in small degree. Bonds rated A have a strong capacity to pay principal and interest, although they are more susceptible to the adverse effects of changes in circumstances and economic conditions. Ratings of Commercial Paper The ratings Prime-1 and Prime-2 are the highest commercial paper ratings assigned by Moody's. Among the factors considered by Moody's in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; 6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships which exist with the issuer; and (8) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. Prime-2 ratings are assigned by Moody's to commercial paper issuers which have a strong capacity for meeting their obligations in a timely fashion. However, their financial, economic and managerial capacities will be less than that of Prime-1 borrowers. Financial characteristics such as earnings, coverage ratios and capitalization will be more affected by external economic factors than Prime-1 borrowers. Liquidity is still believed to be ample. The two highest ratings of S&P for commercial paper are A-1 and A-2. Commercial paper rated A-1 or better by S&P has the following characteristics: Liquidity ratios are adequate to meet cash requirements; long-term senior debt is rated "A" or better, although in some cases "BBB" credits may be allowed; the issuer has access to at least two additional channels of borrowing; basic earnings and cash flow have an upward trend with allowance made for unusual circumstances; typically, the issuer's industry is well established and the issuer has a strong position within the industry; the reliability and quality of management are unquestioned. S&P will assign an A-2 rating to the commercial paper of companies which have the capacity for timely payment on issues. However, the relative degree of safety is less than for issuers rated A-1. Ratings of Municipal Bonds The three highest ratings of Moody's for municipal bonds are Aaa, Aa, and A. Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds 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. Moody's states that Aa bonds are rated lower than the best bonds because margins of protection or other elements make long-term risks appear somewhat larger than for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess many favorable investment attributes and are considered "upper medium grade obligations." Factors giving security to principal and interest of A rated municipal bonds are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. The three highest ratings of S&P for municipal bonds are AAA (Prime), AA (High-grade), and A (Good grade). Bonds rated AAA have the highest rating assigned by S&P to a municipal obligation. Capacity to pay interest and repay principal is extremely strong. Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in a small degree. Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat susceptible to the adverse effects of changes in circumstances and economic conditions. Moody's ratings for municipal notes and other short-term loans are designated Moody's Investment Grade (MIG). This distinction is in recognition of the differences between short-term and long-term credit risk. Loans bearing the designation MIG1 are of the best quality, enjoying strong protection by establishing cash flows of Funds for their servicing or by established and broad-based access to the market for refinancing, or both. Loans bearing the designation MIG2 are of high quality, with margins of protection ample although not as large as in the preceding group. S&P's top ratings for municipal notes are SP-1 and SP-2. The designation SP-1 indicates a very strong capacity to pay principal and interest. A "+" is added for those issues determined to possess overwhelming safety characteristics. An "SP-2" designation indicates a satisfactory capacity to pay principal and interest. The ratings F-1+ and F-1 are the two highest ratings assigned by Fitch. Among the factors considered by Fitch in assigning these rating are: (1) the issuer's liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its ability to service its debt; (5) its profitability; (6) its return on equity; (7) its alternative sources of financing; and (8) its ability to access the capital markets. Analysis of the relative strength or weakness of these factors and others determines whether an issuer's commercial paper is within these two ratings. Other Information Each AARP Fund has a fiscal year ending on September 30. Portfolio securities of the AARP Funds are held separately, pursuant to a custodian agreements with each Trust, by State Street Bank and Trust Company of Boston as Custodian. Each Trust has shareholder servicing agreements with Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of Scudder, Stevens & Clark, Inc. SSC is the transfer agent, dividend disbursing and shareholder service agent for each Fund. Shareholder service expenses charged by SSC were for AARP High Quality Money Fund, $1,488,175; AARP GNMA and U.S. Treasury Fund, $9,570,696; AARP High Quality Bond Fund, $2,008,127; AARP High Quality Tax Free Money Fund, $403,163; AARP Insured Tax Free General Bond Fund, $2,511,304; AARP Growth and Income Fund, $2,985,636; and AARP Capital Growth Fund, $1,339,182, for the fiscal year ended September 30, 1994. Not all of these fees were paid in full at the fiscal year end. Shareholder service expenses charged by SSC for the AARP Balanced Stock and Bond Fund for the period of February 1, 1994 (commencement of operations) to September 30, 1994, were $355,400. The firm of Dechert Price & Rhoads of Washington, D.C. is counsel for the Trusts. Many of the investment changes in the Funds will be made at prices different from those prevailing at the time they may be reflected in a regular report to shareholders. These transactions will reflect investment decisions made by the Fund Manager in light of the objectives and policies of the Funds, and such factors as its other portfolio holdings and tax considerations, and should not be construed as recommendations for similar action by other investors. Costs incurred in connection with subsequent registrations of shares are being amortized on a pro-rata basis as the related shares are issued. If other Funds are added to a Trust, the Trustees will determine whether such Funds should bear any of such costs. Each Trust is located at Two International Place, Boston, Massachusetts 02110-4103 (telephone: 1-800-253-2277). Each has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement under the Securities Act of 1933, as amended, with respect to the shares of the Funds offered by the Prospectus. The Prospectus and this Statement of Additional Information do not contain all of the information set forth in the Registration Statements, certain parts of which are omitted in accordance with Rules and Regulations of the SEC. The Registration Statements may be inspected at the principal office of the SEC at 450 Fifth Street, N.W., Washington, D.C. and copies thereof may be obtained from the SEC at prescribed rates. The following chart demonstrates that tax-free yields are equivalent to higher taxable yields due to their tax-exempt status. For example, tax-free interest of 5% is the equivalent of 6.94% taxable in a 28% tax bracket. Please refer to the chart for more examples. Tax-Exempt Income vs. Taxable Income The following table illustrates comparative yields from taxable and tax-exempt obligations under federal income tax rates in effect for the 1994 calendar year.
1994 Taxable Income Brackets To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a Taxable Investment Would Have To Earn** Individual Federal Return Tax Rates 5% 7% 9% ---------------------- ----------- ------ ------ ------ $0 - $22, 750 15.0% 5.88% 8.24% 10.59% $22, 751 - $ 55,100 28.0% 6.94% 9.72% 12.50% $ 55,101 - $115,000 31.0% 7.25% 10.14% 13.04% $115,001 - $250,000 36.0% 7.81% 10.94% 14.06% Over $250,000 39.6% 8.28% 11.59% 14.90% Joint Return --------------------- $0 - $ 38,000 15.0% 5.88% 8.24% 10.59% $ 38,001 - $ 91,850 28.0% 6.94% 9.72% 12.50% $ 91,851 - $140,000 31.0% 7.25% 10.14% 13.04% $140,001 - $250,000 36.0% 7.81% 10.94% 14.06% Over $250,000 39.6% 8.28% 11.59% 14.90% ** These illustrations assume the Federal alternative minimum tax is not applicable, that an individual is not a "head of household" and claims one exemption and that taxpayers filing a joint return claim two exemptions. Note also that these federal income tax brackets and rates do not take into account the effects of (i) a reduction in the deductibility of itemized deductions for taxpayers whose federal adjusted gross income exceeds $ 111,800 ($ 55,900 in the case of a married individual filing a separate return), or of (ii) the gradual phaseout of the personal exemption amount for taxpayers whose federal adjusted gross income exceeds $ 111,800 (for single individuals) or $ 167,700 (for married individuals filing jointly). The effective federal tax rates and equivalent yields for such taxpayers would be higher than those shown above.
Example:* Based on 1994 federal tax rates, a married couple filing a joint return with two exemptions and taxable income of $40,000 would have to earn a tax-equivalent yield of 6.94% in order to match a tax-free yield of 5%. There is no guarantee that a Fund will achieve a specific yield. While most of the income distributed to the shareholders of each Fund will be exempt from federal income taxes, portions of such distributions may be subject to federal income taxes. Distributions may also be subject to state and local taxes. * Net amount subject to federal income tax after deductions and exemptions, exclusive of the alternative minimum tax. FINANCIAL STATEMENTS The financial statements, including the investment portfolio, of each AARP Fund, together with the Report of Independent Accountants and Supplementary Information are incorporated by reference and attached hereto on pages 22 through 103 inclusive in the Annual Report to the Shareholders of the AARP Funds dated September 30, 1994, and are hereby deemed to be a part of this Statement of Additional Information. Annual Report to Shareholders September 30, 1994 Chairman's Letter to Shareholders Understanding Mutual Fund Investment Performance AARP Fund Reports Portfolio Holdings and Financial Statements AARP Investment Program from Scudder Table of Contents Chairman's Letter to Shareholders 2 Understanding Mutual Fund Investment Performance 7 AARP Fund Reports 22 AARP High Quality Money Fund 23 AARP High Quality Tax Free Money Fund 25 AARP GNMA and U.S. Treasury Fund 27 AARP High Quality Bond Fund 30 AARP Insured Tax Free General Bond Fund 33 AARP Balanced Stock and Bond Fund 36 AARP Growth and Income Fund 39 AARP Capital Growth Fund 42 AARP Funds' Investment Portfolios 46 Financial Statements 88 Financial Highlights 94 Notes to Financial Statements 98 Report of Independent Accountants 103 Officers and Trustees 104 Service Information 107 Chairman's Letter to Shareholders Dear Shareholders, This Annual Report covers the period from October 1, 1993 to September 30, 1994 -- a period in time that has been quite difficult for investors. Most investments -- including some of the AARP Mutual Funds -- provided disappointing returns as the bond and stock markets reacted to rising short- and long-term interest rates and concerns about inflation as the U.S. economy strengthened. As you read through the Report, you will see one-year total returns that are well below those you have enjoyed in the past (yet in some cases above the market averages), and share price declines that may have prompted you to raise questions regarding your investments. It is understandable that many of you are concerned about the way your investments performed during the period covered by this Report. That is why we have added a special section this year that is devoted to understanding mutual fund performance -- the returns and risks of your investments. The scope of the section ranges from putting performance into historic context to interpreting mutual fund rankings, and understanding the risks involved with money funds, bond funds, and stock funds. We have also defined terminology that you may have been reading about lately: derivatives, duration, credit quality. We encourage you to read that section before you read the actual Fund Reports, so you are better able to put this performance information into perspective. In this letter, I'd like first to address why the markets behaved the way they did this year and conclude by updating you on some Program- specific matters. The Economy The financial markets have been turbulent during most of 1994. Ironically, this turbulence has occurred as the U.S. economy moved from a hesitant recovery to a solid expansion. Many of you may be puzzled as to why an improving economy hasn't led to better market performance. Economic growth often triggers worries about inflation because if growth is too fast, it uses up the economy's "spare capacity." Spare labor capacity is people looking for jobs but not finding them, measured by the unemployment rate. Spare production capacity is a factory producing less than it can, measured by the factory operating rate. When there is no more spare capacity, producers begin to ask for higher prices and have to begin to pay higher wages to attract scarce labor. That is the beginning of inflation. To ward off inflation, the Federal Reserve Board (the Fed) tries to keep economic growth consistent with how fast capacity is growing. If the Fed thinks the economy is growing too fast, it raises short-term interest rates to slow the economy down. Since the Fed thought the economy was growing too quickly, it raised the Federal Funds rate (the rate the banks charge each other for overnight loans) five times since February. The rate increases began on February 4, 1994, when the Fed raised the Federal Funds rate from 3.00% to 3.25%. This was the first time in five years the Fed raised interest rates. On March 10, 1994, the Federal Funds rate rose to 3.50% and again to 3.75% on April 18, 1994, and yet again to 4.25% on May 17, 1994. The latest hike as of this Report was on August 16, 1994 when the Federal Funds rate rose to 4.75%. With the increase in the Federal Funds rate, as well as other complex factors such as trade tensions and market speculation by certain investors, short- and long-term interest rates also rose. For the period covered by this Report, short-term rates, as measured by the three-month U.S. Treasury bill, rose from 3% to 4.67%. Long-term interest rates, as measured by the 30-year U.S. Treasury bond, rose from 6.02% to 7.81%. Interest Rates and the Markets Rising interest rates had a negative impact on the bond market because as interest rates rise, bond prices fall. In fact, this was the worst 12-month period for long-term bonds since 1950. From their peak in October 1993 to their trough in September 1994, 30-year U.S. Treasury bond prices declined approximately 22%. The stock market was also negatively impacted by a rise in interest rates, indicating that stock investors are greatly influenced by events in the bond market. Even without rising interest rates, however, many investment professionals felt the stock market was due for what is commonly referred to as a "correction." While this volatility in the stock market seemed severe to many of you because it followed a period of extremely low volatility, this correction was not the worst in history. From its high in late January 1994 to its low in April 1994, the Dow Jones Industrial Average (the Dow) fell approximately 10%. Since the end of World War II, however, there have been nine major market declines of more than 20%. One was in a single day on October 19, 1987, when the Dow dropped 23%, and another was during 1973 to 1974 when the market fell 45%. What to Expect Looking ahead to 1995, it is our view that there will be significant global economic growth, which will include emerging and former communist countries. We believe the U.S. economy will continue to grow modestly. Renewed expansion is likely to be accompanied by some inflationary pressures. However, we expect global competition, cautious monetary policy, and enhanced productivity to prevent a sudden increase in inflation. Against this backdrop, we expect both short-term and long-term interest rates to rise moderately. Moreover, we believe that stocks and bonds should provide long-term positive real (inflation-adjusted) returns in line with historical levels. What This Means to You As we have always stressed -- and it is true now more than ever -- it is important that you remain patient, diversify your assets, and take a long- term view toward investing. Rather than looking at the poor performance of one investment, look at the performance of your entire portfolio. If you have an investment time horizon of one to three years or more and can accept that the bond and stock markets will have short-term volatility, recent events should have little impact on your primary investment goal. Of course, if your personal situation has changed or you have realized that you are not comfortable with fluctuation, a reappraisal of your investment goals may be in order. Remember that diversification, or allocating your assets in a mix of different investments such as stocks, bonds, and money market investments, can be a sensible strategy to provide you with a degree of protection from market volatility. The AARP Investment Program from Scudder -- Two Milestones to Commemorate This year marks the 75th anniversary of the founding of Scudder, Stevens & Clark, Inc. investment adviser for the AARP Mutual Funds. Over the years, Scudder's investment perspective and dedication to research and fundamental investment disciplines have helped Scudder become one of the largest and most respected investment managers in the world. It was this reputation that attracted AARP to Scudder ten years ago, another anniversary to commemorate. The AARP Investment Program from Scudder was established in accordance with specific criteria requiring a commitment to providing value, delivering levels of superior service, and meeting high communication standards. AARP works closely with Scudder to insure the Program's high standards are met. It is this shared commitment to quality on the part of AARP and Scudder that has attracted growing numbers of AARP members to the Program. As of September 30, 1994, there were more than 720,000 investors participating in the Program and nearly $11.7 billion in assets under management. With each new shareholder comes a different need. That is why the Program prides itself on the introduction of new services and features that will help you meet those needs. In addition to the services outlined on the back page of this Report, which are constantly being reviewed and enhanced, the Program has introduced the following over the past year. * The AARP Balanced Stock and Bond Fund After considerable research, we determined that many AARP members were interested in a conservatively managed Fund that could offer them a mix of both stocks and bonds. Therefore, we were pleased to offer our newest AARP Mutual Fund to shareholders on February 1, 1994 -- the AARP Balanced Stock and Bond Fund. You have read about this Fund through the current Prospectus, the Mid-Year Report, and other communications. In addition, you can find information about it beginning on page 36 of this Report. * Helpful Publications We published two additional educational Guides during the year on subjects that AARP members have told us are important to them. "State Tax Laws: A Guide For Investors Aged 50 And Over" provides breakdowns of each state's tax structure. Also included is a glossary that briefly explains some of the more technical tax terms you will encounter, as well as easy-to-read grids that summarize the breakdowns. "Managing Your Money In Retirement: A Guide For Investors Aged 50 And Over" covers topics that may affect your finances during retirement, and is a companion piece to "Planning For Retirement : A Guide For Investors Aged 50 And Over." For your free copy of these Guides please call us at 1-800-253-2277. * Funds Centers Now Available to AARP Members Local offices in Boston, Boca Raton, and Scottsdale are now available to assist AARP members who have investment questions. These Funds Centers provide face-to-face assistance from knowledgeable AARP Mutual Fund Representatives who are specially trained to understand your investment objectives. So if you need help in allocating your assets, have questions about planning for retirement, or want to learn more about the AARP Mutual Funds, stop in and see us. For directions, please call us at 1-800-253-2277. Scudder Funds Center 4141 North Scottsdale Road, Suite 105 (Located in the Scottsdale Financial Center II) Scottsdale, Arizona 85251 Monday -- Friday 8:30 a.m. to 5:00 p.m. Scudder Funds Center 4400 Federal Highway, Suite #130 Boca Raton, Fl 33431 Monday -- Friday, 8:00 a.m. to 5:00 p.m. Scudder Funds Center 166 Federal Street Boston, Ma 02110 Monday -- Friday, 8:00 a.m. to 6:00 p.m. I'd like to close by reiterating that we are aware of how difficult the past year has been for investors. However, we would also like to stress that while most of the AARP Mutual Funds were negatively impacted by this historically unusual environment, all of the Funds adhered to their individual objectives. As you read through the interviews with the portfolio management teams, pay close attention to their investment strategies. You should feel comfortable that while returns -- as compared to past history -- may not have been favorable, the AARP Mutual Funds remained prudently managed with the AARP members' investment objectives in mind. Sincerely, /s/Cuyler W. Findlay Cuyler W. Findlay Chairman, AARP Investment Program from Scudder September 30, 1994 Understanding Mutual Fund Investment Performance: The Elements of Return and Risk Between the late 1980s and the end of 1993, investing in stocks and bonds seemed like an easy decision. With few exceptions, the markets went up for most of that five year period. Then came 1994, and we were all reminded that the markets go down as well as up. It is a good time, therefore, to take another look at mutual fund performance, which involves the elements of return and risk. You can't consider one without the other. By design, a mutual fund -- an investment company that pools money invested by many individuals with a "mutual" investment objective -- can be less risky than investing in individual securities. The reason is that most mutual funds are diversified, or invested in numerous securities. If one security fares poorly, then only a portion of the fund will be adversely affected. Keep in mind, however, that it is not the number of securities in a mutual fund that reduces risk, but the selection of those securities. In addition, the securities must be in line with the fund's objectives. Another way a mutual fund can help reduce risk is through professional investment management. Most of us don't have the time or expertise to continually manage a portfolio of stocks and bonds on our own. In contrast, a portfolio management team is spending every day on the investment process- - -sifting through corporate annual reports, interviewing corporate management, and making buy and sell decisions in a reasoned and researched way. But even with professional management and diversification, a mutual fund investment will fluctuate in value. Let us look at the two factors that make up a mutual fund's performance: how much it returns, and how risky it is. EVALUATING A MUTUAL FUND: Its Return To evaluate the return of a mutual fund, you must look at the income (dividends) the fund distributes, any increases or decreases in the value of fund shares (also referred to as market price changes), plus any capital gains paid to shareholders (distributions of capital gains realized by the fund). The combination of these components comprise a fund's total return. It is important not to confuse total return with yield. The yield of a fund reflects the approximate dividend paid divided by the current market share price, also known as net asset value, or the market worth of one share of a mutual fund. Income returns are generally the most important feature of bond funds, which are typically designed to produce more current income. Growth and income funds and balanced funds also may pursue dividend income from stocks as well as interest income from bonds. Income generally represents the investment performance of money market funds. Increases or decreases in the value of fund shares often account for most of the investment performance of growth funds, which generally invest in stocks for their long-term appreciation potential. Bond fund performance also reflects changes in share price. Money market funds are designed to produce income returns and a stable share price. When total return figures for a mutual fund are calculated, it is assumed that all income and capital gains have been reinvested, rather than taken as cash throughout the life of the investment. Keep in mind that the total return that you receive on a particular investment may be different from the total return figures that appear in advertisements, newsletters, and other publications. That is because the time period used in these publications may differ from the period of time you've owned your shares. Returns can be calculated on a cumulative basis or an average annualized return basis. A fund's cumulative total return will tell you how much a dollar invested on a particular date would be worth at the end of the period, assuming that distributions are reinvested. For example, from 9/30/89 to 9/30/94, the Standard & Poor's 500 Stock Price Index (S&P 500) posted a cumulative total return of 54.89%. (A $1.00 investment on 9/30/89 would have been worth $1.55 on 9/30/94.) Average annualized total return is a percentage that represents the average annual compounded rate of return over a specific time period. The S&P 500's 54.89% 5-year cumulative return, for example, translates into an average annualized total return of 9.14%. Compounding has an important effect on investment returns over time. Compounding is the process whereby investment returns accumulate value over time not only on the money you originally invested, but also on returns made during the life of an investment. With compounding, $1,000 earning 7% annually will be worth $1,070 after one year, $1,144.90 after two years ($1,070 times 1.07), and $1,225.04 after three years ($1,144.90 times 1.07), assuming you leave all your money invested. Whether you choose to reinvest your dividends depends on your need for current income. Comparing Your Fund's Return to a Benchmark Typically, a fund's average annualized total return will be compared to some unmanaged benchmark index. For stocks, the benchmarks include the Dow Jones Industrial Average (the Dow) or the S&P 500. The Dow, the oldest and most widely-quoted of all market indicators, is comprised of 30 large well- known corporations such as American Express, AT&T and IBM. The Dow, which represents about 15% of the market value of stocks listed on the New York Stock Exchange, is calculated based on the closing prices of the 30 component stocks on any given day. The S&P 500 is a broader measure of stock performance. It includes 500 stocks traded on the over-the-counter market and listed exchanges, and represents approximately 16% of the stocks listed on the New York Stock Exchange and 74% of New York Stock Exchange market value. For bonds, standard benchmarks include the 30-Year U.S. Treasury Bond, which is the main yardstick against which most long-term bond prices and interest rates are measured; the Lehman Brothers Aggregate Bond Index, which reflects the entire market for investment-grade treasury, corporate, and mortgage-backed bonds with maturities longer than one year; and the Lehman Brothers Municipal Bond Index, which is representative of investment grade municipal bonds of maturities longer than one year. As you compare a fund's performance to a benchmark, keep in mind that indices such as the S&P 500 or the Dow are not managed and therefore have no management or operating expenses associated with them. (These are expenses that are incurred by all mutual funds to pay costs associated with the fund's management and operations, i.e., investment management, telephone service, legal fees, auditors, etc.) Total operating expenses typically range from 0.25% to 2.5% of the fund's average net assets, and affect a fund's total return. You can find a fund's operating expenses and other fees in both the financial highlights table of the annual report and in the prospectus. How to Interpret Mutual Fund Rankings and Ratings Most of the major business publications, such as Barrons, Business Week, Forbes, Fortune, Kiplinger's, and Money, show rankings and/or ratings of mutual fund performance on a periodic basis. There are also Morningstar Inc. and Lipper Analytical Services Inc., two widely recognized independent rating services. Each publication and rating service uses different approaches and calculations to evaluate fund performance. With so many evaluations available, you should note the distinction between a ranking and a rating, especially since these figures are prominently featured in fund advertising and sales literature. A ranking is a nonjudgmental mathematical process in which similar funds are categorized based on their performance. You will see Lipper ranking mutual funds within particular categories such as GNMA funds, Growth and Income funds, etc. Ratings, based on a mathematical evaluation that involves return, risk, and other possible factors, emphasize some fund characteristics over others. For example, Morningstar rates funds according to total returns and a risk factor that reflects fund performance relative to three-month U.S. Treasury Bill returns. Considering one ranking or rating of your mutual fund, therefore, might not provide a complete picture of a mutual fund's performance. Funds perform differently in different investment environments, and every fund's absolute and relative performance changes depending on which time period is used as a frame of reference. Very few funds performed well during the first half of 1994, when the total return of the S&P 500 was negative 3.4% and the total return of the Lehman Brothers Aggregate Bond Index was negative 3.9%. Performance ratings and rankings, therefore, are just one piece of the puzzle in considering a fund. Putting Performance In Historical Context Part of the investment decision-making process is understanding how different types of securities have performed over long periods of time. This may help you ride through short-term fluctuations in the value of your mutual fund. Historically, stocks, as measured by the S&P 500, produced an average annualized return of 12.1% between 1945 and 1993, which assumes reinvestment of all dividends and capital gains. Bonds, as measured by the Salomon Brothers High-Grade Long-Term Corporate Bond Total Rate of Return Index, produced an average annualized total return of 5.6% -- much less than stocks, but typically with much less volatility. In contrast, three- month U.S. Treasury Bills produced a total return of 4.7%, and inflation averaged 4.4% during this time period. As this information indicates, you are generally better off if you are able to maintain a long-term view and are willing to accept the inevitable fluctuations that go along with investing. EVALUATING A MUTUAL FUND: Its Risk When evaluating the performance of a mutual fund, it is not enough to just look at the return. Measuring performance means you must look at return and risk together. But what do we mean by risk? For the purposes of this discussion, risk can be defined as the possibility of suffering degrees of loss. As in all aspects of life, there is no way to completely eliminate risk from your financial affairs. Put your money under your pillow? The house could burn down. Put the money in the bank? True, accounts up to $100,000 are federally insured. But "playing it safe" like this actually exposes you to the risk that your purchasing power will be eroded by inflation. Consider the purchasing power of the U.S. dollar since 1970. A dollar in 1970 would only buy 25 cents worth of goods today. In 1994, inflation has been generally about 3%, as has the return from some insured, fixed-rate Certificates of Deposit (CDs). If you pay income taxes, your CD returns would have been closer to 2%. You are not keeping up with inflation. To put it another way, putting your money in the bank can leave you vulnerable to purchasing power risk. Price risk is the possibility that your investment will fluctuate up and down in value, which poses a risk to your principal. If you want to avoid price risk, you'll either put your money in an insured, fixed-rate savings account or invest in a money market fund where there is low risk that the value of your principal will vary from year to year. The only way your account will grow, however, is by reinvesting the relatively low interest or dividends you would have received from CDs or money market funds. On the other hand, stock and bond funds involve varying levels of price risk. Their share prices can fluctuate significantly, depending upon the types of securities in the portfolio. However, the value of stock funds has generally risen over the long term, and bonds have returned significant value over time, primarily through the income they generate. Price risk is less and less relevant as your time horizon expands. But if you need the money in the short term, then the risk of price volatility can be significant. Typically, mutual funds that invest in smaller companies or emerging markets such as the Pacific Basin and Latin America tend to fluctuate more in price than do investments in established companies based in the United States. If you invest in bonds, you should also be concerned about credit risk. This refers to a bond issuer's inability, or perceived inability, to honor its obligations to repay its debts. A portfolio manager relies on ratings agencies such as Standard & Poor's (S&P) or Moody's Investors Service when purchasing bonds, although some managers have the ability to rate bonds independently. The bonds of companies that receive a below "investment grade" rating are generally referred to as "junk" bonds. They usually pay higher interest than investment grade bonds to compensate for their increased credit risk. As with corporate bonds, there is a spectrum of credit risk for municipal bonds, since the credit risk for these bonds is a function of the financial and political stability of the issuing municipality. For U.S. Treasury bonds, there is almost no risk because the federal government guarantees their payment. There are, of course, other types of risk involved with different investments. We will look at the risks of investing in money market funds, bond funds, and stock funds in more detail in the sections that follow. A Word about Derivatives Many of you have heard or read about derivatives, and how they are used by financial organizations including mutual funds. Because much has been written about them, it is worthwhile to take a brief look at what they are and whether they pose additional risks to your mutual fund investment. The term "derivative" is commonly defined as a financial instrument whose value is "derived" from, or based on, an underlying security, asset, or index. Derivatives began in the 19th century as risk-transfer contracts that provided protection against price changes in specific agricultural products and livestock. "Derivatives" cover a wide variety of instruments. Options, futures, and forward contracts are derivative contracts that originated with the commodities markets. The value of these derivatives goes up and down as the value of their underlying assets goes up and down. There are also derivative securities that derive their value from a security, index, or asset. An example of a derivative security is a structured note. In recent years, exotic and specialized derivatives such as "synthetic securities" have been introduced. The prices of these instruments may be based on fairly common investments including stocks and government bonds, but they can be reformulated in such a way as to make them have different levels of risk. Derivatives are subject to the same fundamental relationship between risk and potential return as are all investments. The higher the risk of a derivative, the greater its potential return. The lower the risk of the derivative, the lower its potential return. When used by a mutual fund, derivatives can reduce or increase risk in the same way that any security in the portfolio can. Derivatives are often used to help manage risk and to protect against the potential of large losses or to help increase your potential returns, although there is no assurance that this will indeed occur. Much depends on how they are used in the context of an overall fund portfolio -- but a mutual fund's investment in them should be consistent with its investment strategy. (For a more detailed discussion of derivatives, please refer to the October 1994 issue of Financial Focus.) What is Your Tolerance for Risk? Evaluating the risk of an investment involves understanding your own tolerance for risk. Do you know what it will take to make you feel secure, let you sleep at night, and not worry about tomorrow? With every investment, from the safest U.S. Treasury issue to the most speculative stock, there is a fundamental relationship between risk and potential return. If you choose less risky investments you must expect a lower return. To understand your risk tolerance, you may want to make a list of your short- and long-term needs and understand what your investment time horizon is (the period of time over which you plan to meet your investment goals). You may also want to consider your current employment situation (a retiree is likely to be more conservative than someone still working) and your comfort level in watching the value of your investment change. Measuring the Risk of a Mutual Fund Of course, even understanding the risk/ return relationship of an investment may not ease the uncertainty of share price fluctuation in a mutual fund. You want to know how to measure the risks of an investment before you invest. Mutual funds are required to mail a prospectus to you that explains the risks of purchasing shares in the fund. Many mutual fund companies have made great strides to make sure that these documents are written simply. Even with the disclosures, however, risk is very difficult to quantify. Unlike return, risk lacks a benchmark against which to establish public understanding. A standardized way of measuring risk-adjusted returns -- rates of return adjusted for the amount of risk taken -- is becoming more and more important to both individual investors and portfolio managers. Risk is measured by portfolio managers in many ways, such as duration (see page 17), Beta (see page 20), and standard deviation (see page 20). But bear in mind that each risk measure has its shortcomings because there is no one complete way to measure risk. For the individual investor, realizing that a fund's return alone does not give you the whole performance picture is the appropriate starting point. Understanding where a fund stands in the risk/return spectrum -- money funds on one end, aggressive growth funds on the other -- is also critical. And, finally, understanding the usefulness of risk-management techniques discussed next should be an ongoing practice through the life of an investment. Managing Risk through Diversification and Dollar Cost Averaging A way to help manage the price risk of a mutual fund investment -- and help you sleep at night -- is to understand some important risk management techniques. The first one is diversification. As mentioned in the beginning, mutual fund assets are typically diversified, or spread, among numerous securities. This diversification provides you with the opportunity to participate in the earning potential of many diverse securities. It can also help to reduce risk, because if one security fares poorly, it is often offset by another security that was not affected. By spreading your assets among several types of mutual funds, you add further diversification to your investments because different types of funds are likely to perform differently under similar economic conditions. Another way that you can help reduce your risk is by employing the strategy of dollar cost averaging. By investing a fixed amount of money at regular intervals, you buy more shares when prices are low and fewer shares when prices are high. Using this systematic approach, you have a much better chance of buying shares at a low average cost than by trying to determine if the market is at its high or low. Remember, though, that while dollar cost averaging is generally viewed as a prudent way to help reduce the effects of share price fluctuation, it does not ensure a profit and does not protect against a loss in declining markets. Such a plan involves continuous investment in securities regardless of fluctuating share price levels. In addition, you should consider your tolerance to continue purchasing through periods of low price levels. EVALUATING A MUTUAL FUND: Putting Risk and Return Together As we have seen in this report, it is impossible to completely eliminate risk when investing your money. However, the stock and bond markets have been remarkably resilient over the long term. Many people do better when they commit to a long-term horizon and diversify their portfolio across many securities. The following sections take a closer look at the returns and risks of money funds, bond funds, and stock funds. Evaluating Returns and Risks of Money Funds Many of you first invested in mutual funds in the late 1970s when you bought money market funds. At that time, the interest rates that banks and thrifts could pay were limited by federal regulations. Money market funds paid higher returns by pooling investors' money and purchasing higher- yielding money market instruments that most individuals could not buy on their own, such as Treasury bills, negotiable CDs (those limited to $100,000), repurchase agreements, banker's acceptances, and commercial paper. Today, of course, money market funds aren't yielding 17%, as they were in 1981. And most people don't view money market funds as the mainstay of their investment plan when the average fund may have a yield of about 4%. The typical investor uses a money market fund as a stable holding place, or for short-term expenses. Nevertheless, you should still understand how the returns and risks of money market funds work. Money Market Returns: Income Only Unlike bond and stock funds, money market funds offer just one return: income. Because money funds seek to maintain a constant share price value of $1.00 per share, there is generally no capital gain or loss component. The income (generally referred to as yield) from a money market fund is reflected by the interest paid on the securities in which the fund invests. A money market fund will generally quote its most recent 7-day yield, which provides a current picture of the fund's returns. Typically, one money market fund won't pay much more than another, because the securities in which they invest are generally similar in yield and duration. Some differences that might exist are often explained primarily by the expense ratios -- total expenses (e.g., management fees and operating expenses) divided by average assets in the fund. A fund's prospectus reports the money market fund's operating, portfolio management, and marketing expenses if a fund charges a 12b-1 fee. A 12b-1 fee pays the marketing cost of attracting future shareholders. (Many mutual funds do not charge 12b-1 fees.) Because money market fund yields are relatively low, expenses can significantly affect the fund's return. What are the Risks of Money Funds? While money funds strive to maintain a constant share price value of $1.00 per share, which means they typically have no price fluctuation, there can be no assurance that the stable share price value will be maintained. In addition, your investments are not insured or guaranteed by the U.S. government, as are bank CDs up to $100,000. The other risks of money funds are spelled out below: * Purchasing Power Risk If all you did was invest in money market funds when short-term interest rates are low, as they have been in the recent past, then you probably wouldn't keep up with inflation. Even with a modest 3% inflation rate, the inflation-adjusted after-tax return of a taxable money market fund yielding 3% is negative 1%, assuming a combined federal and state income tax rate of 33%. The same is true if you keep your money in a CD -- although at least bank CDs are available with longer-term maturities that can pay higher interest rates. Money market funds have a maximum average maturity of 90 days, and so the yield will be modest when interest rates are low. * Credit Risk As with any debt security, there is always a chance of default. However, money market fund managers purchase high-quality short-term investments that are considered to have very little credit risk. In addition, the fund manager typically purchases dozens of securities to help reduce the risk to the fund from any default. * Income Risk This is the risk you face as an investor that the income you receive from a money fund will decline should interest rates go down. When interest rates dropped in the early 1990s, holders of money market funds were not happy (although people taking out loans or mortgages were). Those depending upon money market funds for their income expenses found that the return from their funds dropped sharply. When you invest in a money market fund, you take the risk that when interest rates fall, your income will also decline. Some Questions to Ask Yourself about Investing in a Money Market Fund To judge the performance -- return and risk levels -- of a particular money market mutual fund, ask yourself these questions, which should be answered in the annual or mid-year reports, or the prospectus: 1. What is the quality of the securities in the fund? 2. How did the fund perform over the last year, five years, and since inception? 3. What is the risk/return relationship of the fund? (It should be low risk/low return.) 4. What has been the fund's investment strategy over the past year? 5. What does the portfolio manager say about the direction of interest rates and the fund's performance? Evaluating Returns and Risks of Bond Funds Most people choose to invest in bonds to earn a steady stream of income. Since 1945, the total return of fixed-income securities has been less than half the total returns of stocks. However, bonds have had much less fluctuation in their value than stocks. In addition, there have been periods when the total returns of bonds have been very competitive with the total returns of stocks. There are many types of bond funds. Each offers different risks and opportunities for return. They include U.S. Government securities funds, Government National Mortgage Association (GNMA) funds, corporate bond funds, municipal bond funds, international bond funds, and high-yield (also known as junk) bond funds. What are the Risks of Bond Funds? Investors seeking income should bear in mind that bond funds have more risk than money market funds, insured, fixed-rate CDs, and other savings vehicles, due to the following risks: * Interest Rate Risk Interest rate risk is the decline in the principal value of your bond investment as interest rates rise. As you may know, when interest rates rise, bond prices fall. When interest rates fall, bond prices rise. That relationship holds for almost all types of bonds. Between 1989 and 1993, interest rates fell steadily and bond prices boomed. In 1994, the reverse happened and bonds declined in value. * Credit Risk Credit risk refers to a bond issuer's inability or perceived inability to repay its debt. Within a bond fund, a bond issuer's inability to honor its obligations could cause the fund's shares to lose value. However, because the fund diversifies its investments among different bonds from an array of issuers, the effect of one downgrade in rating (or even default) on the share price of the entire fund is not nearly as great as it would be for an investor who had only invested in a few bonds. There is no credit risk associated with U.S. Treasury securities. Mortgage-backed securities, except those backed by the full faith and credit of the U.S. government such as GNMAs, do have some credit risk. Municipal, or tax-free, bonds -- IOUs issued by state and local governments to build hospitals, schools, sewer systems, etc. -- have varying degrees of risk, and have defaulted on rare occasions. (They should not be confused with bonds issued by the federal government.) Generally, corporate bonds also have varying degrees of credit risk, and can and do default -- particularly high-yield bonds. International bonds are only as strong as the government or corporation that issues them. Many bonds that are not guaranteed by the federal government may be rated by S&P and Moody's Investor Service. Credit risk can be reduced substantially by a well-diversified portfolio. Some bond funds invest in more than one hundred issues to help reduce the damage that would be done if a single security were to be downgraded or default. Some mutual funds employ analysts who research each and every bond issuer that might be held in a portfolio in an attempt to make sure its financial status remains strong. * Call Risk Call risk is the risk that a bond issuer will prematurely redeem its high-yielding debt before its maturity date. Premature redemption of a bond through a call feature tends to occur after a period of declining interest rates. If a bond was issued when interest rates were high and rates subsequently decline, it may be advantageous for the issuer to sell new bonds at the lower interest rate. The proceeds from the new lower-rate bonds can then be used to redeem the older higher-rate bonds. Of course, premature redemption of debt generally hurts the bondholders who lose the higher yields. To help protect a fund against call risk, many portfolio managers may buy non-callable securities. * Currency Risk Also known as foreign-exchange rate risk, this is the risk to a U.S. investor who purchases a bond in which the issuer promises to make payments in a foreign currency. The investor does not know what the resulting cash flow of the bond will be in U.S. dollars because it depends on the foreign exchange rate at the time the cash flow is received. International bond funds are a relatively new category for the individual investor. It would be almost impossible for individual investors to buy foreign bonds except through investment in a mutual fund. In many cases, foreign governments or corporations have been willing to pay much higher interest rates in return for your investment capital. In some cases, the bond issuers have to pay more because their track record is short. In other cases, there is a risk that while the foreign country is holding your assets, the U.S. dollar will appreciate in value relative to the local currency. Once again, sophisticated money managers employed by mutual fund companies are knowledgeable about how to deal with such currency risk, and they can help insulate the portfolio to some extent by using sophisticated foreign currency "hedging" techniques. * Inflation Risk All securities are subject to inflation risk, but it is often felt hardest by bonds, with their fixed income streams. The reason is that interest and principal payments are made in the future when the purchasing power of the dollar is likely to diminish. Part of the interest payment from a fixed income security is compensation for inflation risk. The amount in excess of inflation is called the real interest rate. For example, if a U.S. Treasury security yields 6% and inflation is 2.5%, then the real interest rate is 3.5%. * Reinvestment Risk Bond fund investors, like those in money funds, also face the possibility that interest rates will fall and that money will have to be reinvested at lower interest rates (although the principal value should have appreciated in a lower interest rate environment.) For funds invested in bonds with longer-term maturities, the impact on income should be reduced. Can You Measure the Risk of Bond Funds? You will often see a bond fund's interest rate risk measured by the average maturity of the holdings in the portfolio. Maturity is simply the number of years until a bond pays back its principal. For most bond funds, the longer the maturity, the greater the movement in the value of the bonds as interest rates change. The problems with considering maturity as a measure of a bond fund's interest rate risk, however, is that it reflects only the timing of the payment of the bond's face value at maturity. For example, a 15-year 5% bond has the same maturity as a 15-year 8% bond. Yet to say that their identical maturity means they have identical risk ignores the fact that a larger portion of the 8% bond's return will be collected sooner (through higher coupon payments) than in the case of the 5% bond. For the individual investor, it is important to understand the concept of "duration," which is a much better measure of interest rate risk because it takes into account interest payments as well as the amount paid at maturity. Duration measures how a bond fund may react to a 1 percentage point change in interest rates. For example, if a bond has a duration of 4 years, it should lose about 4% of its value if interest rates rise by 1 percentage point (6.00% rising to 7.00%, for example). Similarly, if you take half of a fund's duration you can get a good idea of how that bond fund will react if rates change by half of a percentage point. For instance, a bond fund with a duration of 4 years will lose roughly 2% of its value if rates climb half of a percentage point and gain 2% of its value if interest rates fall by half of a percentage point. Before looking at the duration of a bond fund, of course, it is important to identify your goals and choose a category of bond funds that could help you meet those goals. Once you have identified the category, you may use duration as follows to decide which fund within the category is right for you. * Investors seeking greater stability should look for a bond fund with lower duration. A lower duration is typical of bond funds whose portfolios invest in short-term securities. * Investors looking for higher returns and who are comfortable with greater fluctuation should look for a high duration figure. A higher duration is typical of bond funds investing in long-term, generally more fluctuating securities. Though duration is a good measure of interest rate risk, it has its limitations. Duration assumes that both short-term and long-term interest rates rise and fall by the same amount, which is not always the case. Duration does not consider credit, call, and currency risks. Also, duration changes as interest rates change, so you should check your fund's duration periodically. Some Questions to Ask Yourself about Investing in a Bond Fund To judge the performance -- the return and risk levels -- of a bond fund, ask yourself these questions, which should be answered in the fund's annual or mid-year reports, or the prospectus: 1. How has the fund performed during the past year, five years, and since inception? 2. What has been the investment strategy over the past year? 3. What is the risk/return relationship of the fund? (Government Bond and GNMA funds generally have low-moderate risk and return; corporate, international, and tax-exempt bond funds generally have moderate risk and return; high-yield bond funds have high risk with the potential for high returns.) 4. What are the fund's quality standards? 5. How is the fund managed for risk? 6. How much fluctuation has the fund experienced? How much fluctuation is it meant to have based on its objective? Evaluating Returns and Risks of Stock Funds In contrast to investors in bonds, who are primarily looking for income, most investors in stocks are looking for capital growth as well as dividends. Mutual funds investing in stocks are classified according to the degree to which they are seeking growth compared to dividends. For example, funds that invest in electric utilities would be classified as equity income funds because utilities pay high dividends, and their capital appreciation potential is more limited. At the other end of the spectrum are funds that invest in new companies or emerging markets such as Latin American equities. These funds are not expected to pay sizable dividends. Rather, investors hope that the investment in the funds will appreciate in value significantly. The greater the growth expectations, the greater the risks of revaluation or earnings disappointments. As discussed on page 9, the long-term returns from the stock market have typically exceeded the rate of inflation and the returns from money market investments and bonds by a wide margin (depending on the time period chosen), but the short-term volatility has been much greater as well. What are the Risks of Stock Funds? As expected, the potential high returns of stock funds are accompanied by significant risks such as the following: * Security Risk A fund that only invests in "blue chip" stocks -- stocks issued by large, well-established companies that have a history of paying dividends consistently regardless of economic conditions -- generally does not run the risk of a company in the portfolio falling on hard times. But occasionally, it does happen. IBM's stock fell from about $150 to $50 in a few years when the large computer maker was unable to make a rapid transition away from large mainframe machines that were no longer in large demand. More typically, mutual funds worry about securities of companies that don't have a long track record of success. Funds that invest in "small capitalization" companies -- those companies with a market capitalization, or total value, of less than $500 million -- have to keep a close watch on that type of company's management, financial statements, and other factors. * Sector Risk This is the risk that stocks of certain industries, investment styles, countries, etc. will go out of favor from time to time. Funds that invest in a broad range of categories, however, are less likely to be adversely affected by sector risk. Certain mutual funds that invest in specific industries have the most sector risk. Some investors buy sector funds instead of buying individual stocks in that industry. For example, they might buy a pharmaceutical industry sector fund rather than buying Merck stock because they believe that the industry is going to do well, but they're less sure about their ability to select an individual company. However, a sector fund can fluctuate significantly, as can funds that invest in a single country or region. * Market Risk When the entire stock market is declining in value, it's very difficult for a stock fund to show a positive return. Funds that emphasize aggressive growth and risk tend to fall even further than the average, whereas funds that emphasize dividend income tend to be more stable. * Currency Risk Currency risk, also known as foreign exchange risk (see pages 16 and 17 for a more detailed explanation), is a consideration not only for stock funds invested off shore but for domestic funds that have holdings in international companies. Can You Measure the Risk of Growth Funds? There are a few ways to measure the risk of mutual funds that invest in stocks, although these techniques are complex. They include the following: * The Price-Earnings Ratio The price-earnings ratio, also known as the P/E ratio, equals the price of a stock divided by its annual earnings per share (the amount of money a company earns divided by the number of shares outstanding). Let's say a company earns $1 per share and its stock price is $15. The P/E ratio of the company is therefore 15. The P/E ratio of a fund is essentially the weighted average of the P/E ratios of each stock in the portfolio. Stocks with earnings growth tend to sell at a higher P/E ratio than the market as a whole, as investors are willing to pay more for growing earnings than they would for relatively flat earnings. The higher the P/E ratio of the portfolio, the more risky the fund may be because earnings disappointment often causes investors to sell. * Beta & Standard Deviation Beta measures a stock's volatility -- or a fund's volatility -- in relation to the market as a whole. A fund that buys blue chip stocks will probably have a Beta close to one -- because its performance will be similar to that of the S & P 500. A fund that invests in new, smaller companies will probably have a Beta greater than one, since these securities have greater fluctuations in share price. Funds that don't move with the market averages are considered less risky and have Betas less than one. Interestingly, international funds have low Betas because they don't always move in concert with the U.S. stock market. In that one measure of risk, international funds may help lower the risk of a diversified portfolio. Standard deviation is a measure of the volatility of past performance, and may be an indicator of the range of possible future performance. The standard deviation of performance can be calculated for each security and for the portfolio as a whole. The greater the deviation, the greater the risk. Simply put, standard deviation measures a fund's consistency. Funds with high standard deviations have performed more erratically in the past. You should be able to find out a fund's Beta or standard deviation by calling your mutual fund company directly. Some Questions to Ask Yourself about Investing in a Stock Fund To judge the performance -- risk and return levels -- of your stock fund, ask yourself the following questions, which should be answered in the fund's annual or mid-year reports, or the prospectus: 1. How has the fund performed over the past year, five years, and since inception? 2. What are the largest sectors in the portfolio? 3. What has been the investment strategy over the past year? 4. How much fluctuation has the fund experienced? How much fluctuation is it expected to have? 5. How is the fund managed for risk? 6. How is the fund expected to perform over the coming year? AARP Fund Reports The following pages contain a summary of each Fund in the AARP Investment Program from Scudder. Each section contains a description of the Fund's investment objective and an interview with the portfolio management team. Also included are the one-year total return figures, five-year total return figures, cumulative total return figures, and returns since inception. Because a one-year total return could be high or low depending on market conditions over a 12-month period, it is useful to have the perspective of the five-year returns and returns since inception, since they represent a longer investment time frame. Within each Fund description (except for the AARP money funds), one-year total return is broken down into two components: distribution of income and capital change. Distribution of income is defined as reinvested income dividends. Capital change is defined as the change in the price per share including any reinvested capital gains distributions. You will also note that all of the AARP Mutual Funds, except the money funds, have been compared to market indices. We are providing these comparisons to comply with the Securities and Exchange Commission's (SEC) disclosure requirements. Under these requirements, all mutual funds are required to compare their performance over the past ten years (or the period of existence, if shorter) to that of a broad-based securities market index. It is important to note, however, that these indices have limited relevance to the performance of mutual funds. They are hypothetical and do not reflect, for example, the deduction of any servicing, investment management, or administration expenses. Also, some of the AARP Mutual Funds are unique in the high quality of their investment portfolios and the emphasis in some cases on seeking to reduce share price fluctuation. This, in turn, has a significant impact on performance. Therefore, when comparing an AARP Mutual Fund's performance with that of a major market index, remember that any comparison may be of limited value. AARP High Quality Money Fund At a Glance Fund Overview This high-quality Fund is designed to preserve your principal while you earn money market returns. The AARP High Quality Money Fund has quality standards high enough to have secured a AAAm rating from Standard & Poor's (S&P)*, a leading national independent rating firm. The Fund seeks to maintain a $1.00 share price, although there may be circumstances under which this goal cannot be achieved. It is important to note that unlike bank savings accounts, the Fund is not insured or guaranteed by the U.S. Government and the yield of the Fund will fluctuate. * The rating for the Fund is historical and is based on an analysis of the portfolio's credit quality, market price exposure, and management. For Whom the Fund is Designed This Fund may be appropriate for investors who have short-term needs or who do not want the risk of investing in stocks or bonds. These investors include those seeking money market income to meet regular day-to-day needs, those who need immediate access to their assets through free checkwriting, and those who want to diversify their assets with an investment providing safety and stability. Q How has the Fund performed over the past year? A As with all money funds, the performance of the AARP High Quality Money Fund mirrored what happened to short-term interest rates. Short- term interest rates, as measured by three-month U.S. Treasury Bills, rose over the past six months due to actions by the Federal Reserve Board (see Chairman's Letter). On September 30, 1993 short-term rates were 3.00%; as of September 30, 1994 they were 4.67%. Reflecting this trend, the Fund's 7-day net annualized yield as of September 30, 1994 was 3.94% up from 1.97% on September 30, 1993. The Fund's one year total return was 2.84%, which is made up entirely of income. The five- year cumulative total return was 24.95%; the five-year average annualized total return was 4.56%; the cumulative total return since inception on July 22, 1985 was 63.18%; and the average annualized total return since inception was 5.47%. Of course, past performance is not a guarantee of future results, and yield will fluctuate. Q What has been the Fund's investment strategy? A To help take advantage of rising interest rates, the Fund shortened its average maturity to approximately 24 days, which is shorter than the Fund's 55-day average maturity as of September 30, 1993. This gave the Fund greater flexibility to capture higher yields. As of September 30, 1994, approximately 85% of the portfolio was invested in securities with maturities of one month or less or in floating rate instruments that reset in one month or less. The largest sector in which the Fund was invested was in U.S. Government Agency floating rate instruments. These securities allow the Fund to "float" with the market as interest rates rise, thereby helping increase the Fund's yield. Q Why is the AARP High Quality Money Fund a good investment choice for me? A Most money funds are considered a good investment if you require liquidity and stability of principal or if you need a place to put assets over the short-term until you determine your longer term goals. In addition to these features, the AARP High Quality Money Fund has quality standards high enough to have secured a AAAm rating from S&P. This is the highest rating S&P issues a Fund of this type. Q Do you use "derivatives"? If so, why? A Floating rate instruments comprise 57% of the portfolio. We use these floating rate instruments to boost the Fund's yield potential, without exposing the Fund to undue risk. However, we do not use derivatives in a speculative fashion, which was the cause of problems in other money funds in recent months. (Please refer to page 11 for more information on the topic of derivatives.) Q What should I expect from the Fund in the upcoming year? A We expect slow and modest upward movements in short-term interest rates. If this occurs, the yield of the AARP High Quality Money Fund should follow and move upward slightly as well. The Fund should remain a good alternative for your short-term assets and if you are seeking stability of principal. AARP High Quality Tax Free Money Fund At a Glance Fund Overview The AARP High Quality Tax Free Money Fund is designed to offer you stability of principal, along with income free from federal taxes.1 The quality of the Fund is high enough to be one of a few tax-free money funds to secure a AAAm rating from Standard & Poor's (S&P), a leading national independent rating firm.2 The AARP High Quality Tax Free Money Fund is designed to maintain a $1.00 share price, although there may be circumstances under which this goal cannot be achieved. It is important to note that, unlike bank savings accounts, the Fund is not insured or guaranteed by the U.S. Government and the yield will fluctuate. 1 It is the policy of the Fund not to invest in taxable issues. However, the Fund's income may be subject to state and local taxes. Capital gains may be subject to taxes as well. 2 The rating for the Fund is historical and is based on an analysis of the portfolio's credit quality, market price exposure, and management. For Whom the Fund is Designed This Fund may be appropriate for investors in high tax brackets who have short-term investment needs or who do not want the risk of investing in stocks or bonds. These investors include those seeking tax-free money market income to meet regular day-to-day expenses, those needing immediate access to their assets through free checkwriting, and those creating a diversified portfolio who want a portion of their assets in a conservative investment designed to offer safety and stability. Q How has the Fund performed over the past year? A Over the past year, the Fund provided shareholders with modest returns and a rising yield. The Fund's 7-day net annualized yield as of September 30, 1994 was 2.64%. This was up from its 2.03% yield on September 30, 1993. The Fund's one year total return was 1.76%, which is made up entirely of income. The five-year cumulative total return was 19.32%; the five-year average annualized total return was 3.60%, the cumulative total return since inception was 53.38%; and the average annualized total return since inception on November 30, 1984 was 4.48%. Please note that the five-year and since inception figures include the performance of the AARP Insured Tax Free Short Term Fund, which changed its name and objective to the AARP High Quality Tax Free Money Fund on August 1, 1991. Of course, past performance is not a guarantee of future results, and yield will fluctuate. Q What has been the Fund's investment strategy? A Earlier this year, we decreased the average maturity of the Fund, which gave the Fund greater flexibility to capture higher yields. Starting in July, we began to lengthen that average maturity again. As of September 30, 1994 the average maturity of the Fund was 51 days. The longer average maturity has provided shareholders with a more competitive yield. We will not move longer than that because the average maturity of the Fund cannot exceed 60 days if we are to maintain the S&P's AAAm rating. This is the highest rating S&P issues a Fund of this type. Q Why is the AARP High Quality Tax Free Money Fund a good investment choice for me? A Most money funds are considered a good investment if you require liquidity and stability of principal or if you need a place to put assets over the short-term until you determine your longer term goals. In addition, all securities in the AARP High Quality Tax Free Money Fund are rated within the two highest quality ratings of at least one of the three leading national independent rating firms: Fitch Investors Service Inc., Moody's Investors Service Inc., or S&P. For those funds rated by S&P, there are particular guidelines with which each fund must comply in order to maintain its AAAm rating. For further safety, within the universe of securities meeting the S&P criteria, Scudder credit analysts approve only a small percentage of that universe. Therefore, the number of securities that we have to choose from is much smaller and in many cases of better quality than other tax-free money funds. Q Do you use "derivatives"? If so, why? A Tender option bonds comprise approximately 2% of the portfolio. They are designed to mimic existing securities in the short-term marketplace. We do not use derivatives in a speculative fashion, which was the cause of problems with other money funds. (Please refer to page 11 for more information on the topic of derivatives.) Q What should I expect from the Fund in the upcoming year? A We expect slow and modest upward movements in short-term interest rates. The short-term municipal market should follow that trend. We will strive to keep the average maturity long in order to provide shareholders with a slightly higher yield. Therefore, the Fund should continue to provide shareholders in high tax brackets with an alternative for their short-term investment needs. AARP GNMA and U.S. Treasury Fund At a Glance Fund Overview The AARP GNMA and U.S. Treasury Fund seeks to produce monthly income from a conservatively managed high-quality portfolio. Although your principal is not insured or guaranteed as it is with an insured fixed-rate Certificate of Deposit (CD) or savings account, the Fund is designed to help reduce share price fluctuation. While the securities in the Fund are guaranteed as to the timely payment of principal and interest, the guarantee is not related to the Fund's yield or share price, both of which will fluctuate daily. For Whom the Fund is Designed The Fund is suitable for conservative investors who want high current income and a degree of protection from bond market price risk. Investors should be seeking to invest for the longer term and be comfortable with fluctuation in the value of their principal and yield.
GROWTH OF $10,000 INVESTMENT YEARLY PERIODS AARP GNMA AND U.S. LEHMAN BROTHERS ENDED SEPTEMBER 30 TREASURY FUND++ MORTGAGE GNMA INDEX+ - ------------------- ------------------- -------------------- 1 YEAR $9,810 $9,878 5 YEAR $14,348 $14,974 LIFE OF FUND* $22,228 $26,997 TOTAL RETURN CUMULATIVE - ---------- 1 YEAR -1.90% -1.22% 5 YEAR 43.48% 49.74% LIFE OF FUND* 122.28% 169.97% AVERAGE ANNUAL - -------------- 1 YEAR -1.90% -1.22% 5 YEAR 7.49% 8.40% LIFE OF FUND* 8.54% 10.63%
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT YEARLY PERIODS ENDED SEPTEMBER 30++ (CHART DATA)
AARP GNMA AND U.S. LEHMAN BROTHERS TREASURY FUND MORTGAGE GNMA INDEX ------------------ ------------------- Nov-84 10,000 10,000 Sep-85 11,177 11,720 Sep-86 12,699 13,811 Sep-87 12,895 14,079 Sep-88 14,322 16,197 Sep-89 15,492 18,029 Sep-90 16,864 19,733 Sep-91 19,246 23,011 Sep-92 21,399 25,640 Sep-93 22,659 27,330 Sep-94 22,228 26,997
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION YEARLY PERIODS ENDED SEPTEMBER 30++
1990 1991 1992 1993 1994 ------ ------ ------ ------ ------ NET ASSET VALUE $14.95 $15.72 $16.19 $15.96 $14.73 INCOME DIVIDENDS $1.31 $1.26 $1.22 $1.15 $0.93 CAPITAL GAINS $ -- $ -- $ -- $ -- $ -- DISTRIBUTIONS (TOTAL RETURN - CHART DATA) FUND RETURN 8.86% 14.12% 11.19% 5.89% -1.90% INDEX RETURN 9.45% 16.61% 11.43% 6.59% -1.22% + The unmanaged Lehman Brothers Mortgage GNMA Index is a market value weighted measure of all fixed-rate securities backed by mortgage pools of the GNMA. Index returns are calculated monthly and assume reinvestment of dividends. Unlike Fund returns, Index returns do not reflect any fees or expenses. ++ All performance is historical and assumes reinvestment of all dividends and capital gains and is not indicative of future results. Investment return and principal value will fluctuate so an investor's shares when redeemed may be worth more or less than when purchased. * The Fund commenced operations on November 30, 1984.
Q How has the Fund performed over the past year? A The period from October 1, 1993 through September 30, 1994 proved to be a difficult time for bond investors. In fact, as stated in the Chairman's letter, this was the worst 12-month period for long-term bonds since 1950. Rising interest rates offered the challenge of managing the Fund's dual objectives -- to moderate share price fluctuation and provide the income that AARP members desire. Long-term interest rates, as measured by the 30-year U.S. Treasury Bond, rose from 6.02% to 7.81%. As a result, the value of the securities held by the Fund declined. The Fund's one-year total return ended September 30, 1994 was -1.90%, with 5.81% representing distributions of income and -7.71% representing capital change. As illustrated in the graph on page 27, this total return underperformed the Lehman Brothers Mortgage GNMA Index. However, it is important to note that the AARP GNMA and U.S. Treasury Fund is managed in a more conservative fashion than many other GNMA funds. In fact, the AARP GNMA and U.S. Treasury Fund was cited in the September 30, 1994 issue of Morningstar, a leading national independent investment rating organization, for its above- average performance with below-average risk. Morningstar compares performance and risk relative to other mutual funds in its class that have been in existence for at least three years.1 In addition, the Fund continued to provide higher yields than insured fixed-rate 12-month CDs. According to Banxquote, a weekly financial rate reporter, the nationally averaged yield on the 12-month CD as of September 30, 1994 was 3.50% -- significantly lower than the 6.76% yield on the AARP GNMA and U.S. Treasury Fund. (Keep in mind that yield does not take into consideration the share price fluctuation of the Fund. The principal value of a CD remains constant.) 1. Morningstar's proprietary ratings reflect historical risk- adjusted performance as of September 30, 1994. The ratings are subject to change every month. Past performance is no guarantee of future results. Q What has been the Fund's investment strategy? A Earlier this year our investment strategy became more cautious due to the turbulence in the bond market. To help moderate share price fluctuation, we moved a greater share of the Fund's assets into U.S. Government securities with shorter maturities. By the middle of March, we had invested approximately 40% of the Fund in cash equivalents and U.S. Treasury securities with shorter maturities. As you may be aware, it has been an ongoing strategy to keep a portion of the Fund's assets in shorter maturity bonds to help dampen share price fluctuation. Of course, we could have further attempted to reduce share price fluctuation by moving even more of the Fund' assets into U.S. Treasury securities. However, that would have further lowered the Fund's yield and adversely impacted thousands of AARP Investment Program shareholders who depend heavily on the monthly income the Fund provides. During the last few months, we moved some of the assets that were in these shorter maturity investments into GNMA securities. This strategy increased the yield of the Fund. As of September 30, 1994, 68% of the portfolio was in GNMA securities with coupons ranging from 7% to 16%. The remainder of the portfolio was in short-term U.S. Treasury obligations and cash equivalents with maturities of one year or less. Q Why did the share price of the Fund decline during this period? A As with all bond funds, the AARP GNMA and U.S. Treasury Fund's share price moves up and down because of the movement in interest rates. In general, when interest rates rise, the value of bond mutual fund shares falls, and vice versa. Therefore, the value of the Fund's shares declined in recent months because interest rates rose significantly. However, we feel that we adhered to our objective of producing high current income while keeping the price of the Fund's shares more stable than that of a potentially higher- yielding long- term bond. In fact, during February and March -- which were two of the most turbulent months for the bond market in recent years -- the Fund's share price declined a little over 4%, while the price of the 30-year U.S. Treasury Bond declined over 8%. Q Do you use "derivatives"? If so, why? A On occasion, the Fund will use derivatives for bona fide hedging purposes in a conservative fashion. For example, over the period covered by this report, we invested in just one derivative contract, a call option that represented less than 1% of the assets in the portfolio. (Please refer to page 11 for information on the topic of derivatives.) Q What should I expect from the Fund in the upcoming year? A We believe that the bond market will remain turbulent throughout the year. We believe both short-term and long-term interest rates should rise moderately. As the changing interest rate environment has demonstrated, yields will inevitably fluctuate with changing economic conditions, as will bond prices. If you are an investor interested in income, you are generally best served if you stay invested through the bond market's short-term ups and downs. We believe the long-term outlook for the bond market remains promising. AARP High Quality Bond Fund At a Glance Fund Overview The AARP High Quality Bond Fund offers you the opportunity for higher returns than you can expect from the AARP GNMA and U.S. Treasury Fund. In pursuing higher returns, fluctuation in the value of your principal may also be greater. The Fund has quality standards that are among the highest of any general bond fund currently available, with at least 80% of the portfolio invested in AAA-rated and AA-rated issues, and the other 20% in nothing less than A-rated bonds. For whom the Fund is Designed The Fund is suitable for investors who want high returns with moderate risk from a high-quality portfolio. Investors should be seeking to invest for the longer term and be comfortable with fluctuation in the value of their principal and yield.
GROWTH OF $10,000 INVESTMENT YEARLY PERIODS AARP HIGH QUALITY LEHMAN BROTHERS ENDED SEPTEMBER 30 BOND FUND++ AGGREGATE BOND INDEX+ - ------------------ ------------------ -------------------- 1 YEAR $9,445 $9,678 5 YEAR $14,317 $14,945 LIFE OF FUND* $22,052 $26,126 TOTAL RETURN CUMULATIVE 1 YEAR -5.55% -3.22% 5 YEAR 43.17% 49.45% LIFE OF FUND* 120.52% 161.26% AVERAGE ANNUAL 1 YEAR -5.55% -3.22% 5 YEAR 7.44% 8.36% LIFE OF FUND* 8.45% 10.26%
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT YEARLY PERIODS ENDED SEPTEMBER 30++ (CHART DATA)
AARP HIGH QUALITY LEHMAN BROTHERS BOND FUND AGGREGATE BOND INDEX ------------------ -------------------- Nov-84 10,000 10,000 Sep-85 10,940 11,498 Sep-86 12,428 13,830 Sep-87 12,417 13,867 Sep-88 13,954 15,711 Sep-89 15,403 17,481 Sep-90 16,206 18,803 Sep-91 18,707 21,810 Sep-92 20,870 24,547 Sep-93 23,349 26,996 Sep-94 22,052 26,126
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION YEARLY PERIODS ENDED SEPTEMBER 30++
1990 1991 1992 1993 1994 ------ ------ ------ ------ ------ NET ASSET VALUE $14.63 $15.71 $16.44 $17.19 $15.05 INCOME DIVIDENDS $1.17 $1.10 $1.03 $0.93 $0.85 CAPITAL GAINS $ -- $ -- $ -- $0.18 $0.38 DISTRIBUTIONS (TOTAL RETURN - CHART DATA) FUND RETURN 5.21% 15.44% 11.56% 11.88% -5.55% INDEX RETURN 7.56% 15.99% 12.55% 9.98% -3.22% + The unmanaged Lehman Brothers Aggregate Bond Index is a market value weighted measure of all treasury issues, agency issues, corporate bond issues and mortgage securities. Index returns are calculated monthly and assume reinvestment of dividends. Unlike Fund returns, Index returns do not reflect any fees or expenses. ++ All performance is historical and assumes reinvestment of all dividends and capital gains and is not indicative of future results. Investment return and principal value will fluctuate so an investor's shares when redeemed may be worth more or less than when purchased. * The Fund commenced operations on November 30, 1984.
Q How has the Fund performed over the past year? A Like most bond funds during the period from October 1, 1993 through September 30, 1994, the AARP High Quality Bond Fund was adversely affected by the rise in long-term interest rates.(As stated in the Chairman's letter, this was the worst 12-month period for long-term bonds since 1950.) Long-term interest rates, as measured by the 30- year U.S. Treasury Bond, rose from 6.02% on September 30, 1993 to 7.81% on September 30, 1994. As a result, the value of the securities held by the Fund declined. The Fund's performance reflected the lower value of bonds. The one-year total return was -5.55%, with 4.91% representing distributions of income and -10.46% representing capital change. As illustrated on the previous page, the Fund's total return underperformed the Lehman Brothers Aggregate Bond Index return of - 3.22% for the same time period. The primary reason for the underperformance was that the average maturity in the portfolio was longer than that of the index during this period of rising interest rates. (Refer to page 17 for information on average maturity.) It is also important to note that the AARP High Quality Bond Fund restricts the use of less than high-quality bonds. Q What has been the Fund's investment strategy? A We continued to maintain a "barbell" strategy within the Fund; 25% of the Fund was invested in long-term bonds (maturing in 15 years or more), and another 25% was invested in short-term bonds (maturing in one year or less). Although this strategy tended to reduce overall portfolio yield, it has helped the performance of the Fund during this period of rising interest rates. Non-callable bonds (bonds that cannot be redeemed at the option of the issuer) were also favored to sustain the Fund's income stream. The Fund also maintained its objective of investing in high-quality securities. As of September 30, 1994, 81% of the portfolio was invested in AAA or AA securities. The other 19% of the portfolio was placed in A-rated securities or securities of an equivalent quality. Q How does the Fund's portfolio differ from that of the AARP GNMA and U.S. Treasury Fund? A The AARP High Quality Bond Fund invests in a broader array of securities than the AARP GNMA and U.S. Treasury Fund. The Fund invests in Government, corporate, and other fixed income securities, whereas the AARP GNMA and U.S. Treasury Fund invests primarily in securities that are issued or guaranteed by the U.S. Government. The Fund also invests in securities with longer maturities. The AARP High Quality Bond Fund has the potential to offer shareholders a greater total return than the AARP GNMA and U.S. Treasury Fund. It will also have greater share price fluctuation. Q Do you use "derivatives"? If so, why? A The Fund may use derivative contracts in a conservative fashion. However, they have been used infrequently. As of September 30, 1994, 2% of the Fund's assets were invested in futures, which were used in an attempt to protect the Fund against a rise in interest rates. (Please refer to page 11 for more information on the topic of derivatives.) Q What should I expect from the Fund in the upcoming year? A We believe that the bond market will remain turbulent throughout the year, with a rise in both short- and long-term interest rates. However, while investors will most likely have to cope with movements up and down in both share price and yield over the near-term, the long- term outlook for the bond market remains promising. AARP Insured Tax Free General Bond Fund At a Glance Fund Overview The AARP Insured Tax Free General Bond Fund seeks to pay high monthly income that is free from federal taxes.* The Fund invests in a portfolio of high-grade municipal securities, most of which are insured against default. This insurance does not apply to the value of your shares or the yield of the Fund, both of which will fluctuate daily. * It is the policy of the Fund not to invest in taxable issues. However, the Fund's income may be subject to state and local taxes. Gains on sales of Fund shares and distributions of capital gains generally will be subject to federal, state, and local taxes. For Whom the Fund is Designed The Fund is suitable for investors in higher tax brackets who want high income that is free from federal income taxes. Investors should be seeking to invest for the longer term and be comfortable with fluctuation in the value of their principal and yield.
GROWTH OF $10,000 INVESTMENT AARP INSURED TAX YEARLY PERIODS FREE GENERAL BOND LEHMAN BROTHERS ENDED SEPTEMBER 30 FUND++ MUNICIPAL BOND INDEX+ - ------------------- ------------------- --------------------- 1 YEAR $9,552 $9,756 5 YEAR $14,344 $14,685 LIFE OF FUND* $21,846 $25,262 TOTAL RETURN CUMULATIVE 1 YEAR -4.48% -2.44% 5 YEAR 43.44% 46.85% LIFE OF FUND* 118.46% 155.62% AVERAGE ANNUAL 1 YEAR -4.48% -2.44% 5 YEAR 7.48% 7.98% LIFE OF FUND* 8.35% 10.02%
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT YEARLY PERIODS ENDED SEPTEMBER 30++ (CHART DATA)
AARP INSURED TAX FREE LEHMAN BROTHERS GENERAL BOND FUND MUNICIPAL BOND INDEX ------------------- --------------------- Nov-84 10,000 10,000 Sep-85 10,509 11,313 Sep-86 12,397 14,102 Sep-87 12,032 14,176 Sep-88 13,763 16,016 Sep-89 15,230 17,406 Sep-90 15,974 18,590 Sep-91 18,186 21,041 Sep-92 20,007 23,240 Sep-93 22,871 26,202 Sep-94 21,846 25,562
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION YEARLY PERIODS ENDED SEPTEMBER 30++
1990 1991 1992 1993 1994 ------ ------ ------ ------ ------ NET ASSET VALUE $16.12 $17.30 $17.88 $19.00 $16.93 INCOME DIVIDENDS $1.04 $1.00 $0.93 $0.90 $0.86 CAPITAL GAINS $0.25 $ -- $0.17 $0.43 $0.40 DISTRIBUTIONS (TOTAL RETURN - CHART DATA) FUND RETURN 4.89% 13.85% 10.01% 14.31% -4.48% INDEX RETURN 6.80% 13.19% 10.45% 12.74% -2.44% + The unmanaged Lehman Brothers Municipal Bond Index is a market value weighted measure of approximately 15,000 municipal bonds with a maturity of at least two years. Index returns are calculated monthly and assume reinvestment of dividends. Unlike Fund returns, Index returns do not reflect any fees or expenses. ++ All performance is historical and assumes reinvestment of all dividends and capital gains and is not indicative of future results. Investment return and principal value will fluctuate so an investor's shares when redeemed may be worth more or less than when purchased. * The Fund commenced operations on November 30, 1984.
Q How has the Fund performed over the past year? A The performance of the Fund was adversely affected by rising interest rates. As you know, rising interest rates cause bond prices to decline. Consequently, the Fund's one-year total return ended September 30, 1994 was -4.48%, with 4.49% representing distributions of income and -8.97% representing capital change. As illustrated in the graph on page 33, the total return underperformed the Lehman Brothers Municipal Bond Index. Q What has been the Fund's investment strategy? A Despite the volatility in the bond market over the past year, we maintained a positive long-term outlook for the municipal bond market. The investment strategy, therefore, remained largely unchanged during the period from October 1, 1993 to September 30, 1994. The Fund continued to invest in bonds with maturities of less than 20 years. Moreover, we maintained a balance between bonds with good call protection (securities that cannot be easily redeemed at lower interest rates) and premium bonds (those selling above the face value of a bond). During this time, the Fund continued to stress non- callable municipals bonds, with over 70% of the portfolio invested in these securities. Non-callable bond prices tend to do better over time than callable bond prices. Within the portfolio, the largest sector of the Fund was in insured* hospital bonds, which we believe are undervalued bonds. Approximately 18% of the portfolio was invested in this type of bond. The Fund also had 19% invested in Illinois municipal bonds because of their attractive yields. * Remember that this insurance does not apply to the value of your shares or the yield of the Fund, both of which will fluctuate. Q Should an investor in a lower tax bracket consider investing in this Fund? A The way to compute whether a tax-free investment is suitable for you is to calculate the taxable equivalent yield and compare it to a taxable investment of comparable quality. In order to calculate the taxable equivalent yield, you can use the following formula: Tax-free yield - ----------------- = Taxable equivalent yield 1 minus your federal tax bracket For example, let's compare a tax-free investment offering 4.11% to a taxable investment offering 5.39%. At a glance, it appears that the taxable investment offers more yield. However, for an investor in the 31% tax bracket, the 4.11% is worth more. 4.11% - ---------- = 5.96% 1 - (31%) Therefore, 4.11% tax free is equivalent to a 5.96% taxable yield. Of course, a different tax bracket would result in a different taxable equivalent yield. Please consult a tax adviser. Q How does the AARP Insured Tax Free General Bond Fund compare to other tax-free funds available? A The AARP Insured Tax Free General Bond Fund is one of a small group of tax-free funds with insurance on at least 65% of its investments. This means that at least 65% of the securities held by the Fund are fully insured as to the payment of face value and interest by private insurers. As of September 30, 1994, over 90% of the portfolio was invested in insured securities (or securities escrowed in U.S. Treasurys which provide the backing of the U.S. Government). Remember that this insurance does not apply to the value of your shares or the yield of the Fund, both of which will fluctuate daily. In addition, the Fund will purchase only securities rated within the top three ratings by Moody's and Standard & Poor's -- two independent rating services. Q Do you use "derivatives"? If so, why? A Due to our prudent investment approach, we use derivative contracts primarily for defensive purposes. As of September 30, 1994, 2% of the Fund's assets were invested in futures, which were used in an attempt to protect the Fund against a rise in interest rates. (Please refer to page 11 for more information about the topic of derivatives.) Q What should individuals expect from the Fund in the upcoming year? A We believe that the municipal bond market will follow the trend of the taxable bond market, with short- and long-term interest rates rising moderately. This will most likely bring a fair amount of turbulence to investors, who may have to ride out fluctuations in yield and share price. Over the long term, however, the Fund should continue to provide shareholders in high tax brackets with high income free from federal taxes. AARP Balanced Stock and Bond Fund At a Glance Fund Overview The AARP Balanced Stock and Bond Fund seeks to offer you long-term growth of capital and quarterly income while attempting to keep the value of its shares more stable than other potentially higher returning balanced mutual funds. The Fund pursues these objectives by investing in a combination of stocks, bonds, and cash reserves. For Whom the Fund is Designed This Fund, which was introduced on February 1, 1994, is suitable for investors who are seeking long-term growth of their assets, but want less risk than an investment solely in stocks. Investors should be seeking to invest for the longer term and be comfortable with the value of their principal fluctuating up and down.
GROWTH OF $10,000 INVESTMENT AARP BALANCED STANDARD & POOR'S LEHMAN BROTHERS PERIOD FROM FEB.1 STOCK AND BOND 500 STOCK PRICE AGGREGATE BOND TO SEPT. 30, 1994 FUND++ INDEX+ INDEX+ ----------------- ---------- ---------- ---------- LIFE OF FUND* $9,922 $9,801 $9,543 TOTAL RETURN CUMULATIVE LIFE OF FUND* -0.78% -1.99% -4.57%
(LINE CHART TITLE) GROWTH OF $10,000 INVESTMENT MONTHLY PERIODS FEBRUARY 1 SEPTEMBER 30, 1994++ (CHART DATA)
AARP BALANCED STOCK STANDARD & POOR'S 500 LEHMAN BROTHERS AND BOND FUND STOCK PRICE INDEX AGGREGATE BOND INDEX -------------------- -------------------- -------------------- 1/1/94 10,000 10,000 10,000 2/28/94 9,873 9,728 9,826 3/31/94 9,520 9,304 9,583 4/30/94 9,587 9,423 9,507 5/31/94 9,727 9,577 9,506 6/30/94 9,623 9,343 9,485 7/31/94 9,805 9,649 9,674 8/31/94 10,073 10,045 9,685 9/30/94 9,922 9,801 9,543
(BAR CHART TITLE) INVESTMENT RETURNS AND PER SHARE INFORMATION
SEPT. 30, 1994 NET ASSET VALUE $14.64 INCOME DIVIDENDS $0.24 CAPITAL GAINS DISTRIBUTIONS $ -- (TOTAL RETURN - CHART DATA) FUND RETURN (%)++ -0.78% S&P 500 STOCK PRICE INDEX RETURN(%)+ -1.99% AGGREGATE BOND INDEX RETURN(%)+ -4.57% + The unmanaged Lehman Brothers Aggregate Bond Index is a market value weighted measure of all treasury issues, agency issues, corporate bond issues and mortgage securities. The unmanaged Standard & Poor's 500 Stock Price Index is a market value weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange, and Over-the-Counter market. Index returns are calculated monthly and assume reinvestment of dividends. Unlike Fund returns, Index returns do not reflect any fees or expenses. ++ All performance is historical and assumes reinvestment of all dividends and capital gains and is not indicative of future results. Investment return and principal value will fluctuate so an investor's shares when redeemed may be worth more or less than when purchased. * The Fund commenced operations on February 1, 1994.
Q How has the Fund performed over the past year? A The Fund was introduced on February 1, 1994 at a Net Asset Value (NAV) of $15.00. As of September 30, 1994 the Fund's NAV declined to $14.64. Shareholders received three dividend payments during this period totalling $0.24. The Fund's cumulative total return of -0.78% outperformed the unmanaged Lehman Brothers Aggregate Bond Index of - 4.57%, and the unmanaged S&P 500 Stock Price Index of -1.99%. (Please note that these return figures are for the time period from February 1, 1994 through September 30, 1994. Performance is historical and assumes reinvestment of all dividends and capital gains and is no guarantee of future results. Investment return and principal will fluctuate so that an investor's shares when redeemed may be worth more or less than when purchased.) Q What has been the Fund's investment strategy? A In general, the stock portion of the Fund uses an approach similar to the AARP Growth and Income Fund. The Fund will usually invest in stocks of companies that we believe to have favorable long-term outlooks and have above-average dividend yields. As of September 30, 1994, approximately 47% of the Fund's assets were invested in stocks. Since the stock portion of the Fund is managed by the same individuals and with the same strategy as the AARP Growth and Income Fund, refer to the AARP Growth and Income Fund Report on page 40 for details on specific stock selection. (The Fund may invest up to 70% of its assets in stocks.) The portion of the Fund invested in bonds can include corporate issues, U.S. Government securities, mortgage-backed obligations, and other fixed-income securities. At least 75% of these securities will be securities rated within the three highest quality ratings (AAA, AA, A) by Moody's or Standard & Poor's, independent rating organizations. As of September 30, 1994, approximately 26% of the Fund's assets were invested in bonds, with the remainder in cash equivalents. Since the bond portion of the Fund is managed by the same individuals and with the same strategy as the AARP High Quality Bond Fund, refer to the AARP High Quality Bond Fund Report on page 31 for more information on the types of bonds that the Fund invested. (At all times, at least 30% of the Fund's assets will be a combination of bonds and cash equivalents.) Q Do you use "derivatives"? If so, why? A There may be occasions when investing in derivatives is a prudent decision for the Fund. For example, we may enter into forward contracts to hedge foreign currency exposure. (Please refer to page 11 for more information on the topic of derivatives.) Q What can I expect from the Fund in the upcoming year? A Over the near term, we intend to remain approximately 50% invested in stocks. We will also leave a significant percentage of the fund's assets in cash equivalents to provide liquidity in order to take advantage of opportunities in the stock and bond markets. It is our strong conviction that stocks are the asset class of choice for investors with longer term horizons. Therefore, we will continue to concentrate on trends within the stock market and how they may affect the Fund. We believe that we can outperform the market by continuing to focus on companies whose prospects appear favorable and whose stock valuations and dividend yields are attractive. For the portion invested in stocks, the Fund will continue to invest new assets in securities that offer the potential of long-term growth of capital while providing current income. AARP Growth and Income Fund At a Glance Fund Overview The AARP Growth and Income Fund is a conservatively managed stock fund that provides the potential for long-term growth and quarterly income, while still seeking to moderate risk. It invests in stocks yielding above-average dividends that may offer the opportunity for long-term growth. For Whom the Fund is Designed The Fund is suitable for investors who are seeking long-term growth of their assets and the opportunity to keep ahead of inflation. Investors should be seeking to invest for the longer term and be comfortable with fluctuation to their principal that is associated with investing in stocks.
GROWTH OF $10,000 INVESTMENT YEARLY PERIODS AARP GROWTH AND STANDARD & POOR'S 500 ENDED SEPTEMBER 30 INCOME FUND++ STOCK PRICE INDEX+ - ------------------ ------------------- ------------------- 1 YEAR $10,799 $10,368 5 YEAR $16,430 $15,489 LIFE OF FUND* $36,713 $39,350 TOTAL RETURN CUMULATIVE 1 YEAR 7.99% 3.68% 5 YEAR 64.30% 54.89% LIFE OF FUND* 267.13% 293.50% AVERAGE ANNUAL 1 YEAR 7.99% 3.68% 5 YEAR 10.44% 9.14% LIFE OF FUND* 14.27% 14.95%
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT YEARLY PERIODS ENDED SEPTEMBER 30++ (CHART DATA)
AARP GROWTH AND STANDARD & POOR'S 500 INCOME FUND STOCK PRICE INDEX ---------------- ------------------ Nov-84 10,000 10,000 Sep-85 11,353 11,535 Sep-86 14,646 15,196 Sep-87 19,174 21,795 Sep-88 17,120 19,100 Sep-89 22,345 25,405 Sep-90 20,067 23,057 Sep-91 25,523 30,243 Sep-92 28,479 33,585 Sep-93 33,998 37,951 Sep-94 36,713 39,350
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION YEARLY PERIODS ENDED SEPTEMBER 30++
1990 1991 1992 1993 1994 ------ ------ ------ ------ ------ NET ASSET VALUE $22.30 $26.97 $28.67 $32.91 $34.13 INCOME DIVIDENDS $1.15 $1.17 $0.90 $0.87 $1.13 CAPITAL GAINS $0.08 $0.05 $0.48 $0.30 $0.21 DISTRIBUTIONS (TOTAL RETURN - CHART DATA) FUND RETURN -10.19% 27.19% 11.59% 19.38% 7.99% INDEX RETURN -9.24% 31.09% 11.04% 12.97% 3.68% + The unmanaged Standard & Poor's 500 Stock Price Index is a market value weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange, and Over-the-Counter market. Index returns are calculated monthly and assume reinvestment of dividends. Unlike Fund returns, Index returns do not reflect any fees or expenses. ++ All performance is historical and assumes reinvestment of all dividends and capital gains and is not indicative of future results. Investment return and principal value will fluctuate so an investor's shares when redeemed may be worth more or less than when purchased. * The Fund commenced operations on November 30, 1984.
Q How did the Fund perform over the past year? A Though the stock market was relatively stable for the last quarter of 1993, it has declined for most of 1994. This was due in most part to a continual rise in interest rates and concerns about the direction of the economy. Despite a declining market, the AARP Growth and Income Fund performed well. The Fund's total return was 7.99% for the one-year period ended September 30, 1994. This total return represented 3.62% in distributions of income and 4.37% in capital change. The Fund's total return outperformed the Standard & Poor's 500 Stock Price Index return of 3.68%, as illustrated in the graph on the previous page. The Fund has been cited in various publications for its favorable performance. The September 30, 1994 issue of Morningstar, a leading national independent investment rating organization, cited the Fund for its above-average performance and low risk. Morningstar compares performance and risk of the Fund relative to other mutual funds in its class that have been in existence for at least three years.1 The Fund also appeared as one of the nine funds that the June 1994 issue of Kiplingers' Personal Finance Magazine highlighted as "Funds You Can Count On." Remember that past performance is no guarantee of future results. 1. Morningstar's proprietary ratings reflect historical risk- adjusted performance as of September 30, 1994. The ratings are subject to change every month. Q What has been the Fund's investment strategy? A The AARP Growth and Income Fund has had a consistent investment strategy over the past several years. We continue to target stocks of companies that we believe have healthy balance sheets, are estimated to perform well in a strengthening economy, and have dividend yields that are at least 20% above the average market yield at the time of purchase. Q What were your best investment decisions over the year? A There are two components to successful investing: choosing the winners and avoiding the losers. In addition to some of the winners that will be discussed later, one of the best investment decisions was avoiding the domestic electric utility sector. Domestic electric utilities have declined by about 30% over the past year. Despite the high relative yields of these stocks, the portfolio management team of the AARP Growth and Income Fund felt the fundamentals of these stocks were deteriorating rather than improving. While the fundamentals of some of these companies may improve or the prices may decline to a low enough level to buy them, we believe that our decision to avoid this sector was one of our best decisions over this period. Q What were the largest industry sectors in the portfolio over the past year? A Our largest sector is manufacturing, representing approximately 22% of the Fund's portfolio. Chemical companies such as Lyondell Petrochemical, Dow Chemical, Dupont, and paper companies such as Boise Cascade and Federal Paper Board were expected -- and have succeeded -- to perform well in a strengthening economy. Another large sector in the portfolio is healthcare, representing approximately 14%. We have increased our exposure from 3% a year ago to 14% as of this report for a number of reasons. Many of the stocks in this sector were undervalued due to investors' concerns about healthcare reform and stiff price competition due to the emergence of generic products. Moreover, a trend toward consolidation of the healthcare industry has led to such recent events as Eli Lilly's proposal to buy the PCS Division of McKesson Corp., and American Home Products' proposal to buy American Cyanamid. Both McKesson and American Cyanamid were large holdings in the portfolio which benefited from these announced mergers. Q What securities were eliminated from the portfolio? Why? The Fund's portfolio management team employs a disciplined process for sales as well as purchases. If a stock's yield drops below 75% of the S&P 500's yield or if the fundamental outlook for the company has changed, the holding is sold. This approach led to the elimination of British Telecom, Browning Ferris, Equifax, and W.R. Grace. Proceeds from these sales were used to purchase stocks that have more attractive total return prospects. Q Do you invest in foreign stocks? If so, what percentage of the portfolio? A Participating in opportunities outside the U.S. increases shareholders' return potential while reducing overall risk through diversification. That is why the Fund maintained approximately 20% of its assets in foreign securities. Purchases of Smithkline Beecham and Tele Danmark have proven successful for the Fund. Other purchases that have proven successful investments over the past year were Elf Aquitaine, a French energy company and the convertibles of Empresas ICA, a preeminent Mexican construction company. (Please note that portfolio changes should not be considered recommendations for action by individual investors.) Q Do you use "derivatives"? If so, why? A There may be occasions when investing in derivatives is a prudent decision for the Fund. For example, we may enter into forward contracts to hedge foreign currency exposure. (Please refer to page 11 for more information on the topic of derivatives.) Q What should I expect from the Fund in the upcoming year? A We believe that the AARP Growth and Income Fund can outperform the market by continuing to focus on companies whose prospects appear favorable and whose stock valuations and dividend yields are attractive. Our long-term view is that stocks will continue to outperform both money market instruments and fixed income securities. AARP Capital Growth Fund At a Glance Fund Overview The AARP Capital Growth Fund is designed to help aggressive investors take advantage of the high growth potential of the stock market. Because of the opportunity you'll have for high growth of your investment over the long term, there is greater potential for fluctuation in the value of your shares than with other AARP Mutual Funds. For Whom the Fund is Designed The Fund is suitable for aggressive investors seeking high long-term growth of their principal. Investors should be seeking to invest for the longer term (five years or more) and be comfortable with the short-term fluctuation to their principal that is associated with investing in stocks.
GROWTH OF $10,000 INVESTMENT YEARLY PERIODS AARP CAPITAL STANDARD & POOR'S 500 ENDED SEPTEMBER 30 GROWTH FUND++ STOCK PRICE INDEX+ - ------------------ ------------------ ------------------ 1 YEAR $9,530 $10,368 5 YEAR $12,871 $15,489 LIFE OF FUND* $34,258 $39,350 TOTAL RETURN CUMULATIVE 1 YEAR -4.70% 3.68% 5 YEAR 28.71% 54.89% LIFE OF FUND* 242.58% 293.50% AVERAGE ANNUAL 1 YEAR -4.70% 3.68% 5 YEAR 5.18% 9.14% LIFE OF FUND* 13.46% 14.95%
(MOUNTAIN CHART TITLE) GROWTH OF $10,000 INVESTMENT YEARLY PERIODS ENDED SEPTEMBER 30++ (CHART DATA)
AARP CAPITAL STANDARD & POOR'S 500 GROWTH FUND STOCK PRICE INDEX ------------- ----------------- Nov-84 10,000 10,000 Sep-85 11,300 11,535 Sep-86 14,303 15,196 Sep-87 19,598 21,795 Sep-88 18,532 19,100 Sep-89 26,616 25,405 Sep-90 19,447 23,057 Sep-91 27,771 30,243 Sep-92 28,866 33,585 Sep-93 35,946 37,951 Sep-94 34,258 39,350
(BAR CHART TITLE) ANNUAL INVESTMENT RETURNS AND PER SHARE INFORMATION YEARLY PERIODS ENDED SEPTEMBER 30++
1990 1991 1992 1993 1994 ------ ------ ------ ------ ------ NET ASSET VALUE $23.32 $30.23 $30.30 $36.20 $31.74 INCOME DIVIDENDS $0.19 $0.59 $0.23 $0.14 $0.05 CAPITAL GAINS $1.93 $1.79 $0.94 $1.21 $2.90 DISTRIBUTIONS (TOTAL RETURN - CHART DATA) FUND RETURN -26.94% 42.81% 3.94% 24.53% -4.70% INDEX RETURN -9.24% 31.09% 11.04% 12.97% 3.68% + The unmanaged Standard & Poor's 500 Stock Price Index is a market value weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange, and Over-the-Counter market. Index returns are calculated monthly and assume reinvestment of dividends. Unlike Fund returns, Index returns do not reflect any fees or expenses. ++ All performance is historical and assumes reinvestment of all dividends and capital gains and is not indicative of future results. Investment return and principal value will fluctuate so an investor's shares when redeemed may be worth more or less than when purchased. * The Fund commenced operations on November 30, 1984.
Q How did the Fund perform over the past year? A Though the stock market was relatively stable for the last quarter of 1993, it has declined for most of 1994. This was due in most part to a continual rise in interest rates and concerns about the direction of the economy. The AARP Capital Growth Fund has been affected by this volatility as well as some weakness in the cable stocks, in which the Fund is heavily invested (see investment strategy below). The Fund's one year total return was -4.70% as of September 30, 1994. The total return represented .12% in distributions of income and -4.82% in capital change. The Fund's one-year total return underperformed the Standard & Poor's 500 Stock Price Index return of 3.68%, as illustrated in the graph on the previous page. Q What has been your investment strategy? A The Fund has maintained an investment commitment to four industries: communications, cable television, technology, and entertainment. During most of 1993 the Fund's performance benefitted greatly by the appreciation of its cable holdings, as several large investments and joint ventures between telephone and cable companies were announced. However, the cable industry was adversely impacted in the first half of 1994 by new regulation of cable television rates as well as the breakup of the Bell Atlantic/TCI merger. In the past few months, cable television stocks have recovered somewhat as consolidation in the industry continued and as investor confidence in the future growth of the industry firmed. In addition to the areas outlined above, the Fund also invested in industries that perform well during periods of economic growth. The auto industry is a case in point. Therefore, the Fund increased its exposure to companies such as Ford and Chrysler. Q What were some of your better investment decisions during the fiscal year? A Despite the less-than-favorable performance of the four industries mentioned above, we still believe that the cable, entertainment, technology, and communications industries are sound investment decisions for the long-term. We continue to believe that the fundamental forces that have brought about the convergence of the telephone and cable industries remain intact. Moreover, cable has the technology to benefit from the emergence of the "information super highway" and it has the capability to generate significant new sources of revenues from the telephone business in the not-too-distant future. We also believe our investment in the auto industry (Ford and Chrysler) and drug companies (Schering-Plough and Warner-Lambert) will add to the Fund's performance over the long term. (Please note that portfolio changes should not be considered recommendations for action by individual investors.) Q Have you eliminated any major holdings from the portfolio? A Sales from the Fund's holdings included Mattel Inc. and Teradyne, two companies that had appreciated significantly and from which the Fund benefited. The Fund reduced its investment in wholesalers Price/Costco, which appreciated significantly, and Student Loan Marketing Association, which became a disappointing investment. Q Do you invest in foreign stocks? If so, what percentage of the portfolio? A Through the Fund's broad and flexible policy, we use foreign stocks to increase opportunity and help reduce risk through diversification. At the end of the past fiscal year, approximately 13% of the Fund was invested in foreign securities. Specifically, the team invested in stocks of companies based in Latin America, Canada, Europe, and Asia. The portfolio management team repositioned the Fund's foreign holdings by reducing exposure in Mexico and purchasing NTT Communications -- a Japanese telecommunications company and Autoliv, a Swedish company that produces air bags and seat belts. We believe that penetration of air bags in Europe is at a very low level and that it will increase dramatically over the next few years. This company dominates that business. Q Do you use "derivatives"? If so, why? A Derivatives are occasionally used in the Fund primarily for hedging purposes. (Please refer to page 11 for more information on the topic of derivatives.) Q What should I expect from the Fund in the coming year? A The AARP Capital Growth Fund remains committed to its long-term investment strategy. Despite a rough first half of 1994, we are beginning to see some recovery of many stocks that have been out of favor. While the management team cannot predict future returns of the stock market, improving economic growth and our commitment to the key industries outlined earlier we believe could prove favorable for long- term investors. AARP HIGH QUALITY MONEY FUND LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------------------------------------------------- Principal Amount ($) Value ($) - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 4.3% - --------------------------------------------------------------------------------------------------------------------------- 14,380,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/94 at 4.7% to be repurchased at $14,385,632 on 10/3/94, collateralized by a $14,215,000 U.S. Treasury Note, 8.5%, 8/15/95 (COST $14,380,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,380,000 ----------- - --------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER 29.8% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL 20.3% Banks 4.8% 16,000,000 Barclays U.S. Funding Corp., 4.53%, 10/03/94 . . . . . . . . . . . . . . . . . . . . 15,995,973 ----------- Other Financial Companies 7.7% 16,000,000 Asset Securitization Cooperative Group, 5.05%, 12/15/94 . . . . . . . . . . . . . . . 15,817,000 10,000,000 Associates Corp. of North America, 4.75%, 10/05/94 . . . . . . . . . . . . . . . . . 9,994,722 ----------- 25,811,722 ----------- Consumer Finance 7.8% 16,000,000 American Express Credit Corp., 4.78%, 10/13/94 . . . . . . . . . . . . . . . . . . . 15,974,507 10,000,000 General Electric Capital Corp., 4.78%, 10/12/94 . . . . . . . . . . . . . . . . . . . 9,985,394 ----------- 25,959,901 ----------- DURABLES 9.5% Automobiles 4.8% 16,000,000 Ford Motor Credit Co., 4.78%, 10/14/94 . . . . . . . . . . . . . . . . . . . . . . . 15,972,382 ----------- Construction/Agricultural Equipment 4.7% 16,000,000 John Deere Capital Corp., 5%, 1/18/95 . . . . . . . . . . . . . . . . . . . . . . . . 15,734,041 ----------- TOTAL COMMERCIAL PAPER (COST $99,512,423) . . . . . . . . . . . . . . . . . . . . . . 99,474,019 ----------- - --------------------------------------------------------------------------------------------------------------------------- U.S. TREASURY OBLIGATION 3.1% - --------------------------------------------------------------------------------------------------------------------------- 10,000,000 U.S. Treasury Note, 8.5%, 5/15/95 (COST $10,288,076) . . . . . . . . . . . . . . . . 10,167,200 ----------- - --------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES 44.6% - --------------------------------------------------------------------------------------------------------------------------- 20,000,000 Federal National Mortgage Association, 5.44%, 7/14/99* . . . . . . . . . . . . . . . 19,990,000 10,000,000 Student Loan Marketing Association, 5.52%, 4/17/95* . . . . . . . . . . . . . . . . . 10,020,000 25,000,000 Student Loan Marketing Association, 5.14%, 4/16/96* . . . . . . . . . . . . . . . . . 24,961,500 20,000,000 Student Loan Marketing Association, 5.295%, 11/27/96* . . . . . . . . . . . . . . . . 20,070,000 38,690,000 Student Loan Marketing Association, 5.32%, 1/23/97* . . . . . . . . . . . . . . . . . 38,686,131 10,000,000 Student Loan Marketing Association, 5.27%, 10/30/97* . . . . . . . . . . . . . . . . 10,047,900 25,000,000 Student Loan Marketing Association, 5.44%, 7/12/99* . . . . . . . . . . . . . . . . . 25,000,000 ----------- TOTAL U.S. GOVERNMENT AGENCIES (COST $148,764,516) . . . . . . . . . . . . . . . . . 148,775,531 ----------- - --------------------------------------------------------------------------------------------------------------------------- MEDIUM-TERM AND SHORT-TERM NOTES 17.4% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL 12.0% Banks 15,000,000 Banc One Texas, Note, 4.92%, 6/2/95* . . . . . . . . . . . . . . . . . . . . . . . . 15,000,000 15,000,000 PNC Bank, Ohio, Note, 5.02%, 6/15/95* . . . . . . . . . . . . . . . . . . . . . . . . 14,933,821 10,000,000 Trust Company Bank of Georgia, Note, 3.65%, 11/15/94 . . . . . . . . . . . . . . . . 9,984,325 ----------- 39,918,146 -----------
The accompanying notes are an integral part of the financial statements. 46
- --------------------------------------------------------------------------------------------------------------------------- Principal Amount ($) Value ($) - --------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS 5.4% 5,000,000 Anaheim, CA, Certificate of Participation, 4.875%, 10/3/94 . . . . . . . . . . . . . 4,999,997 13,000,000 SMM Trust, 5.55%, 3/17/95* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,967,648 ----------- 17,967,645 ----------- TOTAL MEDIUM-TERM AND SHORT-TERM NOTES ($57,993,228) . . . . . . . . . . . . . . . . 57,885,791 -----------
- --------------------------------------------------------------------------------------------------------------------------- SUMMARY % OF NET ASSETS - --------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO (COST $330,938,243) (a) . . . . . . . . . . 99.2 330,682,541 OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . 0.8 2,755,518 ----- ----------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 333,438,059 ===== =========== - ----------------------------------------------------------------------------------------------------------------------------------- (a) At September 30, 1994, the net unrealized depreciation on investments based on cost for federal income tax purposes of $330,938,243 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . . $ 137,900 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . . (393,602) ---------- Net unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(255,702) ========== * Floating rate notes are securities whose interest rates vary with a designated market index or market rate, such as the coupon equivalent of the U.S. Treasury bill rate. These securities are shown at their rate as of September 30, 1994. - ----------------------------------------------------------------------------------------------------------------------------------- Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements. 47 AARP HIGH QUALITY TAX FREE MONEY FUND - ------------------------------------------------------------------------------------------------------------------------- LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994 - -------------------------------------------------------------------------------------------------------------------------
Principal Credit Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- MUNICIPAL INVESTMENTS -- 100.6% - ------------------------------------------------------------------------------------------------------------------------- ALABAMA Birmingham, AL, Health Services, University of Alabama Medical Clinic, Daily Demand Note, 3.8%, 12/1/26* . . . . . . . . . . . . . . . . . . . 2,000,000 A-1+ 2,000,000 ARIZONA Agricultural Improvement and Power District, AZ, Salt River Project, Tax Exempt Commercial Paper: 2.95%, 10/14/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,006,000 A-1+ 3,006,000 3.05%, 11/15/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 A-1+ 3,600,000 Apache County, AZ, Industrial Development Authority, Tucson Electric Power Co., 1983 Series C, Weekly Demand Note, 3.5%, 12/15/18* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000 Maricopa County, AZ, Pollution Control Revenue, Public Service of New Mexico, Weekly Demand Note, 3.75%, 11/1/22* . . . . . . . . . . . . 4,000,000 A-1+ 4,000,000 Maricopa County, AZ, Pollution Control Revenue, Southern California Edison, Series F, Tax Exempt Commercial Paper, 2.9%, 10/12/94 . . . . . 2,600,000 A-1 2,600,000 Pima County, AZ, Industrial Development Authority, Tucson Electric Power Co., Weekly Demand Note: 3.5%, 10/1/22* . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,900,000 A-1+ 2,900,000 1982 Series A, 3.5%, 7/1/22* . . . . . . . . . . . . . . . . . . . . 4,000,000 A-1 4,000,000 Pinal County, AZ, Pollution Control Revenue, Magma Copper, Weekly Demand Note, 3.8%, 12/1/11* . . . . . . . . . . . . . . . . . . . 1,900,000 A-1+ 1,900,000 CALIFORNIA California General Obligation, Student Educational Loan Marketing Corporation, Series 1993, Mandatory Tender Bond, 2.65%, 11/1/94 . . . . 1,300,000 MIG1 1,300,000 California Revenue Anticipation Note, Series A, 5%, 6/28/95 . . . . . . . . 1,250,000 SP-1+ 1,257,253 Los Angeles County Unified School District, CA, Tax and Revenue Anticipation Note, 4.5%, 7/10/95 . . . . . . . . . . . . . . . . . . . . 1,000,000 SP-1+ 1,006,707 Los Angeles County, CA, Tax and Revenue Anticipation Note, 4.5%, 6/30/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 SP-1+ 2,009,326 COLORADO Clear Creek County, CO, Colorado Counties Financing Program, Series 1988, Weekly Demand Note, 3.55%, 6/1/98* . . . . . . . . . . . . 1,800,000 A-1+ 1,800,000 Colorado State, 4.2%, 5/1/95 . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 1,001,660 FLORIDA Dade County, FL, Water and Sewer System Revenue, Series 1994, Weekly Demand Note, 3.6%, 10/5/22*(c) . . . . . . . . . . . . . . . . . 3,300,000 A-1+ 3,300,000 Putnam County, FL, Pollution Control Revenue, Seminole Electric Cooperative Finance Corp., 1984 Series H-1, Weekly Demand Note, 3.65%, 3/15/14* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400,000 A-1+ 4,400,000 GEORGIA Burke County, GA, Pollution Control Revenue, Ogelthorpe Power Company, Vogtle Project, Tax Exempt Commercial Paper, 3.2%, 11/14/94 . . . . . . 2,000,000 A-1+ 2,000,000 Gordon County, GA, Development Authority Revenue, Sara Lee Corp., Weekly Demand Note, 3.75%, 3/1/02* . . . . . . . . . . . . . . . . . . . 1,400,000 A-1+ 1,400,000 IDAHO Idaho General Obligation, Tax Anticipation Note, 4.5%, 6/29/95 . . . . . . 1,000,000 SP-1+ 1,004,861 ILLINOIS Illinois Development Finance Authority, Deerfield Marriott, Series 1984, Weekly Demand Note, 3.65%, 11/1/14* . . . . . . . . . . . . 1,600,000 MIG1 1,600,000
The accompanying notes are an integral part of the financial statements. 48 - -------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- Illinois Educational Facilities Authority, University Pooled Financing Program, Weekly Demand Note, 3.7%, 12/1/05*(c) . . . . . . . . . . . . . 1,135,000 A-1 1,135,000 Illinois Health Facilities Authority, Highland Park Hospital Revenue, 1991 Series B, Optional Put, 3.75%, 6/1/95(c) . . . . . . . . . . . . . 2,000,000 A-1+ 2,000,000 INDIANA Indiana Bond Bank, Advanced Funding Program, Series A2, 3.03%, 1/17/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 SP-1+ 2,001,608 Jasper County, IN, Northern Indiana Power, Tax Exempt Commercial Paper, 3.3%, 11/17/94 . . . . . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000 IOWA Iowa School Corporation Warrant Certificate, 3.6%, 12/30/94 . . . . . . . . 500,000 SP-1+ 500,234 Louisa County, IA, Pollution Control Revenue, Iowa/Illinois Power & Light, Tax Exempt Commercial Paper, 3.2%, 10/11/94 . . . . . . . 1,690,000 A-1+ 1,690,000 West Des Moines, IA, Greyhound Lines, Commercial Development Revenue, Weekly Demand Note, 3.8%, 12/1/14* . . . . . . . . . . . . . . 6,400,000 A-1+ 6,400,000 KENTUCKY Kentucky Development Finance Authority, Healthcare System, Appalachian Regional Health Care, Series 1991, Weekly Demand Note, 3.65%, 9/1/06* . . . . . . . . . . . . . . . . . . . . . . 7,200,000 A-1+ 7,200,000 LOUISIANA Parish of DeSoto, LA, Pollution Control Revenue, Central Louisiana Electric Co., 1991 Series B, Weekly Demand Note, 3.6%, 7/1/18* . . . . . 1,900,000 A-1+ 1,900,000 MAINE Maine Tax Anticipation Note, Series 1994, 4.5%, 6/30/95 . . . . . . . . . . 1,000,000 SP-1+ 1,005,747 MASSACHUSETTS Massachusetts Bay Transportation Authority: 1984 Series A, Optional Put, 3.75%, 3/1/95 . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000 5%, 9/8/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 SP-1 2,016,191 MINNESOTA Cottage Grove, MN, Minnesota Mining and Manufacturing, Series 1982, Weekly Demand Note, 3.59%, 8/1/12* . . . . . . . . . . . . . . . . . . . 300,000 A-1+ 300,000 Rochester, MN, Health Care Facilities Authority, Mayo Health Clinic, Tax Exempt Commercial Paper, 3%, 10/4/94 . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000 University of Minnesota Board of Regents, Tax Exempt Commercial Paper: 3.05%, 10/28/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 A-1 600,000 3.15%, 11/10/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000 NEW HAMPSHIRE New Hampshire Business Finance Authority, Connecticut Light & Power, Weekly Demand Note, 3.8%, 12/1/22* . . . . . . . . . . . . . . . . . . . 1,700,000 A-1+ 1,700,000 NEW MEXICO Farmington, NM, Pollution Control Revenue, Arizona Public Service, Four Corners Project, 1994 Series A, Daily Demand Note, 3.8%, 5/1/24* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 A-1+ 2,000,000 NORTH CAROLINA North Carolina Medical Care Commission, Hospital Revenue, Pooled Financing Project, 1986 Series A-2, Weekly Demand Note, 3.85%, 7/1/26*(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,000 MIG1 505,000 OREGON Klameth Falls, OR, Hydroelectric Facilities Authority, Salt Caves Project, 1986 Series D, Mandatory Put, 3.75%, 5/1/95 . . . . 2,000,000 SP1+ 2,000,000
The accompanying notes are an integral part of the financial statements. 49 - -------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- Oregon General Obligation, 1973 Series G, Weekly Demand Note, 3.8%, 12/1/18* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,000 A-1+ 2,100,000 PENNSYLVANIA Allegheny County, PA, General Obligation, Tender Option Bond, Weekly Coupon Reset, Series C38, 3.65%, 10/4/94(c) . . . . . . . . . . . 1,000,000 A-1+ 1,000,000 Emmaus, PA, General Authority, Local Government Revenue Bond Pool Program, Series G4, Weekly Demand Note, 3.85%, 3/1/24* . . . . . . 5,100,000 A-1 5,100,000 Philadelphia, PA, Tax and Revenue Anticipation Note, 4.75%, 6/15/95 . . . . 1,500,000 SP-1 1,508,654 Philadelphia School District, PA, Tax and Revenue Anticipation Note, 4.75%, 6/30/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 SP-1+ 1,505,912 RHODE ISLAND Rhode Island Housing & Mortgage Finance Corporation, Series 9-A, Weekly Demand Note, 3.8%, 12/1/95* . . . . . . . . . . . . . . . . . . . 870,000 A-1+ 870,000 TENNESSEE Clarksville, TN, Public Building Authority, Pooled Financing Revenue, Weekly Demand Note, 3.6%, 12/1/00*(c) . . . . . . . . . . . . . . . . . 3,400,000 A-1 3,400,000 Franklin, TN, Industrial Development Revenue, Franklin Oaks Apartments, Weekly Demand Note, 3.35%, 12/1/07* . . . . . . . . . . . . . . . . . . 7,600,000 A-1 7,600,000 Knox County, TN, Industrial Development Board, Monthly Reset Bond, Series 1984: Lonas Project, 3.3%, 12/1/14*(c) . . . . . . . . . . . . . . . . . . 1,000,000 MIG1 1,000,000 Professional Plaza, 3.3%, 12/1/14*(c) . . . . . . . . . . . . . . . . 1,000,000 A-1+ 1,000,000 Tennessee Local Development Authority, Bond Anticipation Note, 4.5%, 6/1/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700,000 SP-1+ 2,714,469 TEXAS Port Development Corp., TX, Marine Terminal Refunding Revenue, Stolt Terminals, Series 1989, Weekly Demand Note, 3.55%, 11/5/14* . . . 2,500,000 A-1+ 2,500,000 University of Texas Board of Regents, Permanent University Fund, Series A, Tax Exempt Commercial Paper, 3.05%, 10/28/94 . . . . . . . . . 1,600,000 A-1+ 1,600,000 UTAH Salt Lake City, UT, Pooled Hospital Financing Program, Tax Exempt Commercial Paper, 2.85%, 10/7/94 . . . . . . . . . . . . . . 5,000,000 A-1+ 5,000,000 WASHINGTON Seattle, WA, Municipal Light & Power, Series 1993, Weekly Demand Note, 3.65%, 11/1/18* . . . . . . . . . . . . . . . . . . 1,900,000 A-1+ 1,900,000 Washington General Obligation, Various Purpose, Series B2, Tender Option Bond, Weekly Coupon Reset, 3.9%, 10/4/94 . . . . . . . . . . . . . . . . 2,100,000 A-1+ 2,100,000 Washington Public Power Supply Authority, Projects #1 & #3, Series 1993, Weekly Demand Note, 3.9%, 7/1/18* . . . . . . . . . . . . . . . . . . . 1,995,000 A-1+ 1,995,000 WISCONSIN Wisconsin General Obligation, 4.5%, 6/15/95 . . . . . . . . . . . . . . . . 1,200,000 SP-1+ 1,204,698 WYOMING Sweetwater County, WY, Pollution Control Revenue Refunding, Pacificorp Project, 1990 Series A, Weekly Demand Note, 3.8%, 7/1/15* . . . . . . . 2,000,000 A-1+ 2,000,000 ----------- TOTAL MUNICIPAL INVESTMENTS (COST $130,138,320) . . . . . . . . . . . . . . 130,138,320 ----------- - ------------------------------------------------------------------------------------------------------------------------- SUMMARY % OF NET ASSETS TOTAL INVESTMENT PORTFOLIO (COST $130,138,320) (a) . . . . . . . . . . 100.6 130,138,320 OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . (0.6) (728,675) ------ ----------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 129,409,645 ====== ===========
The accompanying notes are an integral part of the financial statements. 50 - ------------------------------------------------------------------------------- * Floating rate demand notes are securities whose interest rates vary with a designated market index or market rate, such as the coupon-equivalent of the U.S. Treasury bill rate. Variable rate demand notes are securities whose interest rates are reset periodically at levels that are generally comparable to tax-exempt commercial paper. These securities are payable on demand within seven calendar days and normally incorporate an irrevocable letter of credit or line of credit from a major bank. Since these securities are payable on demand, they are valued at 100% of their principal. (a) The cost for federal income tax purposes was $130,138,320. (b) All of the securities held have been determined to be of appropriate credit quality as required by the Fund's investment objectives. Credit ratings shown are either Standard & Poor's Ratings Group, Moody's Investors Service, Inc. or Fitch Investors Service, Inc. Unrated securities (NR) have been determined to be of comparable quality to rated eligible securities. (c) Bond is insured by one of these companies: AMBAC, FGIC, or MBIA. - ------------------------------------------------------------------------------- At September 30, 1994, and to the extent provided in regulations, the Fund had capital loss carryforwards of approximately $1,309,217 of which $176,679 expires September 30, 1995, $618,345 expires September 30, 1996, $170,432 expires September 30, 1997, $19,559 expires September 30, 1999, $323,801 expires September 30, 2000 and $401 expires September 30, 2001. In addition, from November 1, 1993 through September 30, 1994, the Fund incurred approximately $10,343 of net realized capital losses which the Fund intends to elect to defer and treat as arising in the fiscal year ended September 30, 1995. - ------------------------------------------------------------------------------- Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities. The accompanying notes are an integral part of the financial statements. 51 AARP GNMA AND U.S. TREASURY FUND LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------------------------------------------------- Principal Market Amount ($) Value ($) - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 0.8% - --------------------------------------------------------------------------------------------------------------------------- 45,198,000 Repurchase Agreement with First National Bank of Chicago, dated 9/30/94 at 4.75%, to be repurchased at $45,215,891 on 10/3/94, collateralized by a $45,970,000 U.S. Treasury Note, 4.125%, 5/31/95 (COST $45,198,000) . . . . . . . 45,198,000 ------------- - --------------------------------------------------------------------------------------------------------------------------- U.S. TREASURY BILLS 12.0% - --------------------------------------------------------------------------------------------------------------------------- 250,000,000 3/09/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,362,500 450,000,000 8/24/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427,374,000 ------------- TOTAL U.S. TREASURY BILLS (COST $672,688,156) . . . . . . . . . . . . . . . . . . . 671,736,500 ------------- - --------------------------------------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION SECURITIES* 68.2% - --------------------------------------------------------------------------------------------------------------------------- 47,171,276 7.00% with various maturities to 1/15/24 . . . . . . . . . . . . . . . . . . . . . . 42,748,969 468,427,860 7.50% with various maturities to 11/15/23 . . . . . . . . . . . . . . . . . . . . . 440,027,079 713,515,557 8.00% with various maturities to 7/15/24 . . . . . . . . . . . . . . . . . . . . . . 692,028,256 676,126,823 8.50% with various maturities to 8/15/24 . . . . . . . . . . . . . . . . . . . . . . 675,065,304 921,714,816 9.00% with various maturities to 8/15/24 . . . . . . . . . . . . . . . . . . . . . . 945,923,893 404,295,556 9.50% with various maturities to 6/15/24 . . . . . . . . . . . . . . . . . . . . . . 424,938,572 475,959,710 10.00% with various maturities to 8/15/22 . . . . . . . . . . . . . . . . . . . . . 509,919,931 437,566 10.25% with various maturities to 12/15/98 . . . . . . . . . . . . . . . . . . . . . 464,367 32,708,666 10.50% with various maturities to 1/20/21 . . . . . . . . . . . . . . . . . . . . . 35,414,020 6,766,305 11.50% with various maturities to 2/15/16 . . . . . . . . . . . . . . . . . . . . . 7,595,175 12,836,831 12.00% with various maturities to 9/15/15 . . . . . . . . . . . . . . . . . . . . . 14,569,466 9,978,771 12.50% with various maturities to 8/15/15 . . . . . . . . . . . . . . . . . . . . . 11,432,224 2,425,138 13.00% with various maturities to 11/15/15 . . . . . . . . . . . . . . . . . . . . . 2,787,254 1,281,981 13.50% with various maturities to 12/15/14 . . . . . . . . . . . . . . . . . . . . . 1,493,508 387,191 14.00% with various maturities to 11/15/14 . . . . . . . . . . . . . . . . . . . . . 453,014 141,617 14.50% with various maturities to 10/15/14 . . . . . . . . . . . . . . . . . . . . . 166,400 303,208 15.00% with various maturities to 10/15/12 . . . . . . . . . . . . . . . . . . . . . 359,301 378,909 16.00% with various maturities to 2/15/12 . . . . . . . . . . . . . . . . . . . . . 450,902 ------------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION SECURITIES (COST $3,913,278,381) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,805,837,635 ------------- - --------------------------------------------------------------------------------------------------------------------------- U.S. TREASURY NOTES 15.2% - --------------------------------------------------------------------------------------------------------------------------- 400,000,000 5.500%, 2/15/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,064,000 450,000,000 3.875%, 2/28/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447,259,500 ------------- TOTAL U.S. TREASURY NOTES (COST $848,845,827) . . . . . . . . . . . . . . . . . . . 847,323,500 ------------- - --------------------------------------------------------------------------------------------------------------------------- SUMMARY % OF NET ASSETS - --------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO (COST $5,480,010,364)(a) . . . . . . . . . 96.2 5,370,095,635 NET RECEIVABLE FOR SECURITIES SOLD . . . . . . . . . . . . . . . . . . 3.6 202,951,121 OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . 0.2 12,438,434 ----- ------------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 5,585,485,190 ===== =============
The accompanying notes are an integral part of the financial statements. 52 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ * Effective maturities will be shorter due to amortization and prepayments. (a) At September 30, 1994, the net unrealized depreciation on investments based on cost for federal income tax purposes of $5,480,010,364 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . $ 12,936,874 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . (122,851,603) ------------- Net unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(109,914,729) ============= - ------------------------------------------------------------------------------------------------------------------------------------ Purchases and sales of investment securities, all of which were U.S. Government obligations and U.S. Government Agencies (excluding short-term investments), for the year ended September 30, 1994, aggregated $5,732,995,798 and $6,779,140,243, respectively. - ------------------------------------------------------------------------------------------------------------------------------------ From November 1, 1993 through September 30, 1994, the Fund incurred approximately $304,560,473 of net realized capital losses which the Fund intends to elect to defer and treat as arising in the fiscal year ended September 30, 1995. - ------------------------------------------------------------------------------------------------------------------------------------ Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements. 53 AARP HIGH QUALITY BOND FUND LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------------------------------------------------- Principal Market Amount ($) Value ($) - --------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER 23.6% - --------------------------------------------------------------------------------------------------------------------------- 31,000,000 American Express Credit Corp., 4.65%, 10/3/94 . . . . . . . . . . . . . . . . . . . . 31,000,000 31,000,000 American Express Credit Corp., 4.6%, 10/3/94 . . . . . . . . . . . . . . . . . . . . 31,000,000 31,705,000 Associates Corp. of North America, 4.98%, 10/3/94 . . . . . . . . . . . . . . . . . . 31,705,000 9,388,000 Ford Motor Credit Co., 4.75%, 10/4/94 . . . . . . . . . . . . . . . . . . . . . . . . 9,388,000 31,000,000 ITT Financial Corp., 4.75%, 10/3/94 . . . . . . . . . . . . . . . . . . . . . . . . . 31,000,000 ----------- TOTAL COMMERCIAL PAPER (COST $134,093,000) . . . . . . . . . . . . . . . . . . . . . 134,093,000 ----------- - --------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT & AGENCIES 34.1% - --------------------------------------------------------------------------------------------------------------------------- 15,000,000 Federal National Mortgage Association, 9.65%, 8/10/20 . . . . . . . . . . . . . . . . 16,125,000 2,000,000 Resolution Funding Corp., Zero Coupon, 1/15/08 (8.20**) . . . . . . . . . . . . . . . 686,900 2,400,000 Resolution Funding Corp., Zero Coupon, 7/15/08 (8.23**) . . . . . . . . . . . . . . . 788,640 1,800,000 Resolution Funding Corp., Zero Coupon, 1/15/09 (8.25**) . . . . . . . . . . . . . . . 567,288 2,400,000 Resolution Funding Corp., Zero Coupon, 7/15/09 (8.27**) . . . . . . . . . . . . . . . 724,368 2,100,000 Resolution Funding Corp., Zero Coupon, 1/15/10 (8.30**) . . . . . . . . . . . . . . . 605,535 3,800,000 Resolution Funding Corp., Zero Coupon, 7/15/10 (8.31**) . . . . . . . . . . . . . . . 1,050,320 20,000,000 U.S. Treasury Note, 4.25%, 1/31/95 . . . . . . . . . . . . . . . . . . . . . . . . . 19,934,400 10,000,000 U.S. Treasury Note, 7.875%, 7/15/96 . . . . . . . . . . . . . . . . . . . . . . . . . 10,225,000 35,000,000 U.S. Treasury Note, 5.5%, 9/30/97 . . . . . . . . . . . . . . . . . . . . . . . . . . 33,747,700 48,000,000 U.S. Treasury Note, 6.875%, 7/31/99 . . . . . . . . . . . . . . . . . . . . . . . . . 47,220,000 21,000,000 U.S. Treasury Note, 5.875%, 2/15/04 . . . . . . . . . . . . . . . . . . . . . . . . . 18,585,000 55,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 5/15/09 (8.15**) . 17,098,400 25,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 8/15/09 (8.16**)(b) 7,607,500 35,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 2/15/16 (8.26**) . 6,202,000 35,500,000 U.S. Treasury Separate Trading Registered Interest and Principal, 5/15/16 (8.26**) . 6,164,575 45,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 8/15/18 (8.25**) . 6,527,700 ----------- TOTAL U.S. GOVERNMENT & AGENCIES (COST $201,523,586) . . . . . . . . . . . . . . . . 193,860,326 ----------- - --------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY PASS-THRUS* 15.1% - --------------------------------------------------------------------------------------------------------------------------- 30,000,000 Federal National Mortgage Association, 7.5%, 8/1/24 . . . . . . . . . . . . . . . . . 28,565,400 29,000,000 Government National Mortgage Association Pass-thru, 8%, 8/15/24 . . . . . . . . . . . 28,130,000 29,000,000 Government National Mortgage Association Pass-thru, 8.5%, 8/15/24 . . . . . . . . . . 28,954,470 ----------- TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS (COST $85,775,780) . . . . . . . . . . . . . 85,649,870 ----------- - --------------------------------------------------------------------------------------------------------------------------- COLLATERALIZED MORTGAGE OBLIGATIONS 4.5% - --------------------------------------------------------------------------------------------------------------------------- 19,077,560 Federal Home Loan Mortgage Corp., Separate Trading Registered Principal only, 5/15/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,452,824 10,000,000 Prudential Home Mortgage Securities Co., 1993-4 Series A3, 7%, 2/25/23 . . . . . . . 9,787,500 ----------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $26,296,619) . . . . . . . . . . . . 25,240,324 ----------- - --------------------------------------------------------------------------------------------------------------------------- FOREIGN BONDS -- U.S.$ DENOMINATED 6.6% - --------------------------------------------------------------------------------------------------------------------------- 13,000,000 ABN-AMRO Bank NV, subordinated note, 7.13%, 10/15/2093 . . . . . . . . . . . . . . . 10,413,130 3,500,000 Kingdom of Thailand, 8.7%, 8/1/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,604,790 12,000,000 Province of Ontario, 7.375%, 1/27/03 . . . . . . . . . . . . . . . . . . . . . . . . 11,431,800 8,000,000 Svensk Export Kredit AB, 8.625%, 4/15/26 . . . . . . . . . . . . . . . . . . . . . . 7,620,000 4,300,000 Tokyo Metropolis, Japan, 9.25%, 10/11/98 . . . . . . . . . . . . . . . . . . . . . . 4,561,870 ----------- TOTAL FOREIGN BONDS -- U.S.$ DENOMINATED (COST $41,972,182) . . . . . . . . . . . . . 37,631,590 -----------
The accompanying notes are an integral part of the financial statements. 54
- ------------------------------------------------------------------------------------------------------------------------- Principal Market Amount ($) Value ($) - ------------------------------------------------------------------------------------------------------------------------- ASSET BACKED 5.3% - ------------------------------------------------------------------------------------------------------------------------- AUTOMOBILE RECEIVABLES 1.0% 6,000,000 Capital Automobile Receivable Asset Trust, Series A-6, 4.9%, 2/15/98 . . . . . . . . 5,943,720 ---------- CREDIT CARD RECEIVABLES 0.6% 208,333 Bank of New York Master Credit Card Trust, Series A, 7.95%, 4/15/96 . . . . . . . . . 208,398 3,000,000 Standard Credit Card Trust, Series 1991 1-A, 8.5%, 6/7/96 . . . . . . . . . . . . . . 3,073,110 ---------- 3,281,508 ---------- HOME EQUITY LOANS 2.4% 3,292,300 Fleet Financial Home Equity Trust, 6.65%, 10/16/06 . . . . . . . . . . . . . . . . . 3,260,407 10,892,473 United Companies Financial Corp., Home Loan Trust, Series 1993 B1, 6.075%, 7/25/14 . 10,293,414 ---------- 13,553,821 ---------- MANUFACTURED HOUSING 1.3% 4,500,000 Merrill Lynch Mortgage Investors Inc., Series 1991 D-4, 9.85%, 7/15/11 . . . . . . . 4,591,395 2,540,536 Security Pacific Acceptance Corp., 7.85%, 9/15/11 . . . . . . . . . . . . . . . . . . 2,541,324 ---------- 7,132,719 ---------- TOTAL ASSET BACKED (COST $30,436,473) . . . . . . . . . . . . . . . . . . . . . . . . 29,911,768 ---------- - ------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS 20.0% - ------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 2.6% 15,000,000 Coca Cola Enterprises, Inc., 8.5%, 2/1/22 . . . . . . . . . . . . . . . . . . . . . . 14,759,700 ---------- FINANCIAL 3.6% 1,500,000 American Express Credit Corp., 11.625%, 12/12/00 . . . . . . . . . . . . . . . . . . 1,673,437 4,000,000 British Telecom Financial, Inc., 9.375%, 2/15/99 . . . . . . . . . . . . . . . . . . 4,241,720 4,500,000 Grand Metropolitan Investment Corp., 8.125%, 8/15/96 . . . . . . . . . . . . . . . . 4,592,070 10,000,000 Toyota Motor Credit Corp., 5.75%, 6/15/95 . . . . . . . . . . . . . . . . . . . . . . 9,980,300 ---------- 20,487,527 ---------- DURABLES 4.9% 10,000,000 Boeing Co., 6.875%, 10/15/43 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,907,000 15,000,000 Ford Motor Co., 8.875%, 1/15/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,283,950 5,000,000 Ford Motor Credit Co., 6.25%, 2/26/98 . . . . . . . . . . . . . . . . . . . . . . . . 4,808,450 ---------- 27,999,400 ---------- MANUFACTURING 1.8% 10,000,000 Dow Chemical Co., 9%, 4/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,233,000 ---------- ENERGY 3.0% 15,000,000 Atlantic Richfield Co., 9.125%, 8/1/31 . . . . . . . . . . . . . . . . . . . . . . . 15,457,050 3,100,000 Halliburton Co., Zero Coupon, 3/13/06 (6.15**) . . . . . . . . . . . . . . . . . . . 1,550,000 ---------- 17,007,050 ---------- TRANSPORTATION 1.0% 5,000,000 Consolidated Rail Corp., 9.75%, 6/15/20 . . . . . . . . . . . . . . . . . . . . . . . 5,571,600 ---------- UTILITIES 3.1% 15,000,000 Pacific Bell, 7.125%, 3/15/26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,663,750
The accompanying notes are an integral part of the financial statements. 55
- ------------------------------------------------------------------------------------------------------------------------- Principal Market Amount ($) Value ($) - ------------------------------------------------------------------------------------------------------------------------- 4,500,000 Pacific Gas & Electric Co., 1984 Series D, 12.75%, 11/1/17 . . . . . . . . . . . . . 5,007,150 ----------- 17,670,900 ----------- TOTAL CORPORATE BONDS (COST $122,093,034) . . . . . . . . . . . . . . . . . . . . . . 113,729,177 ----------- - ------------------------------------------------------------------------------------------------------------------------- SUMMARY % OF NET ASSETS - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO (COST $642,190,674) (a) . . . . . . . . . . 109.2 620,116,055 OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . (9.2) (52,130,148) ----- ----------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 567,985,907 ===== =========== - ------------------------------------------------------------------------------------------------------------------------------------ * Effective maturities will be shorter due to amortization and prepayments. ** Yield; (unaudited) bond equivalent yield to maturity; not a coupon rate. (a) At September 30, 1994, the net unrealized depreciation on investments based on cost for federal income tax purposes of $642,190,674 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . $ 1,701,720 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . (23,776,339) ------------ Net unrealized depreciation . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(22,074,619) ============ (b) At September 30, 1994, $1,000,000 par value of U.S. Treasury Separate Trading Registered Interest and Principal, 8/15/09, with a market value of $304,300 was pledged to cover initial margin requirements for open futures contracts.
At September 30, 1994, open futures contracts sold short were as follows (Note 1):
Aggregate Market Futures Expiration Contracts Face Value ($) Value ($) ------- ---------- --------- -------------- --------- U.S. Treasury Notes . . . . . . . Dec 1994 113 11,701,433 11,465,969 ---------- ---------- Total net unrealized appreciation on open futures contracts sold short. . 235,464 ---------- The aggregate face value of futures contracts opened and closed during the year ended September 30, 1994 was $54,312,247 and $58,604,190 respectively. - ------------------------------------------------------------------------------------------------------------------------------------ Purchases and sales of investment securities (excluding short-term investments), aggregated $32,095,358 and $66,909,280, respectively. Purchases and sales of U.S. Government obligations and U.S. Government Agencies, for the year ended September 30, 1994, aggregated $297,413,576 and $256,338,806, respectively. - ------------------------------------------------------------------------------------------------------------------------------------ From November 1, 1993 through September 30, 1994, the Fund incurred approximately $16,822,991 of net realized capital losses which the Fund intends to elect to defer and treat as arising in the fiscal year ended September 30, 1995. - ------------------------------------------------------------------------------------------------------------------------------------ Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements. 56 AARP INSURED TAX FREE GENERAL BOND FUND LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL INVESTMENTS (UNDER 1 YEAR) -- 9.6% - ------------------------------------------------------------------------------------------------------------------------- CALIFORNIA California Revenue Anticipation Note, 3.51%, 6/28/95 (c) . . . . . . . . . 10,000,000 AAA 10,000,000 Sacramento, CA, Municipal Utility District, Electric Revenue, Periodic Auction Reset, Series D, 4%, 11/15/15* (c) . . . . . . . . . . . . . . . 8,800,000 AAA 8,800,000 Southern California Public Power Authority, Power Project Revenue Refunding, Palo Verde, Periodic Auction Reset, 3.5%, 7/1/12* (c) . . . . 29,350,000 AAA 29,350,000 COLORADO Colorado Tax and Revenue Anticipation Note, 4.5%, 6/27/95 . . . . . . . . . 5,000,000 MIG1 5,013,200 FLORIDA Halifax Hospital Medical Center, FL, Hospital Revenue, Periodic Auction Reset, Series A, 3.35%, 10/1/19* (c) . . . . . . . . . . . . . . . . . . 10,650,000 AAA 10,650,000 Palm Beach County, FL, Water & Sewer Revenue, Daily Demand Note, 3.8%, 10/1/11* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,000 MIG1 2,100,000 ILLINOIS Illinois Educational Facilities Authority, University Pooled Finance Program, Weekly Demand Note, 3.7%, 12/1/05* (c) . . . . . . . . . . . . 15,175,000 AAA 15,175,000 MICHIGAN Detroit, MI, Sewage Disposal System, Revenue Refunding, Periodic Auction Reset, Series A, 3.35%, 7/1/23* (c) . . . . . . . . . . . . . . . . . . 22,000,000 AAA 22,000,000 MINNESOTA Minneapolis/St. Paul, MN, Healthcare System, Healthspan, Periodic Auction Reset, 3.25%, 11/15/17* (c) . . . . . . . . . . . . . . . . . . 5,000,000 A-1+ 5,000,000 NEW YORK New York City General Obligation, Daily Demand Note, 3.8%, 8/1/21* . . . . 1,900,000 MIG1 1,900,000 PUERTO RICO Commonwealth of Puerto Rico, Highway & Transportation Authority, Series W, Periodic Auction Reset, 3.595%, 7/1/10* . . . . . . . . . . . 9,450,000 A 9,450,000 Commonwealth of Puerto Rico, Telephone Authority Revenue, Series II93-10, Periodic Auction Reset, 3.23%, 1/1/20* (c) . . . . . . . 3,400,000 AAA 3,400,000 TEXAS North Central Texas, Health Facilities Development Corp., Methodist Hospital of Dallas, Daily Demand Note, 3.8%, 10/1/15* (c) . . . . . . . 4,000,000 A-1 4,000,000 WASHINGTON Washington Public Power Supply System, Periodic Auction Reset: Nuclear Project #1, Series A, 3.75%, 7/1/11* (c) . . . . . . . . . . . . 15,000,000 AAA 15,000,000 Nuclear Project #2, 3.75%, 7/1/10* (c) . . . . . . . . . . . . . . . . . 25,000,000 AAA 25,000,000 WISCONSIN Wisconsin General Obligation, 4.5%, 6/15/95 . . . . . . . . . . . . . . . . 17,000,000 SP-1+ 17,047,770 ----------- TOTAL SHORT-TERM MUNICIPAL INVESTMENTS (COST $183,940,472) . . . . . . . . 183,885,970 ----------- - ------------------------------------------------------------------------------------------------------------------------- LONG-TERM MUNICIPAL INVESTMENTS (OVER 1 YEAR) -- 89.2% - ------------------------------------------------------------------------------------------------------------------------- ALABAMA Birmingham, AL, Baptist Medical Center, Special Care Facility, Series A, 5.5%, 8/15/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800,000 AAA 2,492,196 Montgomery, AL, Baptist Medical Center, Special Care Facility, Series A, 5.75%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,615,000 AAA 2,443,848 ALASKA Anchorage, AK, Certificate of Participation, Series A, 7.8%, 2/15/06 (c) . 10,000,000 AAA 10,571,400
The accompanying notes are an integral part of the financial statements. 57 AARP INSURED TAX FREE GENERAL BOND FUND
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- North Slope Borough, AK, General Obligation: 1993 Series B, Zero Coupon, 1/1/03 (c) . . . . . . . . . . . . . . . . . 16,000,000 AAA 9,885,920 Series I, Zero Coupon, 6/30/95 (c) . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,377,920 Series I, 6.55%, 6/30/95 (c) . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,029,400 ARIZONA Arizona Municipal Finance Program, Certificate of Participation, Series 25, 7.875%, 8/1/14 (c) . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 4,150,020 Maricopa County, AZ: Hospital District #1, Hospital Facilities Revenue, 1985 Series A, 9.25%, 6/30/12, Prerefunded 6/30/95 at 102 (c) . . . . . . . . . . . 1,500,000 AAA 1,585,515 School District #28, Kyrene Elementary, Series B, Zero Coupon, 1/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 AAA 3,493,980 School District #6, Washington Elementary, Series B, 4.1%, 7/1/13 (c) . 2,950,000 AAA 2,178,310 School District #41, Gilbert School, Zero Coupon, 1/1/05 (c) . . . . . . 5,280,000 AAA 2,865,720 School District #68, Alhambra Elementary, Zero Coupon, 7/1/03 (c) . . . 2,860,000 AAA 1,728,012 School District #68, Alhambra Elementary, Zero Coupon, 7/1/04 (c) . . . 2,860,000 AAA 1,617,502 School District #68, Alhambra Elementary, Zero Coupon, 7/1/05 (c) . . . 2,850,000 AAA 1,501,409 Scottsdale, AZ, Industrial Development Authority, Scottsdale Memorial Hospital, 8.5%, 9/1/17 (c) . . . . . . . . . . . . . . . . . . . . . . . 1,050,000 AAA 1,158,402 CALIFORNIA Alameda County, CA, Certificate of Participation, Santa Rita Jail Project, 5.375%, 6/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,615,000 AAA 10,657,343 Banning, CA, Wastewater, Certificate of Participation, 8%, 1/1/19 (c) . . . 2,040,000 AAA 2,439,003 California Health Facilities Finance Authority, Hospital Revenue, Centinela Hospital Medical Center, 9.375%, 9/1/15, Prerefunded 9/1/95 at 102 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 5,327,300 California Public Works Board, Department of Corrections, Lease Revenue, Series A: 5.25%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 9,000,000 AAA 8,259,840 5.25%, 12/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,712,510 Secretary of State, 6.2%, 12/1/05 (c) . . . . . . . . . . . . . . . . . 4,520,000 AAA 4,723,400 Secretary of State, 6.3%, 12/1/06 (c) . . . . . . . . . . . . . . . . . 8,095,000 AAA 8,443,975 California Statewide Communities Development Corporation, Certificate of Participation, Children's Hospital, 5%, 6/1/06 (c) . . . 2,035,000 AAA 1,865,769 Los Angeles County, CA, Capital Asset Leasing, 6%, 12/1/06 (c) . . . . . . 9,000,000 AAA 9,006,660 Los Angeles County, CA, Public Works Finance Authority, Lease Revenue, Multiple Projects IV, 4.75%, 12/1/10 (c) . . . . . . . . 11,140,000 AAA 9,137,696 Northern California Power Agency, Public Power Revenue, Geothermal Project #3, 11.5%, 7/1/10, Prerefunded 7/1/95 at 103 . . . . 85,000 AAA 89,604 Northern California Transmission Revenue, Ore Transmission Project, Series A, 5.1%, 5/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,608,100 Oakland, CA, Redevelopment Agency, Tax Allocation, 6%, 2/1/07 (c) . . . . . 2,000,000 AAA 2,018,900 Palomar Pomerado, CA, Health Systems, Series B, Zero Coupon, 11/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080,000 AAA 1,947,453 Riverside, CA, Transportation Commission, Sales Tax Revenue, Series A: 5.7%, 6/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400,000 AAA 5,327,154 5.75%, 6/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,973,120 5.75%, 6/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,425,000 AAA 2,375,360 San Diego County Water Authority, CA, Certificate of Participation: 5.632%, 4/25/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 6,300,000 AAA 6,080,130 5.681%, 4/22/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000 AAA 4,290,165 San Francisco, CA, Bay Area Rapid Transit District, Sales Tax Revenue Refunding, 6.75%, 7/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,115,540
The accompanying notes are an integral part of the financial statements. 58
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- San Joaquin, CA, Certificate of Participation, County Public Facilities Project, 5.5%, 11/15/13 (c) . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 1,788,680 Sweetwater, CA, Water Revenue, 5.25%, 4/1/10 (c) . . . . . . . . . . . . . 13,240,000 AAA 11,852,448 University of California Regents, Multiple Purpose Projects, Series C, 5.125%, 9/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,539,920 DELAWARE Delaware Health Facilities Authority, Medical Center of Delaware, 6.25%, 10/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,695,000 AAA 2,819,401 DISTRICT OF COLUMBIA District of Columbia, General Obligation: Refunding, 1989 Series B, Zero Coupon, 6/1/00 (c) . . . . . . . . . . . 3,500,000 AAA 2,533,755 1993 Series B, 5.4%, 6/1/06 (c) . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 9,380,900 Refunding, 1993 Series B, 5.4%, 6/1/06 (c) . . . . . . . . . . . . . . . 18,905,000 AAA 17,734,591 Refunding, 1993 Series B, 5.5%, 6/1/07 (c) . . . . . . . . . . . . . . . 25,000,000 AAA 23,393,500 Refunding, 1993 Series B, 5.5%, 6/1/08 (c) . . . . . . . . . . . . . . . 21,300,000 AAA 19,531,887 Refunding, 1993 Series B, 5.5%, 6/1/09 (c) . . . . . . . . . . . . . . . 15,150,000 AAA 13,796,045 Refunding, 1993 Series B, 5.5%, 6/1/10 (c) . . . . . . . . . . . . . . . 15,590,000 AAA 14,070,131 Series B, 5.5%, 6/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . 2,840,000 AAA 2,586,189 Series B, 5.5%, 6/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . 1,050,000 AAA 932,442 Refunding, 1993 Series B, 5.875%, 6/1/05 (c) . . . . . . . . . . . . . . 4,750,000 AAA 4,692,193 Series B, 6.125%, 6/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 4,079,000 Series A, 7.5%, 6/1/09, Prerefunded 6/1/99 at 102 (c) . . . . . . . . . 5,000,000 AAA 5,571,550 9.9%, 12/1/00, Prerefunded 12/1/95 at 102 (c) . . . . . . . . . . . . . 750,000 AAA 811,860 FLORIDA Dade County, FL, Health Facilities Authority, Miami Children's Hospital, 5%, 8/1/23, Prerefunded 2/1/10 at 100 . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,662,980 Florida Department of Environmental Preservation, 4.75%, 7/1/12 (c) . . . . 10,000,000 AAA 8,098,800 Florida Municipal Power Agency, Refunding Revenue, Stanton II Project, Series 1993, 4.5%, 10/1/16 (c) . . . . . . . . . . . . . . . . . . . . . 4,400,000 AAA 3,339,468 Florida Turnpike Authority, Department of Transportation, Series A, 5.25%, 7/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 9,261,300 Orange County, FL, Tax Revenue, Tourist Development, Series A, 5.75%, 10/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 1,972,980 Orlando, FL, Utility Commission, Water & Electric Refunding Revenue, 8.5%, 10/1/09, Prerefunded 10/1/95 at 102 . . . . . . . . . . . . . . . 3,200,000 AAA 3,394,784 Sarasota County, FL, School Board Finance Corp., Lease Revenue: 5%, 7/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800,000 AAA 3,303,720 Refunding, 5%, 7/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,595,000 AAA 4,892,380 GEORGIA Burke County, GA, Development Authority, Pollution Control Revenue, Vogtle Project, 11.75%, 11/1/14 (c) . . . . . . . . . . . . . . . . . . 3,150,000 AAA 3,237,192 Clark County, GA, General Obligation, School District, 5.4%, 7/1/07 (c) . . 2,460,000 AAA 2,333,679 Cobb County, GA, Kennestone Hospital Authority, Series A, 5.625%, 4/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,305,000 AAA 4,940,759 Macon-Bibb County, GA, Hospital Authority, Medical Center of Central Florida, Series C, 5.25%, 8/1/11 (c) . . . . . . . . . . . . . . . . . . 11,225,000 AAA 9,873,510 Municipal Electric Authority of Georgia, 5th Crossover, Project #1, 6.4%, 1/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,544,765 ILLINOIS Berwyn, IL, Hospital Revenue, MacNeal Memorial Hospital Project, 7%, 6/1/15 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 4,146,560 Central Lake County, IL, Joint Action Water Agency, Refunding Revenue: Zero Coupon, 5/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . . 2,245,000 AAA 1,451,729
The accompanying notes are an integral part of the financial statements. 59 AARP INSURED TAX FREE GENERAL BOND FUND
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- 5.3%, 5/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,120,000 AAA 2,005,647 5.4%, 5/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,280,000 AAA 2,146,711 Chicago, IL, Wastewater Transmission Revenue: 5.3%, 1/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400,000 AAA 2,306,208 5.5%, 1/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,990,000 AAA 11,191,106 5.5%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,220,000 AAA 6,671,569 Chicago, IL, General Obligation: 5%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,760,000 AAA 7,537,454 Series B, 5%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,209,950 Series B, 5.125%, 1/1/15 (c) . . . . . . . . . . . . . . . . . . . . . . 9,550,000 AAA 7,903,962 Series A, 5.375%, 1/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . 15,410,000 AAA 13,481,439 Emergency Telephone System, 5.55%, 1/1/08 (c) . . . . . . . . . . . . . 5,820,000 AAA 5,518,524 Series B, 5%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . 6,820,000 AAA 5,832,328 6.25%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,984,490 Chicago, IL, General Obligation Lease, Board of Education, Series A: 6.25%, 1/1/15 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000,000 AAA 22,506,420 6%, 1/1/16 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,025,000 AAA 10,417,523 6%, 1/1/20 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,625,000 AAA 34,276,971 6.25%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,800,000 AAA 6,805,780 Chicago, IL, Motor Fuel Tax Revenue, 6.5%, 1/1/16, Prerefunded 1/1/01 at 100 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,118,480 Chicago, IL, Public Building Commission, Building Revenue, Series A: 5.25%, 12/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400,000 AAA 4,697,082 5.25%, 12/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,420,000 AAA 9,266,402 5.25%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,212,160 Board of Education, Zero Coupon, 1/1/06 . . . . . . . . . . . . . . . . 2,430,000 AAA 1,226,397 Chicago, IL, School Finance Authority, Series A, 5%, 6/1/09 (c) . . . . . . 10,425,000 AAA 8,968,211 Chicago O'Hare International Airport, IL, Revenue Refunding, Series C: 5%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,410,000 AAA 13,259,380 5%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,500,000 AAA 13,977,810 5%, 1/1/18 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,900,000 AAA 4,737,464 Cook County, IL, General Obligation (c): Zero Coupon, 11/1/04 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,205,000 AAA 1,798,678 Series C, 6%, 11/15/07 . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,986,100 Decatur, IL, General Obligation, Series 1991, Zero Coupon: 10/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,455,000 AAA 860,516 10/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,415,000 AAA 782,552 Decatur, IL, Public Building Commission, General Obligation, Certificate of Participation: 6.5%, 1/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,725,000 AAA 1,822,790 6.5%, 1/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 AAA 1,570,545 Illinois, Dedicated Tax Revenue, Civic Center: Series A, 6.5%, 12/15/06 (c) . . . . . . . . . . . . . . . . . . . . . . 3,535,000 AAA 3,714,189 Series A, 6.5%, 12/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . 4,400,000 AAA 4,560,864 6.25%, 12/15/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,974,680 6.25%, 12/15/20 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 6,975,000 AAA 6,730,457 Illinois Educational Facilities Authority Revenue, Loyola University: 1991 Series A, Zero Coupon, 7/1/04 (c) . . . . . . . . . . . . . . . . . 2,860,000 AAA 1,605,289 Zero Coupon, 7/1/05 (c) (d) . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 2,089,720 Illinois Health Facilities Authority Revenue, Brokaw-Mennonite Healthcare: 6%, 8/15/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,380,000 AAA 1,381,021 6%, 8/15/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,460,000 AAA 1,452,116 6%, 8/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,550,000 AAA 1,531,912 6%, 8/15/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,640,000 AAA 1,608,266
The accompanying notes are an integral part of the financial statements. 60
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- Illinois Health Facilities Authority Revenue: Children's Memorial, 6.25%, 8/15/13 (c) . . . . . . . . . . . . . . . . 2,000,000 AAA 1,962,900 Felician Healthcare Inc., Series A, 6.25%, 1/1/15 (c) . . . . . . . . . 17,000,000 AAA 16,485,750 Memorial Medical Center, 6.75%, 10/1/11 (c) . . . . . . . . . . . . . . 2,135,000 AAA 2,195,890 Methodist Health Service, 1985 Series G, 8%, 8/1/15 (c) . . . . . . . . 10,210,000 AAA 11,306,758 University of Chicago, 8.1%, 8/1/14, Prerefunded 8/1/97 at 102 (c) . . . 11,205,000 AAA 12,353,513 Sherman Hospital, 6.75%, 8/1/11 (c) . . . . . . . . . . . . . . . . . . 2,700,000 AAA 2,770,011 Illinois State Toll Highway Authority, 1992 Series A, 5.75%, 1/1/17 (c) . . 15,400,000 AAA 13,734,336 Joliet, IL, Junior College Assistance Corp., Lease Revenue, North Campus Extension Center, 6.7%, 9/1/12 (c) . . . . . . . . . . . . . . . 2,500,000 AAA 2,598,125 Kendall, Kane and Will Counties, IL, Community Unit School District #308: Zero Coupon, 3/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,055,000 AAA 688,778 Zero Coupon, 3/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,540,000 AAA 820,912 Zero Coupon, 3/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,595,000 AAA 789,844 Metropolitan Pier & Exposition Authority, IL, McCormick Place Expansion Project, Zero Coupon: 12/15/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200,000 AAA 1,858,304 6/15/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,300,000 AAA 5,758,421 Northern Cook County, IL, Solid Waste Agency Contract Revenue, 6.5%, 5/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 AAA 6,119,520 Northwest Suburban Municipal Joint Action Water Agency, IL, Supply System Revenue, 6.45%, 5/1/07 (c) . . . . . . . . . . . . . . . . . . . 2,575,000 AAA 2,671,563 Rosemont, IL, General Obligation, Corporate Purpose Project 3, Series C, Zero Coupon, 12/1/94 (c) . . . . . . . . . . . . . . . . . . . 1,510,000 AAA 1,500,185 Rosemont, IL, Tax Increment, Series C: Zero Coupon, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . 2,655,000 AAA 1,162,545 Zero Coupon, 12/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,455,000 AAA 2,269,644 State University Retirement System, IL, Special Revenue, Zero Coupon, 10/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,750,000 AAA 1,626,405 University of Illinois, Board of Trustees, Series 1991: Zero Coupon, 4/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,890,000 AAA 2,368,699 Zero Coupon, 4/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,830,000 AAA 2,031,355 Will County, IL, Community Unit School District #201-U, Crete-monee: Zero Coupon, 12/15/01 (c) . . . . . . . . . . . . . . . . . . . . . . . 1,730,000 AAA 1,149,672 Zero Coupon, 12/15/00 (c) . . . . . . . . . . . . . . . . . . . . . . . 1,325,000 AAA 936,974 INDIANA Fort Wayne, IN, Parkview Memorial Hospital, Series A, 6.5%, 11/15/12 (c) . 1,400,000 AAA 1,409,758 Indiana, Government Center North, Parking Facilities, 1993 Series A, 5.25%, 7/1/15 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,195,000 AAA 5,188,870 Indiana Health Facilities Finance Authority, Hospital Revenue: Ancilla Systems Inc., Series A, 6%, 7/1/18 (c) . . . . . . . . . . . . . 27,635,000 AAA 25,750,017 Community Hospital Project, 6.4%, 5/1/12 (c) . . . . . . . . . . . . . . 5,000,000 AAA 4,963,150 Indiana Municipal Power Agency, Power Supply System, Series B: 5.5%, 1/1/16 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,443,450 6%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,455,000 AAA 15,031,378 6%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 1,933,080 5.875%, 1/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,300,000 AAA 5,120,807 Indiana Transportation Finance Authority, Highway Revenue, Series A, 5.25%, 6/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,100,000 AAA 4,543,080 Indiana University, Revenue Refunding, Series H, Zero Coupon, 8/1/06 (c) . 8,500,000 AAA 4,102,610 Indiana University, Student Fees Revenue, Series J, 5%, 8/1/18 (c) . . . . 4,200,000 AAA 3,338,580 Madison County, IN, Community Hospital of Anderson, Facility Revenue, 8%, 1/1/14, Prerefunded 1/1/98 at 102 (c) . . . . . . . . . . . . . . . 7,055,000 AAA 7,802,407
The accompanying notes are an integral part of the financial statements. 61 AARP INSURED TAX FREE GENERAL BOND FUND
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- Merrillville, IN, Multiple School Building Corp., First Mortgage, Zero Coupon, 1/15/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 1,373,480 Porter County, IN, Hospital Authority, Porter Memorial Hospital, Series 1993, 5.25%, 6/1/14 (c) . . . . . . . . . . . . . . . . . . . . . 8,750,000 AAA 7,339,675 IOWA Muscatine, IA, Electric Utility, Revenue Refunding, 7.625%, 1/1/04 (c) . . 6,600,000 AAA 6,930,726 Polk County, IA, Mercy Hospital, 6.75%, 11/1/05 (c) . . . . . . . . . . . . 5,000,000 AAA 5,296,900 KANSAS Kansas City, KS, Utility System Revenue: Zero Coupon, 9/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,300,000 AAA 2,814,777 Zero Coupon, 9/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,575,000 AAA 2,025,559 Zero Coupon, 9/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,875,000 AAA 932,156 Zero Coupon, 9/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . 2,640,000 AAA 1,488,617 Zero Coupon, 9/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,950,000 AAA 2,075,686 Zero Coupon, 9/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 1,375,000 AAA 671,811 KENTUCKY Kentucky Property and Buildings Commission, Project #55, 4.5%, 9/1/02 (c) . 4,300,000 AAA 3,923,234 LOUISIANA Lafayette, LA, Public Improvement, Sales Tax Revenue, 8%, 3/1/09, Prerefunded 3/1/98 at 102 (c) . . . . . . . . . . . . . . . . . . . . . 3,695,000 AAA 4,101,635 Louisiana Public Facilities Authority, 4.75%, 5/1/16, Prerefunded 2/15/08 at 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,765,000 AAA 5,098,566 New Orleans, LA, General Obligation, Zero Coupon, 9/1/07 (c) . . . . . . . 10,000,000 AAA 4,492,700 MARYLAND University of Maryland, Facilities & Tuition Revenue, 4.75%, 10/1/07 (c) . 14,605,000 AAA 12,768,859 MASSACHUSETTS Massachusetts Bay Transportation Authority: General Transportation System, 5.25%, 3/1/06 (c) . . . . . . . . . . . . 10,000,000 AAA 9,433,200 General Transportation System, 5.4%, 3/1/07 (c) . . . . . . . . . . . . 5,000,000 AAA 4,731,250 Massachusetts General Obligation: Series C, 4.95%, 8/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 9,163,900 Series C2, 5%, 8/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . 20,000,000 AAA 18,037,200 Series A, 7%, 3/1/99 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,850,000 AAA 5,200,316 Series D, 7%, 10/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . 7,000,000 AAA 7,541,310 Dedicated Income Tax, Series A, 7.875%, 6/1/97 (c) . . . . . . . . . . . 13,080,000 AAA 14,058,122 Massachusetts Health & Educational Facilities Authority: Lahey Clinic, Series A, 7.6%, 7/1/08, Prerefunded 7/1/98 at 102 (c) . . 3,000,000 AAA 3,314,490 Lahey Clinic, Series A, 7.625%, 7/1/18, Prerefunded 7/1/98 at 102 (c) . 2,350,000 AAA 2,598,325 Massachusetts Health & Educational Facilities Authority, Tufts University, Inverse Floater, 6.27%, 8/15/18*** (c) . . . . . . . . . . . . . . . . . 4,000,000 AAA 3,329,000 Massachusetts Housing Finance Agency, Multi-Family Mortgage Purchase Revenue, 1985 Series A, 9.25%, 12/1/14 (c) . . . . . . . . . . . . . . . 2,500,000 AAA 2,653,150 Massachusetts Municipal Wholesale Electric Company: Power Supply System Revenue, Series A, 5.1%, 7/1/06 (c) . . . . . . . . 8,795,000 AAA 8,077,680 Power Supply System Revenue, Series A, 5.1%, 7/1/07 (c) . . . . . . . . 2,000,000 AAA 1,801,300 Power Supply System Revenue, Series A, 5.1%, 7/1/08 (c) . . . . . . . . 4,000,000 AAA 3,538,760 MICHIGAN Brighton, MI, Area School District, Series I, Zero Coupon, 5/1/20, Prerefunded 5/1/05 at 34.134 (c) . . . . . . . . . . . . . . . . . . . . 27,675,000 AAA 5,019,415 Detroit, MI, General Obligation, Distributable State Aid Refunding: 5.2%, 5/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,787,360 5.25%, 5/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 AAA 1,369,020
The accompanying notes are an integral part of the financial statements. 62
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- Kalamazoo, MI, Hospital Finance Authority, Hospital Revenue, Borgess Medical Center, Series A, 6%, 7/1/09 (c) . . . . . . . . . . . . . . . . 8,250,000 AAA 8,555,663 Michigan Hospital Finance Authority, Sisters of Mercy Healthcorp Obligated Group, Series P: 5.1%, 8/15/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 2,780,250 5.25%, 8/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 8,655,000 AAA 7,829,053 Michigan Housing Development Authority, Single Family Mortgage Revenue, 1993 Series B, 3.55%, 12/1/18 . . . . . . . . . . . . . . . . . 13,100,000 AA 13,060,831 Michigan Municipal Bond Authority, Local Government Loan Program, School Improvement-Ad Valorem Tax, Zero Coupon, 5/15/04 (c) . . . . . . 5,805,000 AAA 3,307,689 MISSISSIPPI Mississippi Hospital Equipment Facilities Authority, North Mississippi Health Services, 5.5%, 5/15/09 (c) . . . . . . . . . . . . . . . . . . . 5,050,000 AAA 4,644,485 MISSOURI Missouri Health & Educational Facilities Authority, SSM Healthcare, 1992 Series A: 6.35%, 6/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 8,125,000 AAA 8,348,519 6.4%, 6/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 8,640,000 AAA 8,866,886 6.4%, 6/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 9,195,000 AAA 9,367,406 Sikeston, MO, Electric Revenue Refunding, 5.5%, 6/1/06 (c) . . . . . . . . 6,030,000 AAA 6,155,545 NEVADA Clark County, NV, General Obligation, School District, Series B, Zero Coupon, 3/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 8,070,000 AAA 4,301,794 NEW JERSEY New Jersey Housing and Finance Agency, Home Mortgage Purchase Revenue, Zero Coupon, 10/1/16 (c) . . . . . . . . . . . . . . . . . . . 5,155,000 AAA 523,542 NEW YORK Metropolitan Transportation Authority, NY, Transit Facilities Revenue: Series N, 4.9%, 7/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . 8,500,000 AAA 7,473,285 Series F, 8.375%, 7/1/16, Prerefunded 7/1/96 at 102 (c) . . . . . . . . 7,000,000 AAA 7,592,760 New York City Educational Construction Fund, 1989 Series A, 6.8%, 10/1/99 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 5,373,450 New York City General Obligation: Series D, 6%, 8/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 140,000 AAA 140,568 Series D, 6%, 8/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . 370,000 AAA 368,246 Series C, 6.25%, 8/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . 150,000 AAA 157,068 Series C, ETM, 6.25%, 8/1/02** (c) . . . . . . . . . . . . . . . . . . . 5,720,000 AAA 6,030,482 Series C, 6.4%, 8/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . 500,000 AAA 525,260 Series C, 6.4%, 8/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . 430,000 AAA 448,434 Series C, 6.4%, 8/1/05, Prerefunded 8/1/02 at 101.50 (c) . . . . . . . . 16,730,000 AAA 17,962,332 ETM, 6.9%, 8/15/98** (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,150,000 AAA 3,377,840 6.9%, 8/15/98 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,850,000 AAA 1,975,634 Series E, 7%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . 115,000 AAA 122,852 Series H, 7.2%, 8/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . 2,585,000 AAA 2,825,844 8%, 11/1/00 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915,000 AAA 1,000,946 Series A, ETM, 8%, 11/1/00** (c) . . . . . . . . . . . . . . . . . . . . 585,000 AAA 644,799 8.125%, 11/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000 AAA 1,556,604 Series A, 8%, 11/1/01 (c) . . . . . . . . . . . . . . . . . . . . . . . 740,000 AAA 854,811 Series A, 8%, 11/1/01 (c) . . . . . . . . . . . . . . . . . . . . . . . 760,000 AAA 832,633 Series D, 8%, 8/1/05, Prerefunded 8/1/97 at 102 (c) . . . . . . . . . . 830,000 AAA 917,640 Series D, 8%, 8/1/05 . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 AAA 185,851 Series D, 3%, 8/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . . 9,000,000 AAA 7,464,420 Series E, ETM, 7%, 12/1/07** (c) . . . . . . . . . . . . . . . . . . . . 1,385,000 AAA 1,490,980
The accompanying notes are an integral part of the financial statements. 63 AARP INSURED TAX FREE GENERAL BOND FUND
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- New York State Dormitory Authority Revenue, City University Revenue: Series D, 7%, 7/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 AAA 4,358,720 Series C, 7.5%, 7/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,750,000 AAA 6,475,363 New York State Dormitory Authority Revenue, College & University Pooled Capital Program, 7.8%, 12/1/05 (c) . . . . . . . . . . . . . . . 11,805,000 AAA 12,925,058 New York State Medical Care Facilities Agency, Mental Health Services, Series F, 4.8%, 8/15/05 (c) . . . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 8,932,800 New York State Urban Development Corporation, Correctional Facilities, Series A, 5%, 1/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,315,000 AAA 3,874,525 NORTH CAROLINA North Carolina Eastern Municipal Power Agency, Power System Revenue, Series B, 6%, 1/1/18 (c) . . . . . . . . . . . . . . . . . . . 8,775,000 AAA 8,321,771 North Carolina Municipal Power Agency, Catawba Electric Revenue: 5.25%, 1/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 AAA 2,261,975 6%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,235,000 AAA 9,092,781 NORTH DAKOTA Bismarck, ND, Hospital Revenue, St. Alexius Medical Center, Series 1991, Zero Coupon, 5/1/02 (c) . . . . . . . . . . . . . . . . . . 2,850,000 AAA 1,842,953 OHIO Hamilton County, OH, Electric System Mortgage Revenue Refunding, Series B, 8%, 10/15/22, Prerefunded 10/15/98 at 102 (c) . . . . . . . . 3,720,000 AAA 4,184,628 Ohio Air Quality Development Authority, Ohio Power Co., 7.4%, 8/1/09 (c) . 5,000,000 AAA 5,428,450 Ohio Building Authority, 4.9%, 4/1/07 (c) . . . . . . . . . . . . . . . . . 3,375,000 AAA 2,970,236 OKLAHOMA Oklahoma Industrial Authority Revenue, Baptist Medical Center, Series A, 7%, 8/15/14 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 5,261,650 Tulsa, OK, Industrial Authority: Hospital Revenue, St. John's Medical Center, Zero Coupon, 12/1/04 (c) . 5,430,000 AAA 2,973,522 St. John's Medical Center, Zero Coupon, 12/1/02 (c) . . . . . . . . . . 3,930,000 AAA 2,457,547 PENNSYLVANIA Commonwealth of Pennsylvania, Certificate of Participation, Lease Revenue, Series A, 5.25%, 7/1/11 (c) . . . . . . . . . . . . . . . 14,000,000 AAA 12,358,360 Pennsylvania Industrial Development Authority: Economic Development Revenue, 5.8%, 1/1/08 (c) . . . . . . . . . . . . . 4,250,000 AAA 4,176,305 Economic Development Revenue, 5.8%, 7/1/08 (c) . . . . . . . . . . . . . 4,875,000 AAA 4,788,469 Economic Development Revenue, 5.8%, 1/1/09 (c) . . . . . . . . . . . . . 2,500,000 AAA 2,433,575 Philadelphia, PA, Gas Works Revenue, Series 8, 8.7%, 5/1/05, Prerefunded 5/1/95 at 102.50 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,250,000 AAA 3,420,008 Philadelphia, PA, General Obligation, 8.25%, 2/15/09, Prerefunded 2/15/96 at 102 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,215,000 AAA 1,296,490 Philadelphia, PA, Water & Wastewater Revenue: 5.5%, 6/15/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,787,850 5.625%, 6/15/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,000 AAA 2,011,758 5.625%, 6/15/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 20,855,000 AAA 19,841,238 5.625%, 6/15/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000,000 AAA 19,027,800 Philadelphia, PA, Municipal Authority Revenue, Series B, 6.9%, 11/15/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,212,720 Westmoreland County, PA, Industrial Development Revenue, Westmoreland Health, 5.375%, 7/1/11 (c) . . . . . . . . . . . . . . . . 6,750,000 AAA 6,031,665 PUERTO RICO Commonwealth of Puerto Rico, General Obligation, Public Improvement Refunding, 8%, 7/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,700,000 AAA 5,671,500
The accompanying notes are an integral part of the financial statements. 64
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- RHODE ISLAND Rhode Island Clean Water Protection Agency, Pollution Control Revenue, Revolving Fund, Series A, 5.4%, 10/1/15 (c) . . . . . . . . . . . . . . 2,000,000 AAA 1,743,600 Rhode Island Convention Center Authority, 1993 Series B: 5%, 5/15/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,301,200 5.25%, 5/15/15 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,750,000 AAA 13,331,903 Rhode Island Depositors Economic Protection Corp., Series B: 5.8%, 8/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,200,000 AAA 5,879,584 5.8%, 8/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,525,000 AAA 4,233,907 5.8%, 8/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 AAA 2,321,500 5.8%, 8/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,340,000 AAA 6,763,149 Rhode Island Public Building Authority, Public Project Revenue, Series A, 8.2%, 2/1/08, Prerefunded 2/1/98 at 102 (c) . . . . . . . . . 2,200,000 AAA 2,450,932 SOUTH CAROLINA Charleston County, SC, Hospital Authority, 5.5%, 10/1/19 . . . . . . . . . 3,000,000 AAA 2,562,810 Piedmont Municipal Power Agency, SC, Electric Revenue: 5.5%, 1/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,915,000 AAA 1,807,205 Series C, 5.5%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 4,533,350 Series A, 6.5%, 1/1/16 (c) . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 3,016,830 Richland County, SC, Hospital Facility Revenue, Baptist Hospital, Series B, Zero Coupon, 8/1/04 (c) . . . . . . . . . . . . . . . . . . . 2,250,000 AAA 1,266,323 TENNESSEE Chattanooga-Hamilton County, TN, Erlanger Medical, 5.6%, 10/1/08 (c) . . . 1,145,000 AAA 1,096,784 Knox County, TN, Health & Educational Hospital Facilities: 5.75%, 1/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,405,000 AAA 14,608,870 5.75%, 1/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,880,000 AAA 16,798,439 6.25%, 1/1/13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,500,000 AAA 6,412,185 TEXAS Austin, TX, Combined Utility System Revenue, 7.875%, 11/15/06, Prerefunded 5/15/01 at 100 (c) . . . . . . . . . . . . . . . . . . . . . 2,550,000 AAA 2,908,020 Bexar County, TX, Health Facility Development Corp., Revenue Refunding, Independence Hill Project, 7.5%, 12/1/98 (c) . . . . . . . . . . . . . . 1,000,000 AAA 1,093,780 Collin County, TX, General Obligation, Jail Facility, 5.875%, 3/1/07 (c) . 800,000 AAA 790,592 Dallas, TX, Housing Finance Corp., Single Family Mortgage Revenue, Zero Coupon, 10/1/16 (c) . . . . . . . . . . . . . . . . . . . . . . . . 7,450,000 AAA 750,215 Dallas-Fort Worth, TX, Airport Revenue, Series A: 7.375%, 11/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000 AAA 4,979,430 7.375%, 11/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,846,010 7.75%, 11/1/03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 AAA 1,146,040 7.8%, 11/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 AAA 2,320,440 7.8%, 11/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,025,000 AAA 2,330,735 East Texas Housing Finance Corp., Single Family Mortgage Program, 1985 Series A, Zero Coupon, 10/15/16 (c) . . . . . . . . . . . . . . . . 11,545,000 AAA 1,061,794 Harris County, TX, Toll Road Authority, Subordinate Lien, Unlimited Tax: Series A, Zero Coupon, 8/15/04 (c) . . . . . . . . . . . . . . . . . . . 2,050,000 AAA 1,151,137 Series A, Zero Coupon, 8/15/05 (c) . . . . . . . . . . . . . . . . . . . 4,025,000 AAA 2,105,035 Series A, Zero Coupon, 8/15/06 (c) . . . . . . . . . . . . . . . . . . . 4,010,000 AAA 1,948,700 Series A, 5%, 8/15/07 (c) . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,131,275 Harris County, TX, General Obligation: Flood Control District, Zero Coupon, 10/1/00 (c) . . . . . . . . . . . . 1,000,000 AAA 718,650 Zero Coupon, 10/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 9,035,000 AAA 4,356,677 Zero Coupon, 10/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,250,000 AAA 1,452,620 Houston, TX, Water & Sewer System Authority, Series C: Zero Coupon, 12/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 18,600,000 AAA 9,558,354
The accompanying notes are an integral part of the financial statements. 65 AARP INSURED TAX FREE GENERAL BOND FUND
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- Zero Coupon, 12/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 14,575,000 AAA 6,957,231 Zero Coupon, 12/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 AAA 4,090,100 Zero Coupon, 12/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . 14,750,000 AAA 5,556,768 Lubbock, TX, Health Facilities Development, Methodist Hospital: Series B, 5.5%, 12/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . 3,945,000 AAA 3,792,407 Series B, 5.6%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . 2,415,000 AAA 2,317,048 Series B, 5.625%, 12/1/08 (c) . . . . . . . . . . . . . . . . . . . . . 4,400,000 AAA 4,183,080 Lubbock, TX, Health Facilities Development, 5.625%, 12/1/09 (c) . . . . . . 4,640,000 AAA 4,366,518 Montgomery County, TX, Library Refunding, Zero Coupon, 9/1/03 (c) . . . . . 3,475,000 AAA 2,079,544 Montgomery County, TX, Library Refunding, Zero Coupon, 9/1/04 (c) . . . . . 3,475,000 AAA 1,946,278 Montgomery County, TX, Library Refunding, Zero Coupon, 9/1/05 (c) . . . . . 3,475,000 AAA 1,812,595 North Central Texas Health Facilities Development Corp., Presbyterian Healthcare System Hospital Revenue, 8.875%, 12/1/15, Prerefunded 12/1/97 at 102 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 AAA 5,666,850 San Antonio, TX, Electric & Gas Revenue Refunding: Series A, Zero Coupon, 2/1/05 (c) . . . . . . . . . . . . . . . . . . . 2,500,000 AAA 1,359,675 Series B, Zero Coupon, 2/1/05 (c) . . . . . . . . . . . . . . . . . . . 8,000,000 AAA 4,350,960 Series A, Zero Coupon, 2/1/06 (c) . . . . . . . . . . . . . . . . . . . 17,900,000 AAA 9,057,758 Tarrant County, TX, Health Facilities Development Corp.: Fort Worth Osteopathic Hospital, 6%, 5/15/11 (c) . . . . . . . . . . . . 4,615,000 AAA 4,445,537 Fort Worth Osteopathic Hospital, 6%, 5/15/21 (c) . . . . . . . . . . . . 6,235,000 AAA 5,827,231 Texas General Obligation, Super Collider, Series C: Zero Coupon, 4/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 4,300,000 AAA 2,299,296 Zero Coupon, 4/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,385,000 AAA 2,676,776 Texas Municipal Power Agency, Revenue Refunding: 5.25%, 9/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,235,000 AAA 5,612,872 5.75%, 9/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 785,000 AAA 803,487 5.75%, 9/1/12, Prerefunded 9/1/02 at 100 (c) . . . . . . . . . . . . . . 4,950,000 AAA 5,066,573 6.1%, 9/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,250,000 AAA 9,348,328 6.1%, 9/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,435,000 AAA 4,438,992 Texas Public Finance Authority, Building Authority: Zero Coupon, 2/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 13,915,000 AAA 6,987,278 Series B, 6.25%, 2/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . 9,195,000 AAA 9,542,111 Series B, 6.25%, 2/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . 5,190,000 AAA 5,293,022 UTAH Associated Municipal Power System, UT, Hunter Project, Refunding Revenue: Zero Coupon, 7/1/00 (c) . . . . . . . . . . . . . . . . . . . . . . . . 2,755,000 AAA 1,998,367 Zero Coupon, 7/1/02 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,200,000 AAA 3,330,496 Zero Coupon, 7/1/04 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,895,000 AAA 3,308,805 Zero Coupon, 7/1/05 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,900,000 AAA 3,082,337 Zero Coupon, 7/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . 5,895,000 AAA 2,859,900 Zero Coupon, 7/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . 3,750,000 AAA 1,685,513 Intermountain Power Agency, UT, Power Supply Revenue: Series A, Zero Coupon, 7/1/02 (c) . . . . . . . . . . . . . . . . . . . 1,655,000 AAA 1,066,416 Series A, Zero Coupon, 7/1/03 (c) . . . . . . . . . . . . . . . . . . . 1,000,000 AAA 604,200 Series A, Zero Coupon, 7/1/04 (c) . . . . . . . . . . . . . . . . . . . 1,730,000 AAA 978,419 Series B, Zero Coupon, 7/1/02 (c) . . . . . . . . . . . . . . . . . . . 8,230,000 AAA 5,303,083 5%, 7/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 AAA 846,970 Series C, 8.375%, 7/1/12, Prerefunded 7/1/97 at 102 (c) . . . . . . . . 4,150,000 AAA 4,593,843 Series C, 8.5%, 7/1/07, Prerefunded 7/1/97 at 102.50 . . . . . . . . . . 2,000,000 AAA 2,223,160 9.625%, 7/1/08, Prerefunded 7/1/95 at 102.50 (c) . . . . . . . . . . . . 200,000 AAA 213,148 Provo, UT, Electric System Revenue, ETM, 10.375%, 9/15/15** (c) . . . . . . 1,800,000 AAA 2,613,888
The accompanying notes are an integral part of the financial statements. 66
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- VIRGINIA Roanoke, VA, Industrial Development Authority, Roanoke Memorial Hospital, Series B, 6.125%, 7/1/17 (c) . . . . . . . . . . . . . . . . . 7,500,000 AAA 7,192,950 Southeastern Public Service Authority, VA, Series A, 5.25%, 7/1/10 (c) . . 7,380,000 AAA 6,584,953 Virginia Beach, VA, Development Authority: Virginia Beach General Hospital Project, 5%, 2/15/06 (c) . . . . . . . . 1,750,000 AAA 1,584,223 Virginia Beach General Hospital Project, 5%, 2/15/07 (c) . . . . . . . . 1,800,000 AAA 1,609,344 Virginia Beach General Hospital Project, 5.1%, 2/15/08 (c) . . . . . . . 1,345,000 AAA 1,198,193 Virginia Beach General Hospital Project, 5.125%, 2/15/18 (c) . . . . . . 3,000,000 AAA 2,476,230 Virginia Beach General Hospital Project, 6%, 2/15/11 (c) . . . . . . . . 1,595,000 AAA 1,551,153 Winchester County, VA, Industrial Development Authority, 6%, 1/1/15 (c) . . 5,700,000 AAA 4,995,024 WASHINGTON King County, WA, Public Hospital District #1, Valley Medical Center, Series 1992, 5.5%, 9/1/17 (c) . . . . . . . . . . . . . . . . . . . . . 3,500,000 AAA 3,011,295 North Shore, WA, General Obligation, School District #417: 5.45%, 12/1/06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,825,000 AAA 2,710,672 5.5%, 12/1/07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,860,000 AAA 4,631,920 5.6%, 12/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,650,000 AAA 1,532,157 Snohomish County, WA: Public Utilities District #1, 5.5%, 1/1/15 (c) . . . . . . . . . . . . . 1,350,000 AAA 1,173,029 Public Utilities District #1, 5.5%, 1/1/14 (c) . . . . . . . . . . . . . 10,000,000 AAA 8,750,300 School District #6, 6.5%, 12/1/07 (c) . . . . . . . . . . . . . . . . . 3,325,000 AAA 3,499,297 Washington Health Care Facilities Authority: Empire Health Services-Spokane, 5.65%, 11/1/05 (c) . . . . . . . . . . . 2,155,000 AAA 2,120,067 Empire Health Services-Spokane, 5.7%, 11/1/06 (c) . . . . . . . . . . . 3,440,000 AAA 3,351,936 Empire Health Services-Spokane, 5.75%, 11/1/07 (c) . . . . . . . . . . . 3,675,000 AAA 3,556,702 Empire Health Services-Spokane, 5.8%, 11/1/09 (c) . . . . . . . . . . . 2,500,000 AAA 2,395,650 Empire Health Services-Spokane, 5.8%, 11/1/10 (c) . . . . . . . . . . . 2,100,000 AAA 2,002,749 Washington Public Power Supply Revenue, Revenue Refunding: Nuclear Project #3, Series A, Zero Coupon, 7/1/04 (c) . . . . . . . . . 3,625,000 AAA 2,050,155 Nuclear Project #3, Zero Coupon, 7/1/05 (c) . . . . . . . . . . . . . . 4,125,000 AAA 2,173,091 Nuclear Project #2, Series A, 5.7%, 7/1/08 (c) . . . . . . . . . . . . . 5,000,000 AAA 4,864,800 Nuclear Project #1, Series A, 7%, 7/1/11 (c) . . . . . . . . . . . . . . 3,830,000 AAA 4,054,476 Nuclear Project #2, Series C, 7%, 7/1/01 (c) . . . . . . . . . . . . . . 10,000,000 AAA 10,852,900 Nuclear Project #1, Series B, 7.25%, 7/1/12 (c) . . . . . . . . . . . . 10,895,000 AAA 11,714,086 Nuclear Project #2, Series A, 7.25%, 7/1/03 (c) . . . . . . . . . . . . 2,000,000 AAA 2,178,980 Nuclear Project #3, Series A, 7.25%, 7/1/16, Prerefunded 7/1/99 at 102(c) 3,630,000 AAA 4,012,457 Nuclear Project #2, Series C, 7.375%, 7/1/11 (c) . . . . . . . . . . . . 1,370,000 AAA 1,533,770 Nuclear Project #1, Series A, 7.5%, 7/1/15, Prerefunded 7/1/99 at 102(c) 2,405,000 AAA 2,681,310 Nuclear Project #1, Series A, 7.5%, 7/1/15 (c) . . . . . . . . . . . . . 1,595,000 AAA 1,751,342 WEST VIRGINIA West Virginia State Parkways, Economic Development & Tourism Authority, 7.125%, 7/1/19, Prerefunded 7/1/99 at 102 (c) . . . . . . . . 2,185,000 AAA 2,402,910 WISCONSIN Kenosha, WI, General Obligation, Series C, Zero Coupon, 6/1/04 (c) . . . . 3,475,000 AAA 1,960,143 Wisconsin Health & Educational Facilities Authority: Wheaton Franciscan Hospital, 6.1%, 8/15/08 (c) . . . . . . . . . . . . . 4,580,000 AAA 4,554,169 Felician Healthcare Inc., Series B, 6.25%, 1/1/22 (c) . . . . . . . . . 5,285,000 AAA 5,026,141 Villa St. Francis Inc., Series C, 6.25%, 1/1/22 (c) . . . . . . . . . . 9,230,000 AAA 8,777,915 St. Luke's Medical Center, 7.1%, 8/15/11 (c) . . . . . . . . . . . . . . 2,000,000 AAA 2,093,500 Riverview Hospital Association Project, 9%, 5/1/11 (c) . . . . . . . . . 2,500,000 AAA 2,697,750 Hospital Sisters Services Inc. Obligated Group, 5.375%, 6/1/18 (c) . . . 4,800,000 AAA 4,019,892 SSM Healthcare, 1992 Series A: 6.4%, 6/1/08 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,335,000 AAA 2,379,505
The accompanying notes are an integral part of the financial statements. 67 AARP INSURED TAX FREE GENERAL BOND FUND
- ------------------------------------------------------------------------------------------------------------------------- Principal Credit Market Amount ($) Rating (b) Value ($) - ------------------------------------------------------------------------------------------------------------------------- 6.45%, 6/1/09 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,485,000 AAA 2,527,220 6.45%, 6/1/10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,650,000 AAA 2,667,888 6.5%, 6/1/11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,820,000 AAA 2,839,655 6.5%, 6/1/12 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 AAA 3,005,850 OTHER General Electric Capital Public Finance-1, Tax Exempt Grantor Trust, 1990 Series E, 6.622%, 12/15/94 (c) . . . . . . . . . . . . . . . . . . 117,650 AAA 117,650 ------------- TOTAL LONG-TERM MUNICIPAL INVESTMENTS (COST $1,730,643,803) . . . . . . . . 1,708,266,760 ------------- - -------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------- SUMMARY % OF NET ASSETS - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO (COST $1,914,584,275) (a) . . . . . . . . . 98.8 1,892,152,730 OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . 1.2 22,118,223 ----- ------------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 1,914,270,953 ===== ============= - ------------------------------------------------------------------------------------------------------------------------- * Floating rate demand notes are securities whose interest rates vary with a designated market index or market rate, such as the coupon-equivalent of the U.S. Treasury bill rate. Variable rate demand notes are securities whose interest rates are reset periodically at levels that are generally comparable to tax-exempt commercial paper. These securities are payable on demand within seven calendar days and normally incorporate an irrevocable letter of credit or line of credit from a major bank. Since these securities are payable on demand, they are valued at 100% of their principal. ** ETM: Bonds bearing the description ETM (escrowed to maturity) are collateralized by U.S. Treasury securities which are held in escrow by a trustee and used to pay principal and interest on bonds so designated. *** Inverse floating rate notes are instruments whose yields have an inverse relationship to benchmark interest rates. These securities are shown at their rate as of September 30, 1994. (a) At September 30, 1994, the net unrealized depreciation on investments based on cost for federal income tax purposes of $1,914,598,197 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . $ 36,133,087 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . (58,578,554) ------------ Net unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(22,445,467) ============= (b) All of the securities held have been determined to be of appropriate credit quality as required by the Fund's investment objectives. Credit ratings shown are either Standard & Poor's Ratings Group or Moody's Investors Service, Inc. Unrated securities (NR) have been determined to be of comparable quality to rated eligible securities. (c) Bond is insured by one of these companies: AMBAC, FGIC or MBIA. (d) At September 30, 1994, $3,000,000 par value of Illinois Educational Facilities Authority, Zero Coupon, 7/1/05, with a market value of $1,567,290 was pledged to cover initial margin requirements for open futures contracts.
At September 30, 1994, open futures contracts sold short were as follows (Note 1):
Aggregate Market Futures Expiration Contracts Face Value ($) Value ($) ------- ---------- --------- -------------- --------- U.S. Treasury December Bond . . . . . . . . . . . . . . . . . 1994 430 42,756,950 42,543,125 ---------- ---------- Total net unrealized appreciation on open futures contracts sold short . . . . . . . . . . . . 213,825 ---------- The aggregate face value of futures contracts opened and closed during the year ended September 30, 1994 was $319,102,034 and $307,629,895, respectively. - ------------------------------------------------------------------------------------------------------------------------------------ Purchases and sales of investment securities (excluding short-term investments), for the year ended September 30, 1994, aggregated $707,214,727 and $718,899,728, respectively. - ------------------------------------------------------------------------------------------------------------------------------------ From November 1, 1993 through September 30, 1994, the Fund incurred approximately $1,547,279 of net realized capital losses which the Fund intends to elect to defer and treat as arising in the fiscal year ended September 30, 1995. - ------------------------------------------------------------------------------------------------------------------------------------ Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements. 68 AARP BALANCED STOCK AND BOND FUND LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------------------------------------------------- Principal Market Amount ($) Value ($) - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 6.5% - --------------------------------------------------------------------------------------------------------------------------- 11,372,000 Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/94 at 4.8% to be repurchased at $11,376,549 on 10/3/94, collateralized by a $10,520,000 U.S. Treasury Note, 8.875%, 11/15/98 (COST $11,372,000) . . . . . . . 11,372,000 ---------- - --------------------------------------------------------------------------------------------------------------------------- SHORT-TERM NOTES 25.6% - --------------------------------------------------------------------------------------------------------------------------- 20,000,000 Federal Home Loan Bank, Discount Note, 10/28/94 . . . . . . . . . . . . . . . . . . . 19,922,667 15,000,000 Federal Home Loan Mortgage Corp., Discount Note, 10/4/94 . . . . . . . . . . . . . . 14,994,125 10,000,000 Federal Home Loan Mortgage Corp, Discount Note, 10/6/94 . . . . . . . . . . . . . . . 9,992,167 ---------- TOTAL SHORT-TERM NOTES (COST $44,908,959) . . . . . . . . . . . . . . . . . . . . . . 44,908,959 ---------- - --------------------------------------------------------------------------------------------------------------------------- U.S. TREASURY OBLIGATIONS 14.3% - --------------------------------------------------------------------------------------------------------------------------- 2,000,000 U.S. Treasury Bond, 7.25%, 5/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . 1,845,940 2,000,000 U.S. Treasury Note, 4.625%, 2/29/96 . . . . . . . . . . . . . . . . . . . . . . . . . 1,955,940 4,000,000 U.S. Treasury Note, 5.5%, 9/30/97 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,856,880 2,500,000 U.S. Treasury Note, 5.125%, 4/30/98 . . . . . . . . . . . . . . . . . . . . . . . . . 2,346,100 2,500,000 U.S. Treasury Note, 5.875%, 3/31/99 . . . . . . . . . . . . . . . . . . . . . . . . . 2,372,650 6,500,000 U.S. Treasury Note, 6.875%, 7/31/99 . . . . . . . . . . . . . . . . . . . . . . . . . 6,394,375 1,250,000 U.S. Treasury Note, 5.875%, 2/15/04 . . . . . . . . . . . . . . . . . . . . . . . . . 1,106,250 5,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 2/15/09 (8.14**) . 1,587,950 5,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 5/15/09 (8.15**) . 1,554,400 4,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 5/15/16 (8.26**) . 694,600 10,000,000 U.S. Treasury Separate Trading Registered Interest and Principal, 8/15/18 (8.25**) . 1,450,600 ---------- TOTAL U.S. TREASURY OBLIGATIONS (COST $26,280,746) . . . . . . . . . . . . . . . . . 25,165,685 ---------- - --------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY MORTGAGE PASS-THRUS* 5.3% - --------------------------------------------------------------------------------------------------------------------------- 3,300,000 Federal National Mortgage Association, 7.5%, 8/1/24 . . . . . . . . . . . . . . . . . 3,142,194 3,200,000 Government National Mortgage Association Pass-thru, 8%, 8/15/24 . . . . . . . . . . . 3,104,000 3,100,000 Government National Mortgage Association Pass-thru, 8.5%, 8/15/24 . . . . . . . . . . 3,095,133 ---------- TOTAL U.S. GOVERNMENT AGENCY MORTGAGE PASS-THRUS (COST $9,354,969) . . . . . . . . . 9,341,327 ---------- - --------------------------------------------------------------------------------------------------------------------------- FOREIGN BONDS -- U.S.$ DENOMINATED 1.4% - --------------------------------------------------------------------------------------------------------------------------- 1,000,000 ABN-AMRO Bank NV, subordinated note, 7.13%, 10/15/2093 . . . . . . . . . . . . . . . 801,010 1,655,000 United Mexican States, Tesobonos, 8/17/95 . . . . . . . . . . . . . . . . . . . . . . 1,547,888 ---------- TOTAL FOREIGN BONDS -- U.S.$ DENOMINATED (COST $2,399,448) . . . . . . . . . . . . . 2,348,898 ---------- - --------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS 5.0% - --------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES 1.4% Food & Beverage 2,000,000 Borden Inc., 7.875%, 2/15/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,519,420 1,000,000 Coca-Cola Enterprises, Inc., 8.5%, 2/1/22 . . . . . . . . . . . . . . . . . . . . . . 983,980 ---------- 2,503,400 ----------
The accompanying notes are an integral part of the financial statements. 69
- --------------------------------------------------------------------------------------------------------------------------- Principal Market Amount ($) Value ($) - --------------------------------------------------------------------------------------------------------------------------- MEDIA 0.6% Cable Television 1,000,000 Tele-Communications, Inc., 9.8%, 2/1/12 . . . . . . . . . . . . . . . . . . . . . . . 1,023,970 --------- DURABLES 2.2% Aerospace 1.1% 1,000,000 Boeing Co., 6.875%, 10/15/43 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 790,700 1,000,000 McDonnell Douglas Corp., 9.75%, 4/1/12 . . . . . . . . . . . . . . . . . . . . . . . 1,057,970 --------- 1,848,670 --------- Automobiles 1.1% 1,000,000 Ford Motor Co., 8.875%, 1/15/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,018,930 1,000,000 General Motors Acceptance Corp., 5.75%, 4/4/96 . . . . . . . . . . . . . . . . . . . 983,130 --------- 2,002,060 --------- TECHNOLOGY 0.8% Military Electronics 1,500,000 Loral Corp., 8.375%, 6/15/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,392,510 --------- TOTAL CORPORATE BONDS (COST $9,665,708) . . . . . . . . . . . . . . . . . . . . . . . 8,770,610 --------- - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE BONDS 0.0% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL 0.0% Banks 15,000 Credit Suisse, 4.875%, 11/19/02 . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,903 --------- CONSTRUCTION 0.0% Homebuilding 30,000 Empresa ICA Sociedad Controladora S.A., 5.0%, 3/15/04 . . . . . . . . . . . . . . . . 32,625 --------- TOTAL CONVERTIBLE BONDS (COST $52,275) . . . . . . . . . . . . . . . . . . . . . . . 52,528 ---------
- --------------------------------------------------------------------------------------------------------------------------- Shares - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS 3.3% - --------------------------------------------------------------------------------------------------------------------------- HEALTH 0.6% Health Industry Services 38,300 FHP International Corp. "A", Cum. $1.25 . . . . . . . . . . . . . . . . . . . . . . . 1,048,462 --------- SERVICE INDUSTRIES 0.9% EDP Services 26,600 General Motors Corp., Series C, Cum. $3.25 (convertible into GM "E") . . . . . . . . 1,529,500 --------- DURABLES 0.8% Automobiles 16,000 Ford Motor Co., Series A, Cum. $4.20 . . . . . . . . . . . . . . . . . . . . . . . . 1,468,000 --------- MANUFACTURING 0.9% Containers & Paper 0.7% 13,600 Boise Cascade Corp. "E", Cum $1.79 . . . . . . . . . . . . . . . . . . . . . . . . . 380,800 3,300 Boise Cascade Corp. "G", Cum $1.58 . . . . . . . . . . . . . . . . . . . . . . . . . 87,037 25,300 Bowater, Inc. "B" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675,194 --------- 1,143,031 --------- Industrial Specialty 0.2% 7,900 Corning Delaware L.P., Cum. $3.00 . . . . . . . . . . . . . . . . . . . . . . . . . . 393,025 ---------
The accompanying notes are an integral part of the financial statements. 70
- --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- ENERGY 0.1% Oil & Gas Production 4,200 Parker & Parsley Capital Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,300 ---------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $5,711,763) . . . . . . . . . . . . . . . . 5,798,318 ---------- - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 44.0% - --------------------------------------------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY 1.9% Department & Chain Stores 33,900 Edison Brothers Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779,700 15,800 J.C. Penney Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 815,675 37,900 Rite Aid Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 786,425 18,400 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 883,200 ---------- 3,265,000 ---------- CONSUMER STAPLES 2.8% Food & Beverage 1.6% 17,600 General Mills, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,016,400 29,500 H.J. Heinz Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,438 9,200 Quaker Oats Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703,800 ---------- 2,800,638 ---------- Package Goods/Cosmetics 1.2% 22,600 Avon Products Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350,350 22,400 Tambrands Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834,400 ---------- 2,184,750 ---------- HEALTH 6.3% Health Industry Services 0.5% 8,000 McKesson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 814,000 ---------- Pharmaceuticals 5.8% 19,400 American Cyanamid Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,930,300 16,700 American Home Products Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,002,000 34,900 Baxter International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 981,562 18,500 Bristol-Myers Squibb Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,061,437 32,300 Eli Lilly Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,869,363 19,100 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,356,100 13,300 SmithKline Beecham PLC (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410,637 19,800 Warner-Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,588,950 ---------- 10,200,349 ---------- COMMUNICATIONS 2.5% Telephone/Communications 53,000 Alltel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,431,000 22,500 Compania Telefonica Nacional de Espana SA (ADR) . . . . . . . . . . . . . . . . . . . 911,250 8,200 Compania de Telefonos de Chile, SA (ADR) . . . . . . . . . . . . . . . . . . . . . . 719,550 40,900 Hong Kong Telecommunications Ltd. (ADR) . . . . . . . . . . . . . . . . . . . . . . . 823,113 17,100 Tele Danmark A/S (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465,975 ---------- 4,350,888 ---------- FINANCIAL 7.8% Banks 3.2% 36,100 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,263,500 56,700 CoreStates Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,509,637
The accompanying notes are an integral part of the financial statements. 71
- --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- 46,900 First Bank System Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711,850 18,600 J.P. Morgan & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,129,950 --------- 5,614,937 --------- Insurance 1.0% 25,400 EXEL, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987,425 23,500 Lincoln National Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878,313 --------- 1,865,738 --------- Other Financial Companies 1.1% 61,000 Great Western Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,174,250 22,600 Student Loan Marketing Association . . . . . . . . . . . . . . . . . . . . . . . . . 737,325 --------- 1,911,575 --------- Real Estate 2.5% 30,300 Health Care Property Investment Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . 905,212 33,100 McArthur/Glen Realty Corp. (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . 599,938 40,700 Meditrust SBI (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,302,400 24,100 Nationwide Health Properties Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . 927,850 26,000 Omega Healthcare Investors (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . 646,750 --------- 4,382,150 --------- SERVICE INDUSTRIES 0.2% Miscellaneous Commercial Services 13,000 Fleming Companies Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303,875 --------- DURABLES 4.1% Aerospace 2.9% 11,400 Lockheed Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793,725 36,200 Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,239,850 42,800 Thiokol Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,043,250 33,800 United Technologies Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,116,725 --------- 5,193,550 --------- Automobiles 0.9% 30,000 Dana Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840,000 10,800 Eaton Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513,000 6,200 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,050 --------- 1,525,050 --------- Telecommunications Equipment 0.3% 25,805 Alcatel Alsthom (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477,392 --------- MANUFACTURING 10.6% Chemicals 2.3% 16,900 Dow Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,322,425 20,500 E.I. du Pont de Nemours & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,189,000 48,200 Lyondell Petrochemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,225 --------- 4,011,650 --------- Containers & Paper 2.3% 43,600 Boise Cascade Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,286,200 40,100 Federal Paper Board Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,263,150 11,200 Kimberly Clark de Mexico S.A. "A" (ADR) . . . . . . . . . . . . . . . . . . . . . . . 469,000 16,000 Kimberly-Clark Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 940,000 --------- 3,958,350 ---------
The accompanying notes are an integral part of the financial statements. 72
- --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- Diversified Manufacturing 1.5% 27,000 Dresser Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,750 28,900 TRW Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,095,250 ---------- 2,642,000 ---------- Electrical Products 0.7% 17,000 Thomas & Betts Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,151,750 ---------- Machinery/Components/Controls 1.5% 36,500 Parker-Hannifin Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,455,438 33,000 Timken Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,241,625 ---------- 2,697,063 ---------- Office Equipment/Supplies 1.2% 20,500 Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,188,375 ---------- Specialty Chemicals 1.1% 24,800 Betz Laboratories Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,174,900 26,100 Witco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750,375 ---------- 1,925,275 ---------- ENERGY 5.5% Engineering 0.7% 48,600 McDermott International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,251,450 ---------- Oil & Gas Production 0.4% 16,400 Louisiana Land & Exploration Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 717,500 ---------- Oil Companies 3.9% 14,100 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812,512 24,700 Murphy Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,074,450 7,300 Pennzoil Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342,188 13,100 Repsol SA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401,188 7,200 Royal Dutch Petroleum Co. (New York shares) . . . . . . . . . . . . . . . . . . . . . 773,100 31,119 Societe Nationale Elf Aquitaine (ADR) . . . . . . . . . . . . . . . . . . . . . . . . 1,120,284 31,800 Total SA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 930,150 18,400 USX Marathon Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,600 39,500 YPF SA "D" (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 997,375 ---------- 6,777,847 ---------- Oilfield Services/Equipment 0.5% 27,300 Halliburton Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 859,950 ---------- METALS AND MINERALS 0.7% Steel & Metals 49,100 Freeport McMoRan Copper & Gold, Inc. "A" . . . . . . . . . . . . . . . . . . . . . . 1,227,500 ---------- TRANSPORTATION 0.6% Marine Transportation 0.3% 20,300 Alexander & Baldwin Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518,919 ---------- Railroads 0.3% 9,000 CSX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616,500 ---------- UTILITIES 1.0% Electric Utilities 0.6% 8,000 Empresa Nacional de Electricidad SA (ADR) . . . . . . . . . . . . . . . . . . . . . . 342,000 29,700 Unicom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660,825 ---------- 1,002,825 ---------- Natural Gas Distribution 0.4% 20,200 Consolidated Natural Gas Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 785,275 ---------- TOTAL COMMON STOCKS (COST $74,503,686) . . . . . . . . . . . . . . . . . . . . . . . 77,222,121 ----------
The accompanying notes are an integral part of the financial statements. 73 - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- SUMMARY % OF NET ASSETS - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO (COST $184,249,554) (a) . . . . . . . . . . 105.4 184,980,446 OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . (5.4) (9,482,576) ------ ----------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 175,497,870 ====== =========== REIT Real Estate Investment Trust * Effective maturities will be shorter due to amortization and prepayments. ** Yield (unaudited); bond equivalent yield to maturity; not a coupon rate. (a) At September 30, 1994, the net unrealized appreciation on investments based on cost for federal income tax purposes of $184,272,328 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost. . $ 5,144,227 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value. . (4,436,109) ----------- Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 708,118 =========== - ----------------------------------------------------------------------------------------------------------------------------------- Purchases and sales of investment securities, (excluding short-term investments), for the period February 1, 1994 (commencement of operations) to September 30, 1994, aggregated $159,126,852 and $30,898,352, respectively. - ----------------------------------------------------------------------------------------------------------------------------------- From February 1, 1994 through September 30, 1994, the Fund incurred approximately $426,090 of net realized capital losses which the Fund intends to elect to defer and treat as arising in the fiscal year ended September 30, 1995. - ----------------------------------------------------------------------------------------------------------------------------------- Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements. 74 AARP GROWTH AND INCOME FUND LIST OF INVESTMENTS as of September 30, 1994 - ---------------------------------------------------------------------------------------------------------------------------
Principal Market Amount ($) Value ($) - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 2.0% - --------------------------------------------------------------------------------------------------------------------------- 46,147,000 Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/94 at 4.8% to be repurchased at $46,165,459 on 10/3/94, collateralized by a $49,711,000 U.S. Treasury Note, 6.375%, 8/15/02 (COST $46,147,000) . . . . . 46,147,000 ---------- - --------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER 4.3% - --------------------------------------------------------------------------------------------------------------------------- 24,000,000 Pfizer, Inc., 4.72%, 10/5/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,987,413 10,000,000 J.P. Morgan & Co., Inc., 4.7%, 10/7/94 . . . . . . . . . . . . . . . . . . . . . . . 9,992,167 16,000,000 Pfizer, Inc., 4.72%, 10/7/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,987,413 10,000,000 Barclays US Funding Corp., 4.54%, 10/25/94 . . . . . . . . . . . . . . . . . . . . . 9,969,733 30,000,000 Santander Finance Delaware Inc., 4.81%, 11/8/94 . . . . . . . . . . . . . . . . . . 29,847,683 10,000,000 Pitney Bowes Credit Corp., 4.82%, 11/29/94 . . . . . . . . . . . . . . . . . . . . . 9,921,006 ---------- TOTAL COMMERCIAL PAPER (COST $99,705,415) . . . . . . . . . . . . . . . . . . . . . 99,705,415 ---------- - --------------------------------------------------------------------------------------------------------------------------- BANKERS' ACCEPTANCES 0.9% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL Banks 10,000,000 Chemical Bank, 4.77%, 10/31/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,960,250 10,100,000 Chemical Bank, 5.07%, 12/20/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,986,207 ---------- TOTAL BANKERS' ACCEPTANCES (COST $19,946,457) . . . . . . . . . . . . . . . . . . . 19,946,457 ---------- - --------------------------------------------------------------------------------------------------------------------------- U.S. TREASURY OBLIGATIONS 0.2% - --------------------------------------------------------------------------------------------------------------------------- 5,000,000 U.S. Treasury Bill, 11/17/94 (COST $4,970,070) . . . . . . . . . . . . . . . . . . . 4,971,850 ---------- - --------------------------------------------------------------------------------------------------------------------------- SHORT-TERM NOTES 2.6% - --------------------------------------------------------------------------------------------------------------------------- 10,000,000 Federal Home Loan Mortgage Corp., Discount Note, 10/4/94 . . . . . . . . . . . . . . 9,996,083 25,000,000 Federal Home Loan Mortgage Corp., Discount Note, 10/11/94 . . . . . . . . . . . . . 24,967,431 15,000,000 Federal Home Loan Mortgage Corp., Discount Note, 11/2/94 . . . . . . . . . . . . . . 14,936,800 10,000,000 Trust Company Bank of Georgia, 3.65%, 11/15/94 . . . . . . . . . . . . . . . . . . . 9,986,100 ---------- TOTAL SHORT-TERM NOTES (COST $59,899,708) . . . . . . . . . . . . . . . . . . . . . 59,886,414 ---------- - --------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS 0.2% - --------------------------------------------------------------------------------------------------------------------------- MANUFACTURING Electrical Products 4,500,000 Siemens Capital Corp., with warrants, 8%, 6/24/02 (COST $5,885,818) . . . . . . . . 5,715,000 ---------- - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE BONDS 2.7% - --------------------------------------------------------------------------------------------------------------------------- HEALTH 0.1% Health Industry Services 2,000,000 Hillhaven Corp., 7.75%, 11/1/02 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,760,000 ----------
The accompanying notes are an integral part of the financial statments. 75 AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------- Principal Market Amount ($) Value ($) - --------------------------------------------------------------------------------------------------------------------------- COMMUNICATIONS 0.1% Telephone/Communications 1,000,000 Compania de Telefonos de Chile, SA, 4.5%, 1/15/03 . . . . . . . . . . . . . . . . . 1,170,000 ---------- FINANCIAL 1.0% Banks 0.9% 9,000,000 Banco Nacional de Mexico, 7%, 12/15/99 . . . . . . . . . . . . . . . . . . . . . . . 10,080,000 8,995,000 Credit Suisse, 4.875%, 11/19/02 . . . . . . . . . . . . . . . . . . . . . . . . . . 11,935,241 ---------- 22,015,241 ---------- Insurance 0.1% 1,800,000 Cincinnati Financial Corp., 5.5%, 5/1/02 . . . . . . . . . . . . . . . . . . . . . . 2,169,000 500,000 First Central Financial Corp., 9%, 8/1/00 . . . . . . . . . . . . . . . . . . . . . 490,000 ---------- 2,659,000 ---------- MEDIA 0.1% Broadcasting & Entertainment 8,000,000 Time Warner Inc., Zero Coupon Liquid Yield Option Note, 6/22/13 . . . . . . . . . . 2,900,000 ---------- TECHNOLOGY 0.3% Electronic Data Processing 0.2% 8,000,000 Silicon Graphics Inc., 11/5/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,760,000 ---------- Precision Instruments 0.1% 1,000,000 Thermo Instruments Systems Inc., 6.625%, 8/15/01 . . . . . . . . . . . . . . . . . . 1,770,000 ---------- ENERGY 0.2% Oil & Gas Production 4,000,000 Amoco Canada Petroleum Co., 7.375%, 9/1/13 . . . . . . . . . . . . . . . . . . . . . 4,750,000 ---------- CONSTRUCTION 0.5% Homebuilding 10,670,000 Empresa ICA Sociedad Controladora S.A., 5%, 3/15/04 . . . . . . . . . . . . . . . . 11,603,625 ---------- TRANSPORTATION 0.4% Airlines 13,500,000 Delta Air Lines, Inc., 3.23%, 6/15/03 . . . . . . . . . . . . . . . . . . . . . . . 8,910,000 ---------- TOTAL CONVERTIBLE BONDS (COST $61,378,370) . . . . . . . . . . . . . . . . . . . . . 62,297,866 ---------- - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS 5.9% - --------------------------------------------------------------------------------------------------------------------------- Shares - --------------------------------------------------------------------------------------------------------------------------- HEALTH 1.1% Health Industry Services 952,700 FHP International Corp. "A", Cum. $1.25 . . . . . . . . . . . . . . . . . . . . . . 26,080,163 ---------- FINANCIAL 0.1% Insurance 62,500 Equitable Companies, Inc., Series C, Cum. $3.00 . . . . . . . . . . . . . . . . . . 3,046,875 ---------- SERVICE INDUSTRIES 1.0% EDP Services 373,900 General Motors Corp., Series C, Cum. $3.25 . . . . . . . . . . . . . . . . . . . . . 21,499,250 ---------- DURABLES 1.6% Automobiles 17,000 Chrysler Corp., Cum. $4.625 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,133,500 383,000 Ford Motor Co., Series A, Cum. $4.20 . . . . . . . . . . . . . . . . . . . . . . . . 35,140,250 ---------- 37,273,750 ----------
The accompanying notes are an integral part of the financial statements. 76
- --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- MANUFACTURING 1.0% Containers & Paper 0.5% 348,400 Boise Cascade Corp. "E", Cum. $1.79 . . . . . . . . . . . . . . . . . . . . . . . . 9,755,200 61,900 Boise Cascade Corp. "G", Cum. $1.58 . . . . . . . . . . . . . . . . . . . . . . . . 1,632,613 ----------- 11,387,813 ----------- Industrial Specialty 0.5% 211,600 Corning Delaware L.P., Cum. $3.00 . . . . . . . . . . . . . . . . . . . . . . . . . 10,527,100 ----------- TECHNOLOGY 0.1% Electronic Data Processing 50,000 Ceridian Corp., Cum. $2.75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,006,250 ----------- ENERGY 0.5% Oil & Gas Production 215,300 Parker & Parsley Capital Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,087,950 ----------- METALS AND MINERALS 0.5% Precious Metals 500,000 Freeport McMoRan Copper & Gold, Inc., Cum. $1.25 . . . . . . . . . . . . . . . . . . 12,250,000 ----------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $126,242,685) . . . . . . . . . . . . . . . 136,159,151 ----------- - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 81.1% - --------------------------------------------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY 3.3% Department & Chain Stores 462,600 Edison Brothers Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,639,800 408,400 J.C. Penney Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,083,650 1,012,700 Rite Aid Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,013,525 473,100 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,708,800 ----------- 75,445,775 ----------- CONSUMER STAPLES 5.6% Consumer Specialties 0.2% 255,100 A.T. Cross Co. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,241,038 ----------- Food & Beverage 3.1% 458,100 General Mills, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,455,275 760,200 H.J. Heinz Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,842,325 243,600 Quaker Oats Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,635,400 ----------- 72,933,000 ----------- Package Goods/Cosmetics 2.3% 523,300 Avon Products Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,267,175 571,100 Tambrands Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,273,475 ----------- 52,540,650 ----------- HEALTH 12.5% Health Industry Services 0.7% 145,500 McKesson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,804,625 13,400 McKesson Corp. (When-issued) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401,163 ----------- 15,205,788 ----------- Pharmaceuticals 11.8% 503,200 American Cyanamid Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,068,400 438,600 American Home Products Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,316,000 851,900 Baxter International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,959,688 469,400 Bristol-Myers Squibb Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,931,825 654,200 Carter-Wallace Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,913,475 846,400 Eli Lilly Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,985,400 507,200 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,011,200 334,200 SmithKline Beecham PLC (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,318,425
The accompanying notes are an integral part of the financial statements. 77 AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- 525,300 Warner-Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,155,325 ----------- 273,659,738 ----------- COMMUNICATIONS 4.3% Telephone/Communications 770,300 Alltel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,798,100 613,800 Compania Telefonica Nacional de Espana SA (ADR) . . . . . . . . . . . . . . . . . . 24,858,900 200,700 Compania de Telefonos de Chile, SA (ADR) . . . . . . . . . . . . . . . . . . . . . . 17,611,425 1,036,800 Hong Kong Telecommunications Ltd. (ADR) . . . . . . . . . . . . . . . . . . . . . . 20,865,600 898,915 S.I.P. SpA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,535,401 504,900 Tele Danmark A/S (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,758,525 ----------- 100,427,951 ----------- FINANCIAL 13.3% Banks 6.7% 286,000 AmSouth Bancorp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,009,000 72,000 Argentaria Corporacion Bancaria de Espana . . . . . . . . . . . . . . . . . . . . . 2,867,119 969,700 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,939,500 605,200 CoreStates Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,113,450 545,500 Corporacion Bancaria de Espana (ADR) . . . . . . . . . . . . . . . . . . . . . . . . 10,910,000 1,006,500 First Bank System Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,737,250 432,800 J.P. Morgan & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,292,600 201,000 Summit Bancorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,208,438 27,360 Swiss Bank Corp. (PC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,818,205 760 Swiss Bank Corp. Warrants* (expire 6/30/95) . . . . . . . . . . . . . . . . . . . . 11,213 295,300 Wilmington Trust Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,677,800 ----------- 155,584,575 ----------- Insurance 2.2% 692,250 EXEL, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,911,219 623,900 Lincoln National Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,318,263 ----------- 50,229,482 ----------- Other Financial Companies 1.6% 934,700 Great Western Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,992,975 38,500 Security Capital Industrial Trust . . . . . . . . . . . . . . . . . . . . . . . . . 587,125 579,700 Student Loan Marketing Association . . . . . . . . . . . . . . . . . . . . . . . . . 18,912,713 ----------- 37,492,813 ----------- Real Estate 2.8% 39,500 Avalon Properties, Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 834,438 313,500 Camden Property Trust (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,367,250 88,500 Charles E. Smith Residential Realty, Inc. (REIT) . . . . . . . . . . . . . . . . . . 2,267,813 28,000 Equity Residential Properties Trust (REIT) . . . . . . . . . . . . . . . . . . . . . 889,000 225,000 General Growth Properties, Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . . 4,556,250 246,000 Health Care Property Investment Inc. (REIT) . . . . . . . . . . . . . . . . . . . . 7,349,250 31,100 Mark Centers Trust (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,413 161,600 McArthur/Glen Realty Corp. (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . 2,929,000 457,000 Meditrust SBI (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,624,000 399,500 Nationwide Health Properties Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . 15,380,750 20,000 Post Properties Inc. (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602,500 451,200 Southwestern Properties Trust (REIT) . . . . . . . . . . . . . . . . . . . . . . . . 5,358,000 54,400 Vornado Realty Trust (REIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,863,200 ----------- 64,421,864 ----------- SERVICE INDUSTRIES 0.4% Miscellaneous Commercial Services 374,400 Fleming Companies Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,751,600 -----------
The accompanying notes are an integral part of the financial statements. 78
- --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- DURABLES 6.5% Aerospace 4.5% 293,600 AAR Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,816,800 292,500 Lockheed Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,365,313 695,700 Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,827,725 65,000 Thiokol Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,584,375 862,600 United Technologies Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,020,325 ----------- 103,614,538 ----------- Automobiles 1.7% 769,800 Dana Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,554,400 252,700 Eaton Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,003,250 228,600 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,343,650 ----------- 39,901,300 ----------- Telecommunications Equipment 0.3% 426,040 Alcatel Alsthom (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,881,740 ----------- MANUFACTURING 20.2% Chemicals 5.8% 477,500 BOC Group Inc. PLC (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,207,291 473,300 Dow Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,035,725 541,600 E.I. du Pont de Nemours & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,412,800 1,160,600 Lyondell Petrochemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,123,675 707,600 Union Carbide Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,058,400 ----------- 133,837,891 ----------- Containers & Paper 3.1% 1,051,500 Federal Paper Board Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,122,250 581,700 Kimberly-Clark de Mexico S.A. "A" . . . . . . . . . . . . . . . . . . . . . . . . . 12,172,325 33,800 Kimberly-Clark de Mexico S.A. "A" (ADR) . . . . . . . . . . . . . . . . . . . . . . 1,415,375 410,400 Kimberly-Clark Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,111,000 ----------- 70,820,950 ----------- Diversified Manufacturing 2.8% 690,700 Dresser Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,986,675 694,600 TRW Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,358,500 ----------- 64,345,175 ----------- Electrical Products 1.1% 377,100 Thomas & Betts Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,548,525 ----------- Machinery/Components/Controls 2.1% 949,800 Parker-Hannifin Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,873,275 273,500 Timken Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,290,438 ----------- 48,163,713 ----------- Office Equipment/Supplies 2.3% 509,900 Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,431,825 ----------- Specialty Chemicals 3.0% 204,800 ARCO Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,137,600 630,800 Betz Laboratories Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,884,150 306,400 Petrolite Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,268,600 692,600 Witco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,912,250 ----------- 69,202,600 ----------- ENERGY 10.1% Engineering 1.4% 1,287,800 McDermott International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,160,850 -----------
The accompanying notes are an integral part of the financial statements. 79 AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- Oil & Gas Production 1.6% 224,500 Louisiana Land & Exploration Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,821,875 437,500 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,296,875 257,000 Societe Nationale Elf Aquitaine . . . . . . . . . . . . . . . . . . . . . . . . . . 18,446,278 ------------- 37,565,028 ------------- Oil Companies 5.3% 329,700 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,998,963 234,200 Murphy Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,187,700 209,500 Pennzoil Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,820,313 353,000 Repsol SA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,810,625 168,100 Royal Dutch Petroleum Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,049,738 40,800 Texaco Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,448,000 125,795 Total SA "B" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,394,265 593,152 Total SA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,349,696 364,700 USX Marathon Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,473,425 807,400 YPF SA "D" (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,386,850 ------------- 121,919,575 ------------- Oilfield Services/Equipment 1.8% 1,326,500 Halliburton Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,784,750 ------------- METALS AND MINERALS 1.3% Precious Metals 0.4% 405,000 De Beers Consolidated Mines Ltd. (ADR) . . . . . . . . . . . . . . . . . . . . . . . 9,568,125 ------------- Steel & Metals 0.9% 579,010 Freeport McMoRan Copper & Gold, Inc. "A" . . . . . . . . . . . . . . . . . . . . . . 14,475,250 120,100 Reynolds Metals Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,470,388 ------------- 20,945,638 ------------- TRANSPORTATION 1.1% Marine Transportation 0.4% 316,700 Alexander & Baldwin Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,095,644 ------------- Railroads 0.7% 110,300 CSX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,555,550 141,100 Norfolk Southern Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,783,475 ------------- 16,339,025 ------------- UTILITIES 2.5% Electric Utilities 1.6% 1,468,800 China Light & Power Co., Ltd. (ADR) . . . . . . . . . . . . . . . . . . . . . . . . 7,470,170 229,220 Empresa Nacional de Electricidad SA (ADR) . . . . . . . . . . . . . . . . . . . . . 9,799,155 876,100 Unicom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,493,225 ------------- 36,762,550 ------------- Natural Gas Distribution 0.9% 523,500 Consolidated Natural Gas Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,351,051 ------------- TOTAL COMMON STOCKS (COST $1,636,876,852) . . . . . . . . . . . . . . . . . . . . . 1,875,174,767 -------------
- --------------------------------------------------------------------------------------------------------------------------- SUMMARY % OF NET ASSETS - --------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO (COST $2,061,052,375) (a) . . . . . . . . . 99.9 2,310,003,920 OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . 0.1 2,133,996 ----- ------------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 2,312,137,916 ===== =============
The accompanying notes are an integral part of the financial statements. 80 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ REIT Real Estate Investment Trust * Nonincome producing security. (a) At September 30, 1994, the net unrealized appreciation on investments based on cost for federal income tax purposes of $2,059,938,288 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost $ 288,939,154 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (38,873,522) ----------- Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,065,632 ============ - ------------------------------------------------------------------------------------------------------------------------------------ Purchases and sales of investment securities (excluding short-term investments) for the year ended September 30, 1994, aggregated $1,092,876,512 and $578,135,733, respectively. - ------------------------------------------------------------------------------------------------------------------------------------ Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements. 81 AARP Capital Growth Fund - --------------------------------------------------------------------------------------------------------------------------- LIST OF INVESTMENTS as of September 30, 1994 - ---------------------------------------------------------------------------------------------------------------------------
Principal Market Amount ($) Value ($) - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 4.3% 29,166,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette, dated 9/30/94 at 4.8%, to be repurchased at $29,177,666 on 10/3/94, collateralized by a $29,858,000 U.S. Treasury Note, 6%, 12/31/97 (COST $29,166,000) . . . . . . . . . 29,166,000 ---------- - --------------------------------------------------------------------------------------------------------------------------- BANKERS' ACCEPTANCES 0.8% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL Banks 5,300,000 Chemical Bank, 4.74%, 10/7/94 (COST $5,295,813) . . . . . . . . . . . . . . . . . . 5,295,813 ---------- - --------------------------------------------------------------------------------------------------------------------------- SHORT-TERM NOTES 0.7% - --------------------------------------------------------------------------------------------------------------------------- 5,000,000 Federal National Mortgage Association, Discount Note, 10/13/94 (COST $4,992,133) . . 4,992,133 ---------- - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE BONDS 0.5% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL Banks 3,000,000 Banco Nacional de Mexico, 7%, 12/15/99 (COST $3,678,750) . . . . . . . . . . . . . . 3,360,000 ---------- - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS 2.2% - --------------------------------------------------------------------------------------------------------------------------- Shares - --------------------------------------------------------------------------------------------------------------------------- DURABLES Automobiles 121,000 Chrysler Corp., $4.625 (COST $15,351,345) . . . . . . . . . . . . . . . . . . . . . 15,185,500 ---------- - --------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS 0.3% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL Banks 20,000 First Nationwide Bank, non-cumulative 11.5% (COST $2,020,000) . . . . . . . . . . . 2,095,000 - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 92.4% - --------------------------------------------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY 20.5% Apparel & Shoes 1.3% 126,100 Jones Apparel Group, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,089,450 87,200 Luxottica Group SpA (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,953,900 126,700 Phillips-Van Heusen Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,613,188 ---------- 8,656,538 ---------- Department & Chain Stores 4.1% 634,000 Charming Shoppes Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,151,250 445,100 Filene's Basement Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,727,712 86,300 Fred Meyer Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,837,113 100,000 J.C. Penney Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,162,500 100,000 Limited Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,962,500 304,600 Price/Costco Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,892,638 193,000 Wal-Mart Stores Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,511,375 ---------- 28,245,088 ---------- Home Furnishings 0.8% 400,000 Shaw Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,750,000 ----------
The accompanying notes are an integral part of the financial statements. 82
- --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- Hotels & Casinos 6.7% 224,300 Caesar's World Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,729,012 137,000 Carnival Corp., Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,010,875 305,300 Circus Circus Enterprises Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . 6,792,925 13,000 Club Mediterranee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,127,063 377,500 Mirage Resorts Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,116,250 155,000 President Riverboat Casinos* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,443,438 138,000 Promus Companies Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,640,250 241,300 Royal Caribbean Cruises Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,273,800 110,000 Station Casinos Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485,000 ---------- 45,618,613 ---------- Recreational Products 3.4% 280,000 Acclaim Entertainment Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,760,000 147,500 Bally Gaming International Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . 1,917,500 292,700 Electronic Arts Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,414,950 521,200 International Game Technology Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 10,749,750 ---------- 22,842,200 ---------- Specialty Retail 4.2% 185,800 Consolidated Stores Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,042,475 529,000 Fingerhut Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,167,000 245,000 Home Shopping Network Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,633,750 97,100 Spiegel Inc. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,759,938 250,000 Toys "R" Us Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,906,250 ---------- 28,509,413 ---------- CONSUMER STAPLES 3.2% Consumer Electronic & Photographic Products 0.6% 32,000 Goldstar Co. (GDR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704,000 8,404 Samsung Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,605,146 26,000 Samsung Electronics Co., Ltd. (GDS) . . . . . . . . . . . . . . . . . . . . . . . . 1,768,000 1,077 Samsung Electronics Co., Ltd. (GDS) (New) . . . . . . . . . . . . . . . . . . . . . 73,236 348 Samsung Electronics Co., Ltd. (New) . . . . . . . . . . . . . . . . . . . . . . . . 66,467 ---------- 4,216,849 ---------- Consumer Specialties 0.5% 114,900 Paragon Trade Brands, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,987,400 ---------- Food & Beverage 1.6% 98,200 Dr. Pepper/Seven-Up Companies Inc.* . . . . . . . . . . . . . . . . . . . . . . . . 2,283,150 150,000 Pan American Beverages Inc. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . 5,381,250 100,000 PepsiCo Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,312,500 ---------- 10,976,900 ---------- Package Goods/Cosmetics 0.5% 257,400 American Safety Razor Co.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,474,900 ---------- HEALTH 5.5% Health Industry Services 0.7% 129,000 Beverly Enterprises Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,983,375 88,300 Healthcare Compare Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,544,144 ---------- 4,527,519 ---------- Hospital Management 1.3% 198,200 American Medical Holdings Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . 4,434,725 100,000 Columbia/HCA Healthcare Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,350,000 ---------- 8,784,725 ----------
The accompanying notes are an integral part of the financial statements. 83 AARP CAPITAL GROWTH FUND - --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- Medical Supply & Specialty 0.5% 44,900 Elan Corp. PLC (ADS)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,762,325 100,000 Ventritex Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,950,000 ---------- 3,712,325 ---------- Pharmaceuticals 3.0% 365,000 Astra AB "B" (Free) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,588,133 68,000 Carter-Wallace Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 926,500 100,000 Perrigo Co.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350,000 80,000 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,680,000 50,000 Warner-Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,012,500 ---------- 20,557,133 ---------- COMMUNICATIONS 12.5% Cellular Telephone 4.3% 159,100 AirTouch Communications, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,554,237 154,600 Associated Communications Corp. "A"* . . . . . . . . . . . . . . . . . . . . . . . . 3,980,950 249,300 Associated Communications Corp. "B"* . . . . . . . . . . . . . . . . . . . . . . . . 6,419,475 11,700 Grupo Iusacell S.A. de CV "D" (ADR)* . . . . . . . . . . . . . . . . . . . . . . . . 333,450 57,900 Grupo Iusacell S.A. de CV "L" (ADR)* . . . . . . . . . . . . . . . . . . . . . . . . 1,722,525 88,800 LIN Broadcasting Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,354,300 ---------- 29,364,937 ---------- Telephone/Communications 8.2% 328,500 American Telephone & Telegraph Co. . . . . . . . . . . . . . . . . . . . . . . . . . 17,739,000 586,000 Century Telephone Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,920,750 150,000 IDB Communications Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350,000 871 Nippon Telegraph & Telephone Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 7,744,564 263,300 Telephone & Data Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,111,800 ---------- 55,866,114 ---------- FINANCIAL 6.8% Banks 2.0% 100,000 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 56,250 First Commerce Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,504,687 7,000 First Empire State Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,060,500 100,000 G P Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,375,000 43,000 Grupo Financiero Bancomer "C" (ADR) . . . . . . . . . . . . . . . . . . . . . . . . 1,049,544 150,200 MBNA Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,473,375 25,500 Mercantile Bancorporation Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 940,313 ---------- 13,903,419 ---------- Insurance 3.8% 51,500 20th Century Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656,625 99,900 American RE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,021,975 140,000 EXEL, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,442,500 77,800 General Re Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,237,075 44,800 Liberty Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,192,800 130,800 Mid Ocean Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,310,875 300,000 Western National Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,050,000 ---------- 25,911,850 ---------- Other Financial Companies 1.0% 58,000 Federal National Mortgage Association . . . . . . . . . . . . . . . . . . . . . . . 4,567,500 26,400 Nichiei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,835,221 ---------- 6,402,721 ----------
The accompanying notes are an integral part of the financial statements. 84 - --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- MEDIA 20.3% Broadcasting & Entertainment 7.7% 123,200 BET Holdings Inc. "A"* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,986,600 54,700 Jacor Communications, Inc. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . . 793,150 58,800 Savoy Pictures Entertainment Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . 676,200 978,000 Time Warner Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,352,250 25,600 Viacom Inc. "A"* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,046,400 337,968 Viacom Inc. "B"* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,434,228 320,000 Viacom Inc. Rights* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420,000 ---------- 52,708,828 ---------- Cable Television 12.0% 1,588,150 Comcast Corp. "A" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,318,547 1,504,400 Rogers Communications Inc. "B"* . . . . . . . . . . . . . . . . . . . . . . . . . . 22,851,818 1,551,790 Tele-Communications Inc. "A" (New)* . . . . . . . . . . . . . . . . . . . . . . . . 34,430,330 ---------- 81,600,695 ---------- Print Media 0.6% 90,400 Scholastic Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,407,000 ---------- SERVICE INDUSTRIES 0.6% Investment 100,000 Franklin Resources Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,737,500 ---------- DURABLES 3.9% Automobiles 2.3% 110,000 Autoliv AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,308,784 150,000 Collins & Aikman Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,462,500 400,000 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,100,000 ---------- 15,871,284 ---------- Telecommunications Equipment 1.3% 100,000 DSC Communications Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,850,000 68,000 Newbridge Networks Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,176,000 31,500 Nokia AB Oy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,659,850 ---------- 8,685,850 ---------- Tires 0.3% 100,000 Cooper Tire & Rubber Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,337,500 ---------- MANUFACTURING 1.3% Electrical Products 1.1% 250,000 Philips NV (New York shares) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,593,750 ---------- Machinery/Components/Controls 0.2% 70,000 Daewoo Heavy Industries Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,542,506 1,400 Daewoo Heavy Industries Ltd. (New)* . . . . . . . . . . . . . . . . . . . . . . . . 29,097 ---------- 1,571,603 ---------- TECHNOLOGY 8.6% Computer Software 3.5% 203,300 Informix Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,641,575 324,600 Microsoft Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,218,175 ---------- 23,859,750 ---------- Edp Peripherals 0.5% 200,000 Adaptec Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,787,500 ---------- Office/Plant Automation 1.3% 200,000 Cisco Systems, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,475,000 250,000 Novell Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,687,500 ---------- 9,162,500 ----------
The accompanying notes are an integral part of the financial statements. 85 AARP CAPITAL GROWTH FUND - --------------------------------------------------------------------------------------------------------------------------- Market Shares Value ($) - --------------------------------------------------------------------------------------------------------------------------- Semiconductors 3.3% 100,000 Advanced Micro Devices Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,975,000 95,000 Intel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,842,500 948,600 Intel Corp. Warrants (expire 3/14/98)* . . . . . . . . . . . . . . . . . . . . . . . 13,339,687 ----------- 22,157,187 ----------- ENERGY 4.2% Engineering 0.3% 50,000 Grupo Tribasa SA de CV (ADR)* . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,837,500 Oil & Gas Production 2.0% 70,000 Anadarko Petroleum Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,132,500 202,500 Perez Companc S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150,127 291,000 Triton Energy Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,457,500 ----------- 13,740,127 ----------- Oil Companies 1.6% 100,000 Chevron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,162,500 150,000 Unocal Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,237,500 100,000 YPF SA "D" (ADR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,525,000 ----------- 10,925,000 ----------- Oilfield Services/Equipment 0.3% 350,000 Global Marine Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,487,500 52,100 Smith International Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807,550 ----------- 2,295,050 ----------- METALS AND MINERALS 1.6% Steel & Metals 110,700 Allegheny Ludlum Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,380,050 100,000 LTV Corp* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,050,000 30,100 Oregon Steel Mills Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534,275 372,000 Usinas Siderurgicas de Minas Gerais S/A (pfd.) (ADR) . . . . . . . . . . . . . . . . 6,184,500 ----------- 11,148,825 ----------- CONSTRUCTION 2.0% Building Materials 0.4% 10,300 Mannesmann AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,585,698 ----------- Building Products 0.3% 100,000 USG Corp.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,062,500 ----------- Forest Products 0.6% 50,000 Louisiana-Pacific Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,656,250 65,000 Weyerhaeuser Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,900,625 ----------- 4,556,875 ----------- Homebuilding 0.7% 240,000 Hovnanian Enterprises Inc. "A"* . . . . . . . . . . . . . . . . . . . . . . . . . . 1,830,000 164,700 Kaufman & Broad Home Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,244,037 50,000 Toll Brothers Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568,750 ----------- 4,642,787 ----------- UTILITIES 1.4% Electric Utilities 145,500 Destec Energy Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,655,062 60,000 Illinova Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,155,000 50,000 Korea Electric Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,316,264 190,200 Public Service Co. of New Mexico* . . . . . . . . . . . . . . . . . . . . . . . . . 2,329,950 87,600 Unicom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,949,100 ----------- 9,405,376 ----------- TOTAL COMMON STOCKS (COST $613,255,615) . . . . . . . . . . . . . . . . . . . . . . 630,989,329 -----------
The accompanying notes are an integral part of the financial statements. 86 - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- SUMMARY % OF NET ASSETS - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO (COST $673,759,656) (a) . . . . . . . . . . 101.2 691,083,775 OTHER ASSETS AND LIABILITIES, NET . . . . . . . . . . . . . . . . . . (1.2) (8,283,862) ----- ----------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 682,799,913 ===== =========== * Nonincome producing security. (a) At September 30, 1994, the net unrealized appreciation on investments based on cost for federal income tax purposes of $673,847,690 was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost . . $ 63,297,066 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value . . (46,060,981) ------------ Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,236,085 ============ - ----------------------------------------------------------------------------------------------------------------------------------- Purchases and sales of investment securities, (excluding short-term investments), for the year ended September 30, 1994, aggregated $614,231,940 and $497,020,904, respectively. - ----------------------------------------------------------------------------------------------------------------------------------- Percentage breakdown of investments is based on total net assets of the Fund. The total net assets of the Fund are comprised of the Fund's investment portfolio, other assets and liabilities. The percentage of the investment portfolio may be greater or lesser than 100% due to the inclusion of the Fund's assets and liabilities in the calculation. The Fund's other assets and liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements. 87 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES - ------------------------------------------------------------------------------------------------------------------------
AARP High AARP High AARP GNMA Quality Quality Tax Free and September 30, 1994 Money Fund Money Fund U.S. Treasury Fund - ------------------------------------------------------------------------------------------------------------------------ ASSETS Investments, at value (for identified cost, see accompanying lists of investment portfolios) . . . $ 330,682,541 $ 130,138,320 $ 5,370,095,635 Cash . . . . . . . . . . . . . . . . . . . . . . . . 296,594 35,493 1,952 Other receivables: Investments sold . . . . . . . . . . . . . . . . . -- -- 726,432,371 Dividends and interest . . . . . . . . . . . . . . 2,161,176 638,159 30,534,190 Fund shares sold . . . . . . . . . . . . . . . . . 2,150,641 97,851 1,986,378 Due from Fund Manager (Note 2) . . . . . . . . . . -- 8,083 -- Deferred organization expenses (Note 1) . . . . . . . -- -- -- Other assets . . . . . . . . . . . . . . . . . . . . 3,625 938 52,856 --------------- --------------- --------------- Total assets . . . . . . . . . . . . . . . . . . . . 335,294,577 130,918,844 6,129,103,382 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES Payables: Due to custodian bank . . . . . . . . . . . . . . -- -- -- Investments purchased . . . . . . . . . . . . . . -- 1,001,660 523,481,250 Fund shares redeemed . . . . . . . . . . . . . . . 1,417,151 340,394 3,696,718 Dividends . . . . . . . . . . . . . . . . . . . . 113,406 51,806 13,010,755 Daily variation margin on open futures contracts (Note 1) . . . . . . . . . . . . . . . -- -- -- Management fee (Note 2) . . . . . . . . . . . . . 108,799 57,653 1,928,188 Transfer and dividend disbursing agent (Note 2) . 122,974 30,941 736,317 Other accrued expenses . . . . . . . . . . . . . . 94,188 26,745 764,964 --------------- --------------- --------------- Total liabilities . . . . . . . . . . . . . . . . . . 1,856,518 1,509,199 543,618,192 - ------------------------------------------------------------------------------------------------------------------------ Net assets at value . . . . . . . . . . . . . . . . . $ 333,438,059 $ 129,409,645 $ 5,585,485,190 - ------------------------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: Accumulated undistributed net investment income (Note 3) . . . . . . . . . . . . . . . . . $ -- $ -- $ -- Unrealized appreciation (depreciation) on: Investments . . . . . . . . . . . . . . . . . . . (255,702) -- (109,914,729) Futures contracts . . . . . . . . . . . . . . . . -- -- -- Accumulated net realized capital gain (loss) (Note 3) -- (1,321,860) (304,560,473) Accumulated distributions in excess of net realized capital gain (Note 3) . . . . . . . . . . . . . . -- -- -- Shares of beneficial interest, at par . . . . . . . . 3,336,938 129,412 3,791,212 Additional paid-in capital (Note 3) . . . . . . . . . 330,356,823 130,602,093 5,996,169,180 - ------------------------------------------------------------------------------------------------------------------------ Net assets at value . . . . . . . . . . . . . . . . . $ 333,438,059 $ 129,409,645 $ 5,585,485,190 - ------------------------------------------------------------------------------------------------------------------------ Shares of beneficial interest outstanding, $.01 par value, unlimited number of shares authorized. (Note) AARP High Quality Tax Free Money Fund has a $.001 par value. . . . . . . . . . . . . . . 333,693,761 129,411,544 379,121,168 - ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, offering and redemption price per share (net assets at value, per fund, divided by the respective shares of beneficial interest outstanding) $1.00 $1.00 $14.73 - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 88
- ------------------------------------------------------------------------------------------------------------------------ AARP Insured AARP Balanced AARP High Tax Free Stock and AARP Growth AARP Capital Quality Bond Fund General Bond Fund Bond Fund and Income Fund Growth Fund - ------------------------------------------------------------------------------------------------------------------------ $ 620,116,055 $ 1,892,152,730 $ 184,980,446 $ 2,310,003,920 $ 691,083,775 2,175 98,221 190 -- -- 30,262,898 25,250,751 37,308 980,680 -- 4,967,448 26,592,613 724,345 7,671,831 642,613 174,465 698,908 401,723 2,233,734 132,014 -- -- -- -- -- -- -- 48,922 -- -- 2,125 9,769 -- 5,828 4,123 ------------- --------------- ------------- --------------- ------------- 655,525,166 1,944,802,992 186,192,934 2,320,895,993 691,862,525 - ------------------------------------------------------------------------------------------------------------------------ -- -- -- 47,915 10,390 85,775,781 25,203,277 10,329,393 5,692,383 6,909,843 521,896 1,056,812 137,783 1,309,816 1,477,685 733,437 2,978,950 -- -- -- 17,656 107,500 -- -- -- 230,297 777,218 69,301 921,086 354,071 159,046 198,570 40,272 259,840 106,631 101,146 209,712 118,315 527,037 203,992 ------------- --------------- ------------- --------------- ------------- 87,539,259 30,532,039 10,695,064 8,758,077 9,062,612 - ------------------------------------------------------------------------------------------------------------------------ $567,985,907 $ 1,914,270,953 $ 175,497,870 $ 2,312,137,916 $682,799,913 - ------------------------------------------------------------------------------------------------------------------------ $ -- $ -- $ 142,595 $ 4,044,032 $ 122,688 (22,074,619) (22,431,545) 730,892 248,951,545 17,324,119 235,464 213,825 -- -- -- -- -- (453,177) 54,862,328 13,099,140 (16,553,184) (6,619,518) -- -- -- 377,342 1,130,667 119,836 677,403 215,140 606,000,904 1,941,977,524 174,957,724 2,003,602,608 652,038,826 - ------------------------------------------------------------------------------------------------------------------------ $567,985,907 $ 1,914,270,953 $ 175,497,870 $ 2,312,137,916 $ 682,799,913 - ------------------------------------------------------------------------------------------------------------------------ 37,734,181 113,066,680 11,983,629 67,740,274 21,513,985 - ------------------------------------------------------------------------------------------------------------------------ $15.05 $16.93 $14.64 $34.13 $31.74 - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 89 FINANCIAL STATEMENTS STATEMENT OF OPERATIONS - --------------------------------------------------------------------------------------------------------------------------
AARP High AARP High AARP GNMA Quality Quality Tax Free and Year Ended September 30, 1994 Money Fund Money Fund U.S. Treasury Fund - -------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME: Interest . . . . . . . . . . . . . . . . . . . . . $ 11,917,686 $ 3,530,989 $ 419,014,488 Dividends . . . . . . . . . . . . . . . . . . . . -- -- -- ------------ ----------- -------------- 11,917,686 3,530,989 419,014,488 Less foreign taxes withheld . . . . . . . . . . . -- -- -- ------------ ----------- -------------- 11,917,686 3,530,989 419,014,488 - ------------------------------------------------------------------------------------------------------------------------ EXPENSES: Management fee (Note 2) . . . . . . . . . . . . . 1,244,322 568,107 26,198,841 Services to shareholders: Transfer and dividend disbursing expense (Note 2) 1,488,175 403,163 9,570,696 Other expenses . . . . . . . . . . . . . . . . . 154,315 38,501 1,599,164 Trustees' fees and expenses (Note 2) . . . . . . . 20,362 30,653 30,128 Shareholder communications . . . . . . . . . . . . 235,012 49,800 2,589,435 Legal . . . . . . . . . . . . . . . . . . . . . . 28,965 2,979 34,810 Auditing . . . . . . . . . . . . . . . . . . . . . 26,278 26,108 65,132 Custodian fees . . . . . . . . . . . . . . . . . . 68,152 52,392 842,375 Registration expenses . . . . . . . . . . . . . . 60,624 26,910 55,269 Amortization of organization expenses (Note 1) . . -- -- -- Other . . . . . . . . . . . . . . . . . . . . . . 14,675 10,024 193,059 ------------ ----------- -------------- Total expenses before reimbursement from Fund Manager . . . . . . . . . . . . . . . . . . . . . 3,340,880 1,208,637 41,178,909 Reimbursement of expenses from Fund Manager (Note 2) . . . . . . . . . . . . . . . . . . . . . -- (8,083) -- ------------ ----------- -------------- Expenses, net . . . . . . . . . . . . . . . . . . . . 3,340,880 1,200,554 41,178,909 - ------------------------------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME . . . . . . . . . . . . . . . 8,576,806 2,330,435 377,835,579 - ------------------------------------------------------------------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) from: Investments . . . . . . . . . . . . . . . . . . -- (10,344) (301,854,645) Futures contracts (Note 1) . . . . . . . . . . . -- -- -- Option contracts (Note 1) . . . . . . . . . . . -- -- (2,842,351) Foreign currency related transactions (Note 1) . -- -- -- Net unrealized appreciation (depreciation) on: Investments . . . . . . . . . . . . . . . . . . (551,482) -- (194,039,955) Futures contracts . . . . . . . . . . . . . . . -- -- -- ------------ ----------- -------------- Net gain (loss) on investments . . . . . . . . . . . (551,482) (10,344) (498,736,951) - ------------------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . $ 8,025,324 $ 2,320,091 $(120,901,372) - ------------------------------------------------------------------------------------------------------------------------ (a) The AARP Balanced Stock and Bond Fund commenced operations on February 1, 1994.
The accompanying notes are an integral part of the financial statements. 90
- ------------------------------------------------------------------------------------------------------------------------ AARP Insured AARP Balanced AARP High Tax Free Stock and AARP Growth AARP Capital Quality Bond Fund General Bond Fund Bond Fund (a) and Income Fund Growth Fund - ------------------------------------------------------------------------------------------------------------------------ $38,080,183 $ 112,262,836 $ 2,193,509 $ 9,598,880 $ 2,245,740 -- -- 1,502,021 65,512,046 4,606,290 ----------- ------------- ----------- ------------ ------------ 38,080,183 112,262,836 3,695,530 75,110,926 6,852,030 -- -- (32,387) (1,196,056) (129,091) ----------- ------------- ----------- ------------ ------------ 38,080,183 112,262,836 3,663,143 73,914,870 6,722,939 - ------------------------------------------------------------------------------------------------------------------------ 2,952,999 9,944,429 365,435 9,533,476 4,184,437 2,008,127 2,511,304 355,400 2,985,636 1,339,182 210,994 375,965 31,094 642,393 279,618 30,128 30,653 18,050 28,587 28,587 339,654 582,518 28,842 966,885 417,903 3,471 24,460 1,164 21,125 7,454 46,397 55,721 9,921 45,900 42,769 115,124 288,287 64,852 337,143 174,000 36,899 69,675 99,938 343,862 101,845 -- -- 7,323 -- -- 15,738 103,937 1,230 64,973 27,045 ----------- ------------- ----------- ------------ ------------ 5,759,531 13,986,949 983,249 14,969,980 6,602,840 -- -- -- -- -- ----------- ------------- ----------- ------------ ------------ 5,759,531 13,986,949 983,249 14,969,980 6,602,840 - ------------------------------------------------------------------------------------------------------------------------ 32,320,652 98,275,887 2,679,894 58,944,890 120,099 - ------------------------------------------------------------------------------------------------------------------------ (12,214,126) (782,787) (481,337) 54,940,316 17,135,778 1,131,998 5,547,043 -- -- -- -- -- -- -- -- -- -- 56,480 (92,431) 2,595 (56,963,191) (198,675,783) 730,892 38,962,776 (53,012,292) 163,838 119,639 -- -- -- ----------- ------------- ----------- ------------ ------------ (67,881,481) (193,791,888) 306,035 93,810,661 (35,873,919) - ------------------------------------------------------------------------------------------------------------------------ $ (35,560,829) $ (95,516,001) $ 2,985,929 $152,755,551 $ (35,753,820) - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 91 FINANCIAL STATEMENTS STATEMENT OF CHANGES IN NET ASSETS - ------------------------------------------------------------------------------------------------------------------------
AARP High AARP High AARP GNMA Quality Quality Tax Free and Money Fund Money Fund U.S. Treasury Fund - ------------------------------------------------------------------------------------------------------------------------ YEARS ENDED YEARS ENDED YEARS ENDED SEPT. 30, SEPT. 30, SEPT. 30, 1994 1993 1994 1993 1994 1993 ------------ ------------ ------------ ------------ ------------ ------------ Increase (Decrease) in Net Assets Operations: Net investment income (loss) $ 8,576,806 $ 6,035,616 $ 2,330,435 $ 2,088,141 $ 377,835,579 $ 430,864,251 Net realized gain (loss) from: Investments . . . . . . . -- -- (10,344) -- (301,854,645) 59,602,264 Future contracts . . . . . -- -- -- -- -- -- Option contracts . . . . . -- -- -- -- (2,842,351) -- Foreign currency related transactions . . . . . . -- -- -- -- -- -- Net unrealized appreciation (depreciation) on: Investments . . . . . . . (551,482) (319,753) -- -- (194,039,955) (144,230,011) Future contracts . . . . . -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------- -------------- Net increase (decrease) in net assets resulting from operations . 8,025,324 5,715,863 2,320,091 2,088,141 (120,901,372) 346,236,504 ------------ ------------ ------------ ------------ ------------- -------------- Distributions to shareholders: Net investment income . . . (8,576,806) (6,035,616) (2,330,435) (2,088,141) (377,835,579) (430,864,251) Net realized gains . . . . . -- -- -- -- -- -- In excess of net realized gains -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------- -------------- (8,576,806) (6,035,616) (2,330,435) (2,088,141) (377,835,579) (430,864,251) ------------ ------------ ------------ ------------ ------------- -------------- Fund share transactions: Proceeds from sale of shares 457,195,131 274,945,434 72,891,766 88,294,482 767,903,410 2,063,407,242 Net asset value of shares issued to shareholders in reinvestment of distributions from net investment income and net realized gains 7,471,832 5,060,331 1,833,452 1,582,369 243,322,806 257,800,461 Cost of shares redeemed . . (384,553,352) (348,502,951) (78,946,046) (83,650,326) (1,639,307,179) (756,627,380) ------------ ------------ ------------ ------------ ------------- -------------- Net increase (decrease) in net assets from Fund share transactions 80,113,611 (68,497,186) (4,220,828) 6,226,525 (628,080,963) 1,564,580,323 ------------ ------------ ------------ ------------ ------------- -------------- Increase (decrease) in net assets 79,562,129 (68,816,939) (4,231,172) 6,226,525 (1,126,817,914) 1,479,952,576 Net assets at beginning of period 253,875,930 322,692,869 133,640,817 127,414,292 6,712,303,104 5,232,350,528 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of period (a) $333,438,059 $253,875,930 $129,409,645 $133,640,817 $5,585,485,190 $6,712,303,104 - -------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN FUND SHARES: Shares outstanding at beginning of period . . . . . . . . . 253,580,150 322,077,336 133,632,372 127,405,847 420,695,404 323,129,713 ------------ ------------ ------------ ------------ ------------- -------------- Shares sold . . . . . . . . 457,195,131 274,945,434 72,891,766 88,294,482 49,495,268 128,658,180 Shares issued to shareholders in reinvestment of distributions from net investment income and net realized gains . . 7,471,832 5,060,331 1,833,452 1,582,369 15,901,711 16,084,629 Shares redeemed . . . . . . (384,553,352) (348,502,951) (78,946,046) (83,650,326) (106,971,215) (47,177,118) ------------ ------------ ------------ ------------ ------------- -------------- Net increase (decrease) in Fund shares . . . . . . . . 80,113,611 (68,497,186) (4,220,828) 6,226,525 (41,574,236) 97,565,691 ------------ ------------ ------------ ------------ ------------- -------------- Shares outstanding at end of period 333,693,761 253,580,150 129,411,544 133,632,372 379,121,168 420,695,404 - -------------------------------------------------------------------------------------------------------------------------------- (a) Includes accumulated undistributed net investment income $ -- $ -- $ -- $ -- $ -- $ -- (b) Commencement of Operations
The accompanying notes are an integral part of the financial statements. 92
- ------------------------------------------------------------------------------- AARP Insured AARP Balanced AARP High Tax Free Stock and Quality Bond Fund General Bond Fund Bond Fund - ------------------------------------------------------------------------------- FOR THE PERIOD YEARS ENDED YEARS ENDED FEBRUARY 1, SEPT. 30, SEPT. 30, 1994 (B) TO 1994 1993 1994 1993 SEPT. 30, 1994 - ------------ ------------ -------------- -------------- -------------- $ 32,320,652 $ 26,965,293 $ 98,275,887 $ 86,370,483 $ 2,679,894 (12,214,126) 10,651,382 (782,787) 43,487,055 (481,337) 1,131,998 (1,663,384) 5,547,043 (6,800,868) -- -- 7,203 -- -- -- -- -- -- -- 56,480 (56,963,191) 20,235,403 (198,675,783) 116,438,608 730,892 163,838 71,626 119,639 (543,673) -- - ------------ ------------ -------------- -------------- ------------ (35,560,829) 56,267,523 (95,516,001) 238,951,605 2,985,929 - ------------ ------------ -------------- -------------- ------------ (32,320,652) (26,965,293) (98,275,887) (86,370,483) (2,565,619) -- (4,651,794) (38,761,058) (37,168,095) -- (13,990,833) -- (6,584,253) -- -- - ------------ ------------ -------------- -------------- ------------ (46,311,485) (31,617,087) (143,621,198) (123,538,578) (2,565,619) - ------------ ------------ -------------- -------------- ------------ 168,940,806 242,905,095 384,083,220 624,141,174 190,243,552 34,534,021 23,182,316 97,111,633 83,057,025 970,439 (157,452,199) (70,960,326) (414,495,879) (223,287,123) (16,137,931) - ------------ ------------ -------------- -------------- ------------ 46,022,628 195,127,085 66,698,974 483,911,076 175,076,060 - ------------ ------------ -------------- -------------- ------------ (35,849,686) 219,777,521 (172,438,225) 599,324,103 175,496,370 603,835,593 384,058,072 2,086,709,178 1,487,385,075 1,500 - ------------------------------------------------------------------------- $567,985,907 $603,835,593 $1,914,270,953 $2,086,709,178 $175,497,870 - ------------------------------------------------------------------------- 35,123,046 23,357,425 109,849,454 83,203,792 100 - ------------ ------------ -------------- -------------- ------------ 10,342,361 14,684,297 21,237,027 34,272,260 13,025,672 2,141,000 1,393,219 5,382,600 4,612,964 67,628 (9,872,226) (4,311,895) (23,402,401) (12,239,562) (1,109,771) - ------------ ------------ -------------- -------------- ------------ 2,611,135 11,765,621 3,217,226 26,645,662 11,983,529 - ------------ ------------ -------------- -------------- ------------ 37,734,181 35,123,046 113,066,680 109,849,454 11,983,629 - ------------ ------------ -------------- -------------- ------------ - ------------------------------------------------------------------------- $ -- $ -- $ -- $ -- $ 142,595
- ----------------------------------------------------------- AARP Growth AARP Capital and Income Fund Growth Fund - ----------------------------------------------------------- YEARS ENDED YEARS ENDED SEPT. 30, SEPT. 30, 1994 1993 1994 1993 - -------------- -------------- ------------ ------------- $ 58,944,890 $ 34,089,726 $ 120,099 $ 1,106,973 54,940,316 12,040,829 17,135,778 50,408,582 -- -- -- -- -- -- -- (124,419) (92,431) 36,536 2,595 (71,574) 38,962,776 149,831,506 (53,012,292) 60,475,465 -- -- -- -- - -------------- -------------- ------------ ------------- 152,755,551 195,998,597 (35,753,820) 111,795,027 - -------------- -------------- ------------ ------------- (66,829,027) (29,531,904) (916,825) (2,058,600) (11,016,834) (8,828,720) (53,175,158) (17,789,275) -- -- -- -- - -------------- -------------- ------------ ------------- (77,845,861) (38,360,624) (54,091,983) (19,847,875) - -------------- -------------- ------------ ------------- 915,359,577 754,800,190 277,949,808 212,871,489 57,428,013 33,894,170 51,627,257 18,931,304 (295,649,512) (134,524,207) (164,072,900) (141,104,911) - -------------- -------------- ------------ ------------- 677,138,078 654,170,153 165,504,165 90,697,882 - -------------- -------------- ------------ ------------- 752,047,768 811,808,126 75,658,362 182,645,034 1,560,090,148 748,282,022 607,141,551 424,496,517 - ----------------------------------------------------------- $2,312,137,916 $1,560,090,148 $682,799,913 $607,141,551 - ----------------------------------------------------------- 47,404,023 26,100,037 16,773,892 14,008,476 - -------------- -------------- ------------ ------------- 27,412,953 24,549,104 8,230,221 6,449,803 1,732,575 1,135,138 1,522,034 593,086 (8,809,277) (4,380,256) (5,012,162) (4,277,473) - -------------- -------------- ------------ ------------- 20,336,251 21,303,986 4,740,093 2,765,416 - -------------- -------------- ------------ ------------- 67,740,274 47,404,023 21,513,985 16,773,892 - ----------------------------------------------------------- $ 4,044,032 $ 12,292,606 $ 122,688 $ 800,377
The accompanying notes are an integral part of the financial statements. 93 FINANCIAL HIGHLIGHTS AARP HIGH QUALITY MONEY FUND THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
Years Ended September 30, ----------------------------------------------- 1994 1993 1992 1991 1990 ----------------------------------------------- Net asset value, beginning of period . . . . . . . . . . $1.000 $1.000 $1.000 $1.000 $1.000 ----------------------------------------------- Net investment income (a) . . . . . . . . . . . . . . .028 .021 .040 .060 .073 Distributions from net investment income . . . . . . . (.028) (.021) (.040)(b) (.060) (.073) ----------------------------------------------- Net asset value, end of period . . . . . . . . . . . . . $1.000 $1.000 $1.000 $1.000 $1.000 =============================================== TOTAL RETURN (%) (C) . . . . . . . . . . . . . . . . . . 2.84 2.13 4.12 6.22 7.58 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions) . . . . . . . . . 333 254 323 357 376 Ratio of operating expenses to average net assets (%) (a) 1.125 1.312 1.151 1.053 1.058 Ratio of net investment income to average net assets (%) 2.889 2.123 3.613 6.050 7.319 (a) Reflects a per share reimbursement of expenses during the period by the Fund Manager of: $ -- $ -- $ .000 $ .001 $ .001 (b) Includes approximately $.005 per share of net realized short-term capital gains. (c) Total returns in some periods were higher due to maintenance of the Fund's expenses. - ------------------------------------------------------------------------------------------------------------------------------
AARP HIGH QUALITY TAX FREE MONEY FUND (B) THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
Under prior objectives (b) -------------- Years Ended September 30, ----------------------------------------------- 1994 1993 1992 1991 1990 ----------------------------------------------- Net asset value, beginning of period . . . . . . . . . . $1.000 $1.000 $1.000 $ .996 $ .998 ----------------------------------------------- Income from investment operations: Net investment income (a) . . . . . . . . . . . . . . .017 .016 .026 .055 .061 Net realized and unrealized gain (loss) on investments -- -- -- .004 (.002) ----------------------------------------------- Total from investment operations . . . . . . . . . . . . .017 .016 .026 .059 .059 ----------------------------------------------- Less distributions from net investment income . . . . . . (.017) (.016) (.026) (.055) (.061) ----------------------------------------------- Net asset value, end of period . . . . . . . . . . . . . $1.000 $1.000 $1.000 $1.000 $ .996 =============================================== TOTAL RETURN (%) (C) . . . . . . . . . . . . . . . . . . 1.76 1.62 2.58 6.10 6.02 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions) . . . . . . . . . 129 134 127 119 98 Ratio of operating expenses to average net assets (%) (a) .90 .93 .95 1.06 1.12 Ratio of net investment income to average net assets (%) 1.75 1.60 2.54 5.43 6.06 Portfolio turnover rate (%) . . . . . . . . . . . . . . . -- -- -- -- 39.88 (a) Reflects a per share reimbursement of expenses during the period by the Fund Manager of: $ .000 $ .002 $ .002 $ .001 $ -- (b) On August 1, 1991 the Fund implemented a 15.17 to 1.00 stock split and adopted its present name and investment objectives. Prior to that date, the Fund was known as the AARP Insured Tax Free Short Term Fund. Financial Highlights, for the years ended September 30, 1990 and 1991, have been restated to reflect the stock split and should not be considered representative of the present Fund. (c) Total returns in some periods were higher due to maintenance of the Fund's expenses.
94 AARP GNMA AND U.S. TREASURY FUND THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
Years Ended September 30, ------------------------------------------------ 1994 1993 1992 1991 1990 ------------------------------------------------ Net asset value, beginning of period . . . . . . . . . . $15.96 $16.19 $15.72 $14.95 $14.98 ------------------------------------------------ Income from investment operations: Net investment income . . . . . . . . . . . . . . . . .93 1.15 1.22 1.26 1.31 Net realized and unrealized gain (loss) on investments (1.23) (.23) .47 .77 (.03) ------------------------------------------------ Total from investment operations . . . . . . . . . . . . (.30) .92 1.69 2.03 1.28 ------------------------------------------------ Less distributions from net investment income . . . . . (.93) (1.15) (1.22) (1.26) (1.31) ------------------------------------------------ Net asset value, end of period . . . . . . . . . . . . . $14.73 $15.96 $16.19 $15.72 $14.95 ================================================ TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . (1.90) 5.89 11.19 14.12 8.86 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions) . . . . . . . . . 5,585 6,712 5,232 3,311 2,583 Ratio of operating expenses to average net assets (%) . . .66 .70 .72 .74 .79 Ratio of net investment income to average net assets (%) 6.09 7.15 7.69 8.23 8.71 Portfolio turnover rate (%) . . . . . . . . . . . . . . . 114.54 105.49 74.33 86.64 60.54 - -------------------------------------------------------------------------------------------------------------------------------
AARP HIGH QUALITY BOND FUND THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
Years Ended September 30, ------------------------------------------------ 1994 1993 1992 1991 1990 ------------------------------------------------ Net asset value, beginning of period . . . . . . . . . . $17.19 $16.44 $15.71 $14.63 $15.04 ------------------------------------------------ Income from investment operations: Net investment income (a) . . . . . . . . . . . . . . .85 .93 1.03 1.10 1.17 Net realized and unrealized gain (loss) on investments (1.76) .93 .73 1.08 (.41) ------------------------------------------------ Total from investment operations . . . . . . . . . . . . (.91) 1.86 1.76 2.18 .76 ------------------------------------------------ Less distributions: Net investment income . . . . . . . . . . . . . . . . (.85) (.93) (1.03) (1.10) (1.17) Net realized gains on investments . . . . . . . . . . -- (.18) -- -- -- In excess of net realized gains on investments . . . . (.38) -- -- -- -- ------------------------------------------------ Total distributions . . . . . . . . . . . . . . . . . . . (1.23) (1.11) (1.03) (1.10) (1.17) ------------------------------------------------ Net asset value, end of period . . . . . . . . . . . . . $15.05 $17.19 $16.44 $15.71 $14.63 ================================================ TOTAL RETURN (%) (b) . . . . . . . . . . . . . . . . . . (5.55) 11.88 11.56 15.44 5.21 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions) . . . . . . . . . 568 604 384 201 151 Ratio of operating expenses to average net assets (%) (a) .95 1.01 1.13 1.17 1.14 Ratio of net investment income to average net assets (%) 5.31 5.64 6.40 7.26 7.86 Portfolio turnover rate (%) . . . . . . . . . . . . . . . 63.75 100.98 63.00 90.43 47.39 (a) Reflects a per share reimbursement of expenses during the period by the Fund Manager of: $ -- $ -- $ -- $ -- $ .009 (b) Total returns in some periods were higher due to maintenance of the Fund's expenses.
95 FINANCIAL HIGHLIGHTS AARP INSURED TAX FREE GENERAL BOND FUND THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
Years Ended September 30, ------------------------------------------------ 1994 1993 1992 1991 1990 ------------------------------------------------ Net asset value, beginning of period . . . . . . . . . . $19.00 $17.88 $17.30 $16.12 $16.61 ------------------------------------------------ Income from investment operations: Net investment income . . . . . . . . . . . . . . . . .86 .90 .93 1.00 1.04 Net realized and unrealized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . (1.67) 1.55 .75 1.18 (.24) ------------------------------------------------ Total from investment operations . . . . . . . . . . . (.81) 2.45 1.68 2.18 .80 ------------------------------------------------ Less distributions: Net investment income . . . . . . . . . . . . . . . . (.86) (.90) (.93) (1.00) (1.04) Net realized gains on investments . . . . . . . . . . (.34) (.43) (.17) -- (.25) In excess of net realized gains on investments . . . . (.06) -- -- -- -- ------------------------------------------------ Total distributions . . . . . . . . . . . . . . . . . . . (1.26) (1.33) (1.10) (1.00) (1.29) ------------------------------------------------ Net asset value, end of period . . . . . . . . . . . . . $16.93 $19.00 $17.88 $17.30 $16.12 ================================================ TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . (4.48) 14.31 10.01 13.85 4.89 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions) . . . . . . . . . 1,914 2,087 1,487 1,068 771 Ratio of operating expenses to average net assets (%) . . .68 .72 .74 .77 .80 Ratio of net investment income to average net assets (%) 4.80 4.90 5.31 5.92 6.29 Portfolio turnover rate (%) . . . . . . . . . . . . . . . 38.39 47.96 62.45 32.18 48.24 - -------------------------------------------------------------------------------------------------------------------------------
AARP BALANCED STOCK AND BOND FUND THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS. For the Period February 1, 1994 (c) to September 30, 1994 --------------------- Net asset value, beginning of period . . . . . . . . . . . . . . . . $15.00 ------ Income from investment operations: Net investment income . . . . . . . . . . . . . . . . . . . . . . .25 Net realized and unrealized loss on investments . . . . . . . . . (.37)(d) ------ Total from investment operations . . . . . . . . . . . . . . . . . . (.12) ------ Less distributions from net investment income . . . . . . . . . . . . (.24) ------ Net asset value, end of period . . . . . . . . . . . . . . . . . . . $14.64 ====== TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . . . . . . . (.78)(a) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions) . . . . . . . . . . . . . . . 175 Ratio of operating expenses to average net assets (%) . . . . . . . . 1.31(b) Ratio of net investment income to average net assets (%) . . . . . . 3.58(b) Portfolio turnover rate (%) . . . . . . . . . . . . . . . . . . . . . 49.32(b) (a) Not Annualized (b) Annualized (c) Commencement of operations (d) The amount shown for a share outstanding throughout the period does not accord with the change in the aggregate gains and losses in the portfolio securities during the period because of the timing of sales and repurchases of Fund shares in relation to fluctuating market values during the period.
96 AARP Growth and Income Fund THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
Years Ended September 30, ------------------------------------------------ 1994 1993 1992 1991 1990 ------------------------------------------------ Net asset value, beginning of period . . . . . . . . . . $32.91 $28.67 $26.97 $22.30 $26.11 ------------------------------------------------ Income from investment operations: Net investment income . . . . . . . . . . . . . . . . .94 .83 .97 1.11 1.11 Net realized and unrealized gain (loss) on investments 1.62 4.58 2.11 4.78 (3.69) ------------------------------------------------ Total from investment operations . . . . . . . . . . . . 2.56 5.41 3.08 5.89 (2.58) ------------------------------------------------ Less distributions from: Net investment income . . . . . . . . . . . . . . . . (1.13) (.87) (.90) (1.17) (1.15) Net realized gains on investments . . . . . . . . . . (.21) (.30) (.48) (.05) (.08) ------------------------------------------------ Total distributions . . . . . . . . . . . . . . . . . . . (1.34) (1.17) (1.38) (1.22) (1.23) ------------------------------------------------ Net asset value, end of period . . . . . . . . . . . . . $34.13 $32.91 $28.67 $26.97 $22.30 ================================================ TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . 7.99 19.38 11.59 27.19 (10.19) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions) . . . . . . . . . 2,312 1,560 748 392 248 Ratio of operating expenses to average net assets (%) . . .76 .84 .91 .96 1.03 Ratio of net investment income to average net assets (%) 3.00 3.08 3.84 4.61 4.76 Portfolio turnover rate (%) . . . . . . . . . . . . . . . 31.82 17.44 36.40 53.68 58.47 - -------------------------------------------------------------------------------------------------------------------------------
AARP Capital Growth Fund THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
Years Ended September 30, ------------------------------------------------ 1994 1993 1992 1991 1990 ------------------------------------------------ Net asset value, beginning of period . . . . . . . . . . $36.20 $30.30 $30.23 $23.32 $34.17 ------------------------------------------------ Income from investment operations: Net investment income (a) . . . . . . . . . . . . . . .00 .06 .15 .24 .54(b Net realized and unrealized gain (loss) on investments (1.51) 7.19 1.09 9.05 (9.27) ------------------------------------------------ Total from investment operations . . . . . . . . . . . . (1.51) 7.25 1.24 9.29 (8.73) ------------------------------------------------ Less distributions from: Net investment income . . . . . . . . . . . . . . . . (.05) (.14) (.23) (.59) (.19) Net realized gains on investments . . . . . . . . . . (2.90) (1.21) (.94) (1.79) (1.93) ------------------------------------------------ Total distributions . . . . . . . . . . . . . . . . . . . (2.95) (1.35) (1.17) (2.38) (2.12) ------------------------------------------------ Net asset value, end of period . . . . . . . . . . . . . $31.74 $36.20 $30.30 $30.23 $23.32 ================================================ TOTAL RETURN (%) (c) . . . . . . . . . . . . . . . . . . (4.70) 24.53 3.94 42.81 (26.94) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions) . . . . . . . . . 683 607 424 242 160 Ratio of operating expenses to average net assets (%) (a) .97 1.05 1.13 1.17 1.11 Ratio of net investment income to average net assets (%) .02 .22 .61 .90 2.00 Portfolio turnover rate (%) . . . . . . . . . . . . . . . 79.65 100.63 89.20 99.62 83.28 (a) Reflects a per share reimbursement of expenses during the period by the Fund Manager of: $ -- $ -- $ -- $ -- $ .009 (b) Net investment income per share includes non recurring dividend income amounting to $.18 per share. (c) Total returns in some periods were higher due to maintenance of the Fund's expenses.
97 NOTES TO FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES. The AARP Cash Investment Funds, consisting of the AARP High Quality Money Fund, the AARP Income Trust, consisting of the AARP GNMA and U.S. Treasury Fund and the AARP High Quality Bond Fund, the AARP Tax Free Income Trust, consisting of the AARP High Quality Tax Free Money Fund, (formerly AARP Insured Tax Free Short Term Fund), and the AARP Insured Tax Free General Bond Fund, and the AARP Growth Trust, consisting of the AARP Balanced Stock and Bond Fund, which commenced operations on February 1, 1994, AARP Growth and Income Fund, and the AARP Capital Growth Fund are each Massachusetts business trusts and are registered under the Investment Company Act of 1940, as amended, as open-end management investment companies. All funds are diversified. The AARP Cash Investment Funds, has one series, the AARP Growth Trust has three series and each of the other Trusts have two series. The Declaration of Trust of each Trust permits its Trustees to create an unlimited number of series and to issue an unlimited number of full and fractional shares of each separate series. The policies described below are followed consistently by the funds in preparation of their financial statements and are in conformity with generally accepted accounting principles. A. SECURITY VALUATION. The AARP High Quality Money Fund uses the penny rounding method of security valuation as permitted under Rule 2a-7 of the Investment Company Act of 1940. Under this method, securities for which market quotations are readily available and which have remaining maturities of sixty-one days or more from the date of valuation are valued at the mean between the over-the-counter bid and asked prices by an independent registered broker/dealer. On the sixtieth day prior to maturity and there- after until maturity, securities originally purchased with more than sixty days remaining to maturity are valued at amortized cost calculated daily, based upon the market valuation of the securities on the sixty-first day prior to maturity. The AARP High Quality Tax Free Money Fund uses the amortized cost method of security valuation as permitted under Rule 2a-7 of the Investment Company Act of 1940. Under this method, the value of a security is determined by adjusting its original cost to face value through the amor- tization of any acquisition discount or premium at a constant rate until maturity, which approximates market. Security valuation with respect to each of the remaining funds is performed in the following manner: Common and preferred stocks traded on national securities exchanges are valued at the most recent sale price on such exchange where the security is principally traded. If no sale occurred, the security is valued at the mean between the most recent bid and asked quotations on such exchanges. If there is no such bid and asked quotations the most recent bid quotation is used. Unlisted securities quoted on the National Association of Securities Dealers Automatic Quotation ("NASDAQ") System, for which there have been sales, are valued at the most recent sale price reported on such system. If there are no such sales, the value is the high or "inside" bid quotation. Unlisted securities which are not quoted on the NASDAQ System but are traded in another over-the-counter market are valued at the most recent sale price on such market. If no sale occurred, the security is valued at the mean between the most recent bid and asked quotations. If there are no such bid and asked quotations the most recent bid quotation is used. Portfolio debt securities with remaining maturities greater than sixty days are valued by pricing agents approved by the Trustees, which prices reflect broker/dealer-supplied valuations and electronic data processing techniques. If the pricing agents are unable to provide such quotations, the most recent bid quotation supplied by a bona fide market maker shall be used. Short-term investments with remaining maturities of 60 days or less are valued at amortized cost. Variable rate demand notes are carried at cost which together with accrued interest approximates market. The value of all other securities is determined in good faith under the direction of the Trustees. B. REPURCHASE AGREEMENTS. The AARP High Quality Money Fund, AARP Growth Funds and AARP GNMA and U.S. Treasury Fund regularly invest in repurchase agreements. Each of the AARP funds may enter into repurchase agreements with selected banks and broker/dealers whereby each fund, through its custodian, receives delivery of the securities collateralizing 98 repurchase agreements, the amount of which at the time of purchase and each subsequent business day is required to be maintained at such a level that the market value, depending on the maturity of the underlying collateral, is equal to at least 101% of the resale price. C. COVERED CALL OPTIONS. The AARP growth funds and the AARP income funds may write (sell) exchange listed and over-the-counter covered call option contracts on their securities. When a fund writes a covered call option, it gives the purchaser of the option the right to buy the underlying security at the price specified in the option (the "exercise price") at any time during the option period, generally ranging up to nine months. If the option expires unexercised, the fund will realize a capital gain to the extent of the net premium received. If the option is terminated through a closing purchase transaction, the fund will realize a capital gain (or loss if the cost of the closing purchase transaction exceeds the net premium received) and the liability will be elimi- nated. If the option is exercised, a decision over which a fund has no control, the fund must sell the underlying security to the option holder at the exercise price. The proceeds of the sale are increased by the net premium originally received and the fund will realize a capital gain or loss on the transaction. By writing a covered call option, the fund foregoes, in exchange for the premium less any commission paid, the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price. When a fund writes a covered call option, the premium received by the fund is included in the fund's "Statement of Assets and Liabilities" as a deferred credit (liability). The liability of a traded option will be marked-to-market at the last sale price or, in the absence of a sale, the mean between the closing bid and asked price or at the most recent asked price if no bid or asked price is available. Over-the-Counter written options are valued using dealer supplied valuations. D. OPTIONS ON FUTURES CONTRACTS. Each of the funds in the AARP Income Trust, the AARP Insured Tax Free General Bond Fund and the AARP Balanced Stock and Bond Fund may purchase and write (sell) call and put options on futures contracts which are traded on exchanges for bona fide hedging purposes. Options on futures contracts are valued in accordance with the security and options valuation policies described above. E. FUTURES CONTRACTS. Each of the funds in the AARP Income Trust, the AARP Insured Tax Free General Bond Fund and the AARP Balanced Stock and Bond Fund may enter into futures contracts. Such contracts may either be based on indices of particular groups of securities (index futures contracts) or be for the purchase or sale of a debt obligation (debt futures contracts). Upon entering into a futures contract, the fund is required by the exchange to deposit cash or pledge U.S. Government securities with a broker in an amount (initial margin) equal to a certain percentage of the purchase price indicated in the futures contract. Subsequent payments, which are dependent on the daily fluctuations in the value of the underlying index or security, are made or received by the fund each day (daily variation margin). The aggregate of these payments or receipts through the expiration of the futures contracts is recorded for book purposes as unrealized gains or losses by the fund. If the fund enters into a closing transaction, it will realize, for book purposes, a gain or loss equal to the difference between the value of the futures contract at the time it was opened or purchased and its value at the time it was closed. Open futures contracts are valued at the most recent settlement price. Certain risks may arise upon entering into futures contracts from the contingency of imperfect market conditions. F. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each of the funds in the AARP Growth Trust, in connection with portfolio purchases and sales of securities denominated in a foreign currency, may enter into forward foreign currency exchange contracts ("contracts"). Additionally, from time to time, each fund may enter into contracts to hedge certain foreign currency denominated assets. Contracts are recorded at market value. Certain risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts. Realized gains or losses arising from such transactions are included in net realized gain (loss) from foreign currency related transactions. 99 NOTES TO FINANCIAL STATEMENTS G. FOREIGN CURRENCY TRANSLATIONS. Foreign currency transactions from foreign investment activity are translated into U.S. dollars on the following basis: (i) market value of investment securities, other assets and liabilities at the daily rates of exchange, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing on the respective dates of such transactions. The Funds do not isolate that portion of gains and losses on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains and losses from investments. Net realized and unrealized gain (loss) from foreign currency related transactions includes gains and losses between trade and settlement dates on securities transactions, gains and losses arising from the sales of foreign currency, and gains and losses between the ex and payment dates on dividends, interest, and foreign withholding taxes. H. SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME. Securities transactions are accounted for on the trade date basis and dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Original issue discount on securities purchased is accreted on an effective yield basis over the life of the security. Acquisition discount is accreted on taxable securities purchased with original maturity dates of one year or less. Premium on securities purchased by the AARP Tax Free Income Trust is amortized on an effective yield basis over the life of the security. The funds use the specific identification method for determining the realized gain or loss on investments sold for both financial and federal income tax reporting purposes. I. FEDERAL INCOME TAXES. Each of the funds is treated as a single entity for federal income tax purposes. It is the policy of each fund to comply with the requirements of the Internal Revenue Code as amended which are applicable to regulated investment companies, and to distribute all of its taxable and tax exempt income to its shareholders. Accordingly, the funds paid no U.S. federal income taxes, and no provisions for federal income taxes were required. J. DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of each fund is declared as a dividend to shareholders. The dividends from AARP High Quality Money Fund and each of the funds in the AARP Income Trust and the AARP Tax Free Income Trust are declared daily and distributed monthly. The dividends from AARP Balanced Stock and Bond Fund and AARP Growth and Income Fund are declared and paid quarterly. The dividends from AARP Capital Growth Fund are declared and paid annually. During any particular year, net realized gains from securities transactions for each fund which are in excess of any available capital loss carryforwards, would be taxable to the fund if not distributed and, therefore, will be distributed to shareholders in the following fiscal year. The AARP High Quality Money Fund takes into account realized gains and losses on the sales of securities held less than one year in its daily distributions. An additional distribution may be made by each fund to the extent necessary to avoid the payment of a four percent federal excise tax. The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal income tax rules and regulations which may differ from generally accepted accounting principles. These differences relate primarily to investments in options, futures, forward contracts, foreign denominated investments and mortgage backed securities. As a result, net investment income and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund. K. EXPENSES. Each fund is charged for those expenses that are directly attributable to it, such as management, custodian, audit, and certain shareholder service fees. Expenses that are not directly attributable to a fund, such as reports to shareholders, portions of Trustees' and legal fees, are allocated among all the funds. L. ORGANIZATION COST. Costs incurred by the AARP Balanced Stock and Bond Fund in connection with its organization and initial registration of shares have been deferred and are being 100 amortized on a straight-line basis over a five-year period. M. PORTFOLIO INSURANCE. The cost of premiums paid by the AARP Insured Tax Free General Bond Fund for insurance, which covers individual securities, is non-cancellable and runs the life of such securities, is added to the cost basis of such securities. This insurance provides for the timely payment of principal and interest on these securities when due and protects the fund against loss from default by the Municipal issuer. It does not protect the investor from losses due to changes in market values. N. SECURITIES PURCHASED ON A FORWARD DELIVERY OR WHEN-ISSUED BASIS. The AARP High Quality Money Fund, each of the funds in the AARP Income Trust and AARP Tax Free Income Trust, and AARP Balanced Stock and Bond Fund may purchase securities on a forward delivery or when-issued basis. Municipal, corporate and government securities are frequently offered on a forward delivery or when-issued basis. At the time the fund makes the commitment to purchase a security on a forward delivery or when-issued basis, the price of the underlying security is fixed. The fund will record the transaction at the time of the commitment and reflect the value of the security in determining its net asset value. The settlement date of the transaction can occur within one month or more after the date the commitment was made. During the period between purchase and settlement date, no payment is made on behalf of the fund and no interest accrues to the fund. NOTE 2. MANAGEMENT FEE AND OTHER RELATED TRANSACTIONS. On January 13, 1994, the Shareholders approved, effective February 1, 1994, a new investment management and advisory agreement (the "Management Agreement") between each Trust and Scudder (the "Fund Manager"). Under the new Management Agreement, the management fee consists of two elements: a Base Fee and an Individual Fund Fee. The Base Fee is calculated as a percentage of the combined net assets of all of the AARP Funds ("Program Assets"). Each AARP Fund pays, as its portion of the Base Fee, an amount equal to the ra- tio of its daily net assets to the daily net assets of all of the AARP Funds. The Annual Base Fee is calculated as follows: .35%, of the first $2.0 billion of such assets, .33% of the next $2.0 billion of such assets, .30% of the next $2.0 billion of such assets, .28% of the next $2.0 billion of such assets, .26% of the next $3.0 billion of such assets, .25% of the next $3.0 billion of such assets, .24% of such assets in excess of $14.0 billion. In addition to the Base Fee Rate, each Fund agrees to pay the Fund Manager a flat Individual Fund Fee based on the average daily net assets of that Fund. The Individual Fund Fee Rate recognizes the different characteristics of each Fund, the varying levels of complexity of investment research and securities trading required to manage each Fund. The Individual Fund Fee Rate is calculated at the following percentages of the average daily net assets of each fund: .10% for AARP High Quality Money Fund and AARP High Quality Tax Free Money Fund; .12% for AARP GNMA and U.S. Treasury Fund; .19% for AARP High Quality Bond Fund, AARP Insured Tax Free General Bond Fund, AARP Balanced Stock and Bond Fund and AARP Growth and Income Fund; .32% for AARP Capital Growth Fund. The amount for each fund is shown in the Statement of Operations as Management Fee. As manager of the assets of each Fund, the Fund Manager directs the investments of each Fund in accordance with its investment objectives, policies and restrictions. In addition to portfolio management services, the Fund Manager under the Management Agreement will provide certain administrative services in accordance with such Agreement. The Fund Manager has also entered into a Member Ser- vices Agreement with AARP Financial Services Corp. ("AFSC"), a subsidiary of AARP, and pays portions of its investment management and advisory fee to AFSC. Under the previous Management Agreement (the "Agreement") which was in effect prior to February 1, 1994, the approximate annual fee rate was .49% for AARP High Quality Bond Fund, AARP High Quality Tax Free Money Fund, AARP Insured Tax Free General Bond Fund and AARP Growth and Income Fund; .62% for AARP Capital Growth Fund; and .48% of the first $250 million of average daily net assets declining to .38% of such assets over $2.0 billion for AARP High Quality Money Fund; and .45% of the first $2.0 billion of average daily net assets declining to .43% of such assets over $3.0 billion for AARP GNMA and U.S. Treasury Fund. 101 NOTES TO FINANCIAL STATEMENTS Both the Management Agreement and the Agreement provide that the Fund Manager will reimburse the funds for annual expenses in excess of the lowest state limitations imposed, exclusive of taxes, brokerage commissions, interest and extraordinary expenses. The Fund Manager agreed to maintain the annualized expenses of the AARP High Quality Tax Free Money Fund at not more than 0.90% of average daily net assets until February 1, 1995. Effective February 1, 1994, the Fund Manager agreed to maintain the annualized expenses of the AARP Balanced Stock and Bond Fund at not more than 1.50% of average net assets until September 30, 1994. The amount of expenses reimbursed by the Fund Manager, if any, for each fund has been shown in the Statement of Operations as Reimbursement of expenses from Fund Manager. Each Trust has a shareholder servicing agreement with Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of Scudder. As shareholder servicing agent, SSC provides various transfer agent, dividend disbursing, and shareholder communication functions. The amount for each fund has been shown in the Statement of Operations as Transfer and Dividend Disbursing Expense. Each fund pays each Trustee not affiliated with Scudder or AARP $2,000 annually, $270 for each Trustees' meeting, $200 for each audit committee meeting attended, and $100 for other committee meetings, plus expenses, subject to certain maximums per Trustee for meetings held jointly with other funds. The amount for each fund has been shown in the Statement of Operations as Trustees' fees and expenses. NOTE 3. RECLASSIFICATION OF CAPITAL ACCOUNTS. As required, effective October 1, 1993, the Funds have adopted the provisions of Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies (SOP)." In implementing the SOP, the AARP GNMA and U.S. Treasury Fund has reclassified $14,728,770 to accumulated distributions in excess of net investment income and $93,528,045 from accumulated net realized capital gain (loss) for a net decrease of $78,799,275 to additional paid in capital. The AARP High Quality Bond Fund has reclassified $719,941 to accumulated distributions in excess of net investment income and $221,919 to accumulated net realized capital gain (loss) for a net increase of $498,022 to additional paid in capital. The AARP Insured Tax Free General Bond Fund has reclassified $35,409 to accumulated distributions in excess of net investment income and $383,778 from accumulated net realized capital gain (loss) for a net increase of $419,187 to additional paid in capital. The AARP Growth and Income Fund has reclassified $212,415 from accumulated net investment income (loss) and $318,201 to accumulated net realized capital gain (loss) for a net decrease of $105,786 to additional paid in capital. The AARP Capital Growth Fund has reclassified $152,914 to accumulated net investment income (loss) and $152,952 from accumulated net realized capital gain (loss) for a net increase of $38 to additional paid in capital. These reclassifications, which have no impact on the net asset value of the Funds, are primarily attributable to certain differences in the computation of distributable income and capital gains under federal income tax rules and regulations versus generally accepted accounting principles. The statement of changes in net assets and financial highlights have not been restated to reflect this change in presentation. 102 Report of Independent Accountants 160 Federal Street Telephone 617 439 4390 Boston MA Price Waterhouse LLP November 8, 1994 To the Board of Trustees and Shareholders of AARP Cash Investment Funds, AARP Income Trust, AARP Tax Free Income Trust and AARP Growth Trust In our opinion, the accompanying statements of assets and liabilities, including the shares, principal amount, and value of the securities in the lists of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial positions of AARP Cash Investment Funds which is comprised of AARP High Quality Money Fund (formerly AARP Money Fund), AARP Income Trust which is comprised of AARP GNMA and U.S. Treasury Fund and AARP High Quality Bond Fund, AARP Tax Free Income Trust which is comprised of AARP High Quality Tax Free Money Fund (formerly AARP Insured Tax Free Short Term Fund) and AARP Insured Tax Free General Bond Fund and AARP Growth Trust which is comprised of AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund and AARP Capital Growth Fund at September 30, 1994 and the results of their operations, the changes in their net assets, and their financial highlights for each of the periods indicated in conformity with generally accepted accounting principles. These financial statements and the financial highlights (thereafter referred to as "financial statements") are the responsibility of the Trusts' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted accounting standards which require that we plan and perform the audits to obtain a reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities owned at September 30, 1994 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. /s/Price Waterhouse LLP Officers and Trustees Adelaide Attard Trustee of AARP Income Trust and AARP Growth Trust; Consultant, Gerontology; Commissioner, County of Nassau, NY Department of Senior Citizen Affairs (1971-1991); Board Member, American Association of International Aging (1983-1992); Member, NYS Community Services for the Elderly Advisory Council _ Appointed by Governor (1987-1990); Chairperson, Federal Council on Aging (1981-1986); U.S. Senior Advisor to 1982 United Nations World Assembly on Aging. Cyril F. Brickfield Trustee of AARP Income Trust, AARP Tax Free Income Trust, AARP Growth Trust; Honorary Trustee, AARP Cash Investment Funds; Honorary President and Special Counsel, American Association of Retired Persons; Board Member, American Association of International Aging, National Alzheimer's Association, and American Federation of Aging Research (AFAR). Robert N. Butler, M.D. Trustee of AARP Income Trust and AARP Growth Trust; Brookdale Professor of Geriatrics and Adult Development; Chairman, Henry L. Schwartz Department of Geriatrics and Adult Development, Mount Sinai Medical Center; Former Director, National Institute on Aging, National Institute of Health (1976- 1982). Linda C. Coughlin President and Trustee of AARP Cash Investment Funds, AARP Income Trust, AARP Tax Free Income Trust and AARP Growth Trust; Director of Scudder Investor Services, Inc.; Managing Director and Member, Board of Directors of Scudder, Stevens & Clark, Inc. Horace B. Deets Vice Chairman and Trustee of AARP Cash Investment Funds, AARP Income Trust, AARP Tax Free Income Trust and AARP Growth Trust; Executive Director, American Association of Retired Persons; Member, Board of Councilors, Andrus Gerontology Center; Member of the Board, HelpAge International. Mary Johnston Evans Trustee of AARP Cash Investment Funds, AARP Tax Free Income Trust and AARP Growth Trust; Director, Scudder New Europe Fund, Inc.; Director, Baxter International, Inc., Delta Air Lines, Inc., Household International, Inc., The Sun Company and Dun & Bradstreet Corporation. Edgar R. Fiedler Trustee of AARP Cash Investment Funds, AARP Income Trust and AARP Tax Free Income Trust; Vice President and Economic Counsellor, The Conference Board, Inc.; Director or Trustee, The Brazil Fund, Inc., Scudder Fund, Inc., Scudder Institutional Fund, Inc.; Director of The Stanley Works, Zurich- American Insurance Company, HT Insight Funds, and Emerging Mexico Fund. Cuyler W. Findlay Chairman and Trustee of AARP Cash Investment Funds, AARP Income Trust, AARP Tax Free Income Trust, and AARP Growth Trust; Senior Vice President and Director, Scudder Investor Services.; Managing Director, Scudder, Stevens & Clark, Inc.; Trustee or Director of Scudder GNMA Fund, Scudder Cash Investment Trust, Scudder Fund, Inc., and Scudder Institutional Fund, Inc. Eugene P. Forrester Trustee of AARP Income Trust and AARP Tax Free Income Trust; Consultant, International Trade; Lt. General (Retired), U.S. Army; Command General, U.S. Army Western Command, Honolulu (1981-1983); Consultant, Digital Equipment Corp., DHI, Philip Morris, PICS Previews, and Whittle Communications. Wayne F. Haefer Trustee of AARP Income Trust, AARP Tax Free Income Trust, and AARP Growth Trust; Director, Membership Division of AARP; Secretary, Employee's Pension and Welfare Trusts of AARP and Retired Persons Services, Inc.; Formerly Director, Administration and Data Management Division of AARP. William B. Macomber Trustee of AARP Tax Free Income Trust and AARP Growth Trust; Formerly Teacher, History and Government, Nantucket High School, Nantucket, MA; Director, Becton, Dickinson & Co.; Trustee, Carnegie Endowment for International Peace; Formerly President, The Metropolitan Museum of Art (1978-1987) and U.S. Ambassador to Turkey and to Jordan. George L. Maddox, Jr. Trustee of AARP Income Trust and AARP Tax Free Income Trust; Director and Professor, Long Term Care Resources Program, Duke University Medical Center; Senior Fellow, Center for the Study of Aging and Human Development, Duke University; Professor of Sociology, Departments of Sociology and Psychiatry, Duke University. Robert J. Myers Trustee of AARP Cash Investment Funds, AARP Income Trust and AARP Growth Trust; Actuarial Consultant; Formerly Executive Director, National Commission on Social Security Reform (1982-1983); Director, NASL Series Trust, Inc.; Formerly Director, Board of Pensions, Evangelical Lutheran Church in America; Former Chairman, Commission on Railroad Retirement Reform; Member, Commission on the Social Security Notch Issue (appointed by Senate Majority Leader), 1993. Joseph S. Perkins Trustee of AARP Cash Investment Funds, AARP Growth Trust, AARP Income Trust and AARP Tax Free Income Trust; Director, American Association of Retired Persons; Corporate Retirement Manager, Polaroid Corporation. James H. Schulz Trustee of AARP Tax Free Income Trust and AARP Growth Trust; Professor of Economics and Kirstein Professor of Aging Policy, Policy Center of Aging, Florence Heller School, Brandeis University. Mildred M. Seltzer Trustee of AARP Cash Investment Funds and AARP Income Trust; Professor Emerita, Department of Sociology and Anthropology, Miami University, Oxford, Ohio; Senior Fellow, The Scripps Gerontology Center, Miami University. Gordon Shillinglaw Trustee of AARP Cash Investment Funds, AARP Tax Free Income Trust, AARP Growth Trust; Professor Emeritus of Accounting, Columbia University Graduate School of Business; Director and Treasurer, FERIS Foundation of America; Director or Trustee, Scudder Equity Trust, Scudder Development Fund, Scudder International Fund, Inc. and Scudder Mutual Funds, Inc. Edward Creed* Vice President Thomas W. Joseph* Vice President David S. Lee* Vice President and Assistant Treasurer Douglas M. Loudon* Vice President Thomas F. McDonough* Vice President and Assistant Secretary Pamela A. McGrath* Vice President and Treasurer Edward J. O'Connell* Vice President and Assistant Treasurer Kathryn L. Quirk* Vice President and Secretary Howard Schneider* Vice President Cornelia M. Small* Vice President *Scudder, Stevens & Clark, Inc. Telephone Numbers and Addresses Shareholder Service Line 1-800-253-2277 Our knowledgeable AARP Mutual Fund Representatives are available to answer questions about the Program or your account Monday through Friday, between 8:00 a.m. and 6:00 p.m., eastern time. Transactions can be made Monday through Friday between 8:00 a.m. and 4:00 p.m., eastern time. WRITE: AARP Investment Program P.O. Box 2540 Boston, MA 02208-2540 AARP Investment Program (for overnight and certified mail) 1099 Hingham Street Rockland, MA 02370 Easy-Access Line 1-800-631-4636 Shareholders may call for a recorded message to find out fund performance information and, with a touch-tone telephone, current account information, 24 hours a day, 7 days a week. Also, with a touch-tone phone you can exchange or sell (redeem) your AARP Mutual Fund shares. Transactions by Fax 1-800-821-6234 If you have access to a fax machine, you can fax transaction requests. Any exchange or redemption request received after business hours will be processed the next business day. All faxes are kept confidential. Telecommunications Device for the Deaf and Speech Impaired (TDD) 1-800-634-9454 AARP members with hearing or speech impairments and access to TDD equipment can communicate with the AARP Investment Program Monday through Friday between 8:00 a.m. and 6:00 p.m., eastern time. Transactions can be made between 8:00 a.m. and 4:00 p.m., eastern time. TAX INFORMATION Of the dividends paid from net investment income by the AARP High Quality Tax Free Money Fund and the AARP Insured Tax Free General Bond Fund for the Funds' fiscal years ending September 30, 1994, 100% constituted exempt- interest dividends for regular federal income tax purposes. Pursuant to Section 852 of the Internal Revenue Code, the AARP GNMA and U.S. Treasury Fund, the AARP High Quality Bond Fund, the AARP Insured Tax Free General Bond, the AARP Growth and Income Fund and the AARP Capital Growth Fund designate $39,226,084, $975,953, $219,529, $48,608,627, and $16,466,874, respectively, as capital gain dividends for their fiscal years ended September 30, 1994. In January 1995 you will receive federal tax information on all distributions paid to your account in calendar year 1994. -----END PRIVACY-ENHANCED MESSAGE-----