Scudder
Short Term
Bond Fund
Annual Report
December 31, 1998
Pure No-Load(TM) Funds
Seeks to provide a high level of income consistent with a high degree of
principal stability.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Short Term Bond Fund
- --------------------------------------------------------------------------------
Date of Inception: 4/2/84 Total Net Assets as of Ticker Symbol: SCSTX
12/31/98: $992 million
- --------------------------------------------------------------------------------
o Interest rates generally declined and bond prices rose over the year with
long-term U.S. Treasury securities providing the best performance, especially in
the third quarter.
o Scudder Short Term Bond Fund provided a total return of 4.34% for the period.
o The Fund maintained its four star rating from Morningstar(TM) for its
risk-adjusted performance among 1,488 taxable bond funds as of December 31,
1998^1.
Table of Contents
3 Letter from the Fund's President 17 Financial Highlights
4 Performance Update 18 Notes to Financial Statements
5 Portfolio Summary 22 Report of Independent Accountants
6 Portfolio Management Discussion 23 Shareholder Meeting Results
9 Glossary of Investment Terms 24 Officers and Trustees
10 Investment Portfolio 25 Investment Products and Services
14 Financial Statements 26 Scudder Solutions
^1 Source: Morningstar. Ratings are subject to change monthly and are
calculated from the Fund's 3-, 5-, and 10-year average annual returns in
excess of 90-day Treasury bill returns with appropriate fee adjustments,
and a risk factor that reflects Fund performance below 90-day T-bill
returns. In an investment category, the top 10% of funds receive 5 stars
and the next 22.5% receive 4 stars. In the taxable bond category, the Fund
received a 4-star rating for the three-year period, a 3-star rating for the
five-year period and a 4-star rating for the ten-year period among 1,488,
987, and 368 funds, respectively. Past performance is no guarantee of
future results.
2 - Scudder Short Term Bond Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
The past year has been a nerve-wracking period for many investors. Although
1998 closed with most asset classes posting strong returns, extreme volatility
and dramatic news events left market participants on edge for much of the year.
For the better part of this decade, the investment environment in the United
States has been marked by solid economic growth, low inflation, and falling
interest rates. With a great deal of media attention focused on these trends, it
was easy for investors to lose sight of the fact that such ideal conditions
might not always prevail. When the various global crises began to destabilize
the markets this summer, even relatively conservative investments -- such as the
high-quality corporate bonds held in Short Term Bond Fund -- could not escape
the downdraft. As the subsequent rebound has demonstrated, however, a long-term
perspective that stresses the importance of patience and diversification
continues to be a sound investment philosophy.
Scudder Short Term Bond Fund posted a total return of 4.34%, for the period,
and provided a 30-day net annualized SEC yield of 5.23% as of December 31. A
detailed discussion of the market conditions, investment strategy, and outlook
of the Fund's management team begins on page 6.
For those of you who are interested in new Scudder products, we recently
introduced Scudder Corporate Bond Fund, which seeks to provide a high level of
current income by investing in a portfolio consisting primarily of investment
grade bonds. The Fund's management team will utilize a research-intensive
process to diversify among intermediate-term corporate bonds in a wide range of
sectors and industries, and to seek below-investment grade issues positioned for
credit rating improvements. Scudder Corporate Bond Fund is a compelling option
for investors seeking high monthly income, as well as those wishing to increase
their fixed income exposure.
Thank you for your continued investment in Scudder Short Term Bond Fund. If
you have any questions about your investment, please call Scudder Investor
Information at 1-800-225-2470, or visit our Web site at www.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Short Term Bond Fund
3 - Scudder Short Term Bond Fund
<PAGE>
Performance Update as of December 31, 1998
- ----------------------
Fund Index Comparisons
- ----------------------
Total Return
- ---------------------------------------------------
Period Ended Growth of Average
12/31/98 $10,000 Cumulative Annual
- ---------------------------------------------------
Scudder Short Term Bond Fund
- ---------------------------------------------------
1 Year $ 10,434 4.34% 4.34%
5 Year $ 12,374 23.74% 4.35%
10 Year* $ 20,094 100.94% 7.23%
- ---------------------------------------------------
Salomon Brothers Inc. Treasury/Government
Sponsored Corporate Index (1-3 years)
- ---------------------------------------------------
1 Year $ 10,695 6.95% 6.95%
5 Year $ 13,386 33.86% 6.00%
10 Year* $ 20,484 104.84% 7.43%
- ---------------------------------------------------
- ------------------------------
Growth of a $10,000 Investment
- ------------------------------
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
CHART DATA:
Salomon Brothers Inc.
Treasury/Government
Sponsored Corporate Index Scudder Short Term Bond
(1-3 years) Fund
------------------------- -----------------------
'88 10000 10000
'89 11092 11328
'90 12170 12448
'91 13611 14237
'92 14488 15011
'93 15303 16239
'94 15396 15773
'95 17073 17467
'96 17955 18141
'97 19152 19259
'98 20484 20094
Yearly periods ended December 31
Salomon Brothers Inc. Treasury/Government Sponsored Corporate Index (1-3 years)
is composed of Treasury, Government Sponsored Agency, and Corporate securities
with maturities of one to three years. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or expenses.
- ---------------------------------
Returns and Per Share Information
- ---------------------------------
Yearly Periods Ended
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
ILLUSTRATING THE FUND TOTAL RETURN (%) AND
INDEX TOTAL RETURN (%)
CHART DATA:
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value $ 11.71 $ 11.72 $ 12.25 $ 11.93 $ 12.01 $ 10.91 $ 11.35 $ 11.05 $ 11.04 $ 10.87
- -----------------------------------------------------------------------------------------------------------------------------------
Income Dividends $ .83 $ 1.09 $ 1.08 $ .96 $ .80 $ .76 $ .71 $ .72 $ .67 $ .64
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Gains Distributions $ .09 $ -- $ -- $ -- $ .07 $ -- $ -- $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Fund Total Return (%) 13.20 9.88 14.38 5.43 8.18 -2.87 10.74 3.86 6.17 4.34
- -----------------------------------------------------------------------------------------------------------------------------------
Index Total Return (%) 10.93 9.70 11.85 6.44 5.63 .60 10.89 5.16 6.67 6.95
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All performance is historical, 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. If the Adviser had not reimbursed the Fund, the one
year total return for the Fund for the year ended December 31, 1998 would have
been lower.
* The Fund, with its current name and objective, commenced operations on July 3,
1989. Performance figures include the performance of its predecessor, the
General 1994 Portfolio of Scudder Target Fund. Since adopting its current
objective, the cumulative and average annual returns are 86.39% and 6.77%,
respectively.
4 - Scudder Short Term Bond Fund
<PAGE>
Portfolio Summary as of December 31, 1998
- ---------------
Diversification
- ---------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Corporate Bonds 27%
U.S. Government & Treasury
Obligations 21%
Asset-Backed Securities 19%
Collateralized Mortgage Obligations 13%
Government National Mortgage
Association 7%
U.S. Government Agency Pass-Thrus 7%
Cash Equivalents 5%
Foreign Bonds-- U.S.$ Denominated 1%
---------------------------------------------
100%
---------------------------------------------
The high relative yields of corporate bonds have prompted us
to increase our weighting in this sector.
- -------
Quality
- -------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
U.S. Government & Treasury
Obligations 35%
AAA* 24%
AA 10%
A 7%
BBB 23%
NR 1%
---------------------------------------------
100%
---------------------------------------------
Weighted Average Quality: AA
*Category includes cash equivalents
We have maintained an emphasis on high quality bonds.
- ------------------
Effective Maturity
- ------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Under 1 year 20%
1 - 5 years 76%
5 - 8 years 3%
8 years or greater 1%
---------------------------------------------
100%
---------------------------------------------
Weighted average effective maturity: 2.72
years
As rates declined throughout the year, we gradually
increased the Fund's duration.
For more complete details about the Fund's investment portfolio, see page 10. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
5 - Scudder Short Term Bond Fund
<PAGE>
Portfolio Management Discussion
In the following interview, Lead Portfolio Manager Stephen Wohler discusses
Scudder Short Term Bond Fund's strategy and the market environment in the
twelve-month period ended December 31, 1998.
Q: How would you characterize the investment environment over the last twelve
months?
A: The past year certainly has been a roller coaster ride for fixed-income
investors. In the first half of the year, bonds benefited from the favorable
combination of moderate growth, low inflation, and a surplus in the Federal
budget. In July, however, financial markets began to unravel following Russia's
debt default and the bailout of the U.S. hedge fund Long Term Capital
Management. In the months following these events, yields on Treasuries fell to
historic lows (and prices rose) as investors sought the highest quality, most
liquid issues available. Prices of corporate bonds and asset-backed securities,
on the other hand, fell sharply when liquidity evaporated from the market. This
trend reversed course in late September and early October, when the Federal
Reserve's decision to cut the Fed Funds rate three times in seven weeks spurred
bond prices upward. To some degree, this was just what the markets needed. In
the fourth quarter, Treasuries gave up two-thirds of their third quarter gains
when recession fears abated, helping corporate bonds, mortgages, and
asset-backed securities to outperform Treasuries for the first time in 1998.
Q: How did the Fund perform in this difficult environment?
A: The Fund posted a total return of 4.34% for the twelve-month period, trailing
the 6.95% return of its unmanaged benchmark, the Salomon Brothers
Treasury/Government Sponsored Corporate Index. The primary reason for the
underperformance was a yield-oriented strategy which led us to overweight
corporate, asset-backed securities and mortgages. While we retained a positive
outlook on the fundamental strengths of the Fund's holdings, events in the
overall bond market adversely affected these issues regardless of their
individual merits.
Q: What factors led you to take this overweighted position in corporate bonds?
A: Our goal is to take a prudent, long-term approach to investing in high
quality securities, with safety as a primary consideration. In general, we feel
that a substantial position in corporate bonds can provide superior
risk-adjusted returns due to the higher yield and low credit risk of the issues
in which we invest. Unfortunately, exogenous shocks of the kind we experienced
in 1998 will occasionally create havoc in the bond market and hurt the prices of
even the highest quality debt. Believing that the panic of this past summer was
greatly overdone, we decided that it would be unwise to sell into the falling
market, and were positioned to benefit from the fourth quarter rebound as a
result. Going forward, we continue to find corporates of intermediate maturities
- -- primarily three to five years -- particularly attractive. The combination of
valuations not seen since the recession of 1990-91, yields that remain at
historically high levels relative to government issues, and a tame inflation
outlook should allow our holdings in the corporate bond sector to weather a full
range of economic conditions.
6 - Scudder Short Term Bond Fund
<PAGE>
Q: What sectors did you find attractive within the corporate bond market?
A: As economic growth decelerated over the year, we assumed a defensive posture
by favoring bonds in non-cyclical industries. Bonds issued by companies that are
in economically sensitive businesses such as steel, paper, or railroads tend to
fall further when a recession appears to be imminent. By investing in sectors
such as media and consumer non-durables, we have increased exposure to
industries whose revenue streams tend to remain stable even in diverse economic
conditions. For example, we own bonds in the media sector issued by TCI which
stands to benefit from the strong demand for communications infrastructure.
Safeway, a supermarket chain, is another issuer whose financial stability should
remain intact even in the event of a recession. We have also added other
non-cyclicals, including Xerox, Kellogg and Cadbury Schweppes, to our corporate
holdings. We believe that these companies have solid financial positions and the
potential to perform well in the slower growth environment we expect in 1999.
Q: How did you position the remainder of the portfolio?
A: The Fund benefited from two decisions we made with respect to government
issues. First, we increased our weighting in Treasuries and agency notes to 21%
throughout the course of the year, which is a relatively high percentage
compared to our historical average. When Treasuries soared in the late summer,
this position provided a buffer to our holdings in the corporate sector. Second,
we decreased our weighting in mortgage-backed issues, believing that the falling
rate environment would hurt total return by sparking a wave of homeowner
7 - Scudder Short Term Bond Fund
<PAGE>
refinancing activity. While this is indeed what transpired, the attractive
yields and moderate risk offered by mortgages by the end of the quarter prompted
us to begin adding to this position once again.
Q: What was your strategy with respect to duration?
A: Duration measures a portfolio's sensitivity to interest rate changes, and is
adjusted by altering the mix of securities. The shorter a portfolio's duration,
the less its net asset value will be affected by rising interest rates. In the
early part of the year, the Fund's duration was fairly short -- in the 1.6 to
1.8 year range -- to guard against a possible rise in short term interest rates.
As rates moved higher toward the end of the fourth quarter, however, we
increased duration to 2.0 years.
Q: What is your outlook for the months ahead?
A: While we see an outside chance of a recession in 1999, we feel that a
slowdown is a more likely scenario. In addition, inflation remains low and is
moving lower, the Federal budget remains in surplus, and real interest rates in
the U.S. are relatively high compared to those of other industrialized nations.
While such an environment may be favorable for interest rates, it can be harmful
to lower quality corporate bonds. As a consequence, we will maintain a
diversified portfolio with a continued focus on higher quality corporate issues,
which can offer both attractive yields and relative safety of principal. We
believe that in this environment, the higher yields of corporates and mortgage
backed securities more than sufficiently compensate investors for additional
risks.
Scudder Short Term
Bond Fund:
A Team Approach to Investing
Scudder Short Term Bond Fund is managed by a team of Scudder Kemper
Investments, Inc. (the "Adviser") professionals, each of whom plays an
important role in the Fund's management process. Team members work together to
develop investment strategies and select securities for the Fund's portfolio.
They are supported by the Adviser's large staff of economists, research
analysts, traders, and other investment specialists who work in our offices
across the United States and abroad. We believe our team approach benefits
Fund investors by bringing together many disciplines and leveraging our
extensive resources.
Stephen A. Wohler, Lead Portfolio Manager, is responsible for the Fund's
day-to-day operations and overall investment strategy. Mr. Wohler joined the
Adviser in 1979 and has over 20 years of experience managing fixed income
investments. Robert S. Cessine, Portfolio Manager, joined the team in 1998 and
helps set the Fund's investment strategy. Mr. Cessine joined the Adviser in
1993 and has over 16 years of investment and financial services industry
experience.
8 - Scudder Short Term Bond Fund
<PAGE>
Glossary of Investment Terms
CYCLICAL COMPANIES Companies whose earnings fluctuate with the
business cycle. Cyclical industries include steel,
cement, paper, machinery, and autos.
DURATION A measure of bond price volatility. Duration can be
defined as the approximate percentage change in
price for a 100 basis point (one single percentage
point) change in market interest rate levels. A
duration of 5, for example, means that the price of
a bond will change by approximately 5% for a
100-basis point change in yield.
LIQUIDITY A characteristic of an investment or an asset
referring to the ease of convertibility into cash
within a reasonably short period of time. When
trading activity dries up in a particular market, it
is said to be "illiquid."
REAL INTEREST RATES The nominal interest rate minus the inflation
rate. For example, if the U.S. 30-year Treasury
bond is yielding 5% and inflation is running
at 1%, the real yield is 4%.
30-DAY SEC YIELD The standard yield reference for bond funds, based
on a formula prescribed by the SEC. This annualized
yield calculation reflects the 30-day average of the
income earnings capability of every holding in a
given fund's portfolio, net of expenses, assuming
each is held to maturity.
TOTAL RETURN The most common yardstick to measure the performance
of a fund or investment. Total return-- annualized
or compounded-- is based on a combination of share
price changes plus income and capital gain
distributions, if any, expressed as a percentage
gain or loss in value.
YIELD CURVE A graph plotting the yields of all bonds of the
same quality with maturities ranging from the
shortest to the longest available. The resulting
curve shows the relationship between short-,
intermediate-, and long-term interest rates.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of
Finance and Investment Terms)
9 - Scudder Short Term Bond Fund
<PAGE>
Investment Portfolio as of December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements 1.2%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 12/31/1998 at 5%,
to be repurchased at $11,362,308 on 1/4/1999, collateralized by a $11,270,000 -----------
U.S. Treasury Bond, 3.625%, 1/15/2008 (Cost $11,356,000) .............................. 11,356,000 11,356,000
-----------
Short-Term Notes 3.5%
- ------------------------------------------------------------------------------------------------------------------------------
American Express Credit Corp., 5.71%, 1/4/1999 .......................................... 10,000,000 10,000,000
Ford Motor Credit Corp., 5.767%, 1/6/1999 ............................................... 10,000,000 10,000,000
General Motors Acceptance Corp., 5.817%, 1/6/1999 ....................................... 5,000,000 5,000,000
Household Finance Corp., 5.713%, 1/7/1999 ............................................... 10,000,000 10,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Notes (Cost $35,000,000) 35,000,000
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government & Treasury Obligations 20.8%
- ------------------------------------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, 5.625%, 9/2/2003 .............................................. 7,190,000 7,225,950
Federal Home Loan Bank, 5.5%, 4/14/2000 ................................................. 10,000,000 10,062,500
Federal Home Loan Bank, 5.625%, 3/19/2001 ............................................... 20,000,000 20,265,600
Federal Home Loan Bank, 5.125%, 9/15/2003 ............................................... 40,000,000 40,192,000
Federal Home Loan Mortgage Corp., 5.75%, 7/15/2003 ...................................... 20,000,000 20,515,600
Federal National Mortgage Association, 5.625%, 3/15/2001 ................................ 20,000,000 20,293,800
U.S. Treasury Note, 5.875%, 11/30/2001 .................................................. 15,000,000 15,506,250
U.S. Treasury Note, 5.625%, 12/31/2002 .................................................. 60,000,000 61,996,800
U.S. Treasury Note, 5.5%, 5/31/2003 ..................................................... 10,000,000 10,325,000
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government & Treasury Obligations (Cost $205,666,829) 206,383,500
- ------------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association 7.4%
- ------------------------------------------------------------------------------------------------------------------------------
11.5% with various maturities to 7/20/2020 .............................................. 11,404,180 12,722,262
11.0% with various maturities to 10/20/2020 ............................................. 1,267,267 1,380,084
9.0%, 11/15/2020 ........................................................................ 165,748 178,126
10.0% with various maturities to 1/20/2022 .............................................. 2,648,977 2,839,981
8.0% with various maturities to 12/15/2023 .............................................. 54,230,659 56,386,688
- ------------------------------------------------------------------------------------------------------------------------------
Total Government National Mortgage Association (Cost $73,376,068) 73,507,141
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Pass-Thrus 6.7%
- ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., 7.5%, 4/1/2013 ........................................ 38,884,917 39,978,359
Federal Home Loan Mortgage Corp., 9.5%, 8/1/2016 ........................................ 4,782,377 5,147,751
Federal National Mortgage Association, 8.0%, 12/1/2012 .................................. 8,969,657 9,235,877
Federal National Mortgage Association, 8.5% with various maturities to 8/1/2022 ......... 11,008,373 11,577,720
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agency Pass-Thrus (Cost $66,157,499) 65,939,707
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - Scudder Short Term Bond Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Collateralized Mortgage Obligations 13.4%
- ------------------------------------------------------------------------------------------------------------------------------
Citicorp Mortgage Securities Inc., Series 1997-3, 7%, 8/25/2027 ......................... 5,261,456 5,243,369
Countrywide Funding Corp., Series 1994-2 A8, 6.5%, 2/25/2009 ............................ 333,884 332,528
Federal Home Loan Mortgage Corp., Series 1719-C at principal only, 4/15/1999 ............ 6,478,654 6,415,892
First Bank System Inc., Series 1993-F, 7.07%, 11/25/2024 ................................ 11,051,150 11,037,336
General Electric Capital Mortgage Services, Inc., Series 1992-E, 7%, 1/25/2008 .......... 6,288,207 6,309,776
General Electric Capital Mortgage Services, Inc., Series 1994-21A, 6.5%, 8/25/2009 ...... 12,441,362 12,414,116
General Electric Capital Mortgage Services, Inc., Series 1994-27, 6.5%, 7/25/2024 ....... 3,309,220 3,297,844
Morgan Stanley Capital Investment Inc., 6.25%, 7/15/2007 ................................ 7,733,828 7,895,151
Mortgage Index Amortizing Trust, Series 1997-1, 6.682%, 8/25/2004 ....................... 14,000,000 14,293,125
Norwest Asset Securities Corp., Series 1996-5 A13, 7.5%, 11/25/2026 ..................... 8,203,577 8,188,196
Norwest Asset Securities Corp., Series 1998-23 A2, 6.75%, 10/25/2028 .................... 13,667,733 13,680,547
Residential Funding Mortgage Securities, Series 1996-S15, 7.75%, 1/25/2007 .............. 7,726,322 7,798,756
Residential Funding Mortgage Securities, Series 1993-A5, 7.068%, 10/25/2023 ............. 11,398,655 11,363,035
Residential Funding Mortgage Securities I Inc., Series 1997-S19 A6, 6.5%, 12/25/2012 .... 18,276,166 18,267,028
Residential Funding Mortgage Securities I Inc., Series 1997-S13 A8, 7.1%, 9/25/2027 ..... 6,525,977 6,516,188
- ------------------------------------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations (Cost $133,655,160) 133,052,887
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Bonds-- U.S.$ Denominated 0.9%
- ------------------------------------------------------------------------------------------------------------------------------
Cadbury Schweppes, PLC, 6.25%, 10/4/1999 (Cost $9,028,620) .............................. 9,000,000 9,072,000
-----------
Asset Backed 18.8%
- ------------------------------------------------------------------------------------------------------------------------------
Manufacturing 1.3%
PBG Equipment Trust, Series 1A, 6.27%, 1/20/2012 ........................................ 13,106,078 13,219,183
-----------
Health 1.3%
Bally's Health & Tennis Master Trust, 8.43%, 8/15/2002 .................................. 13,000,000 13,016,250
-----------
Credit Card Receivables 2.6%
Advanta Corp., Series 1997-2 A3, 7.3%, 10/25/2022 ....................................... 10,500,000 10,632,891
First USA Bank, Series 1994-1, 7.45%, 4/15/1999 ......................................... 4,528,302 4,530,792
Proffitt's, Inc. Credit Card Master Trust, 6%, 9/15/2004 ................................ 10,000,000 10,173,750
-----------
25,337,433
-----------
Home Equity Loans 3.8%
AFC Home Equity Loan Trust, Series 1990-3A, 9.6%, 7/26/2005 ............................. 766,332 770,163
AFC Home Equity Loan Trust, Series 1992-3A, 7.05%, 8/15/2007 ............................ 385,789 383,860
CTS Home Equity Loan Trust, Series 1991-1A, 8.8%, 1/15/2006 ............................. 215,993 216,600
Contimortgage Home Equity Loan Trust, Series 1997-3 M1-F, 7.31%, 8/15/2028 .............. 18,500,000 18,950,938
Contimortgage Net Interest Margin Notes, Series 1997-3, 7.23%, 7/16/2028 ................ 5,069,196 4,959,892
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Short Term Bond Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Green Tree Home Equity Loan Trust, Series 1997-B A5, 7.15%, 5/15/2025 ................... 9,600,000 9,703,500
Old Stone Credit Corp. Home Equity Loan, Series 1992-2, 6.95%, 5/15/2007 ................ 2,242,167 2,243,557
Old Stone Credit Corp. Home Equity Loan, Series 1993-1, 5.85%, 3/15/2008 ................ 550,779 549,316
-----------
37,777,826
-----------
Automobile Receivables 1.5%
World Omni Automobile Lease Securitization Trust, Series 1996-B, 6.85%,
11/15/2002 ............................................................................ 14,902,241 14,766,025
-----------
Manufactured Housing Receivables 8.3%
Associated Manufactured Housing Corp., Series 1997-1 B1, 7.6%, 6/15/2028 ................ 8,000,000 7,718,750
Green Tree Financial Corp., Securitized NIM, Series 1994-A, 6.9%, 2/15/2004 ............. 11,710,998 11,766,808
Green Tree Financial Corp., Securitized NIM, Series 1994-B, 7.85%, 7/15/2004 ............ 9,737,911 9,873,329
Green Tree Financial Corp., Series 1995-3 B2, 8.1%, 8/15/2025 ........................... 20,636,400 19,003,222
Green Tree Financial Corp., Series 1995-5 B2, 7.65%, 9/15/2026 .......................... 9,000,000 7,916,836
Green Tree Financial Corp., Series 1995-8 B1, 7.3%, 12/15/2026 .......................... 9,500,000 9,252,852
Green Tree Financial Corp., Series 1996-5 B2, 8.45%, 7/15/2027 .......................... 9,998,413 9,190,728
Merrill Lynch Mortgage Investors Inc., Series 1992-B, 8.5%, 4/15/2012 ................... 8,126,384 8,047,640
-----------
82,770,165
- ------------------------------------------------------------------------------------------------------------------------------
Total Asset Backed (Cost $190,599,739) 186,886,882
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 27.3%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 1.5%
Wal-Mart Stores Inc., 5.85%, 6/1/2000 ................................................... 15,000,000 15,075,000
-----------
Consumer Staples 3.1%
Kellogg Co., 5.75%, 2/2/2001 ............................................................ 10,000,000 10,100,000
Philip Morris Companies Inc., 6.15%, 3/15/2000 .......................................... 15,000,000 15,037,500
Safeway Inc., 5.875%, 11/15/2001 ........................................................ 6,000,000 6,022,560
-----------
31,160,060
-----------
Communications 1.1%
AT&T Capital Corp., 6.25%, 5/15/2001 .................................................... 11,000,000 10,813,000
-----------
Financial 13.6%
American Health Properties, Inc. (REIT), 7.05%, 1/15/2002 ............................... 2,200,000 2,287,208
BANC ONE CORP., 6.25%, 10/1/2001 ........................................................ 10,000,000 10,217,400
Citicorp, 8.03%, 2/15/2000 .............................................................. 15,000,000 15,436,950
Colonial Realty LP (REIT), 7.5%, 7/15/2001 .............................................. 4,000,000 4,040,280
ERP Operating LP (REIT), 8.5%, 5/15/1999 ................................................ 4,100,000 4,132,431
General Electric Capital Corp., 6.02%, 5/4/2001 ......................................... 15,000,000 15,108,000
Home Savings of America, 6%, 11/1/2000 .................................................. 500,000 503,115
NationsBank Corp., 5.75%, 3/15/2001 ..................................................... 19,000,000 19,181,070
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Short Term Bond Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Oasis Residential Inc. (REIT), 6.75%, 11/15/2001 ........................................ 13,400,000 13,141,916
Oasis Residential Inc. (REIT), 7%, 11/15/2003 ........................................... 15,000,000 14,617,800
Spieker Properties, Inc. (REIT), 6.65%, 12/15/2000 ...................................... 15,000,000 15,072,300
Spieker Properties, Inc. (REIT), 6.8%, 12/15/2001 ....................................... 5,500,000 5,527,720
Spieker Properties, Inc. (REIT), 6.95%, 12/15/2002 ...................................... 3,500,000 3,519,705
Sun Communities, Inc. (REIT), 7.625%, 5/1/2003 .......................................... 5,850,000 6,206,441
Susa Partnership LP (REIT), 7.125%, 11/1/2003 ........................................... 5,400,000 5,354,262
-----------
134,346,598
-----------
Media 0.6%
Tele-Communications, Inc., 7.375%, 2/15/2000 ............................................ 6,000,000 6,130,500
-----------
Manufacturing 1.0%
Equistar Chemical Corporation, 9.125%, 3/15/2002 ........................................ 9,000,000 9,404,910
-----------
Technology 2.6%
Raytheon Co., 6.45%, 8/15/2002 .......................................................... 15,000,000 15,384,300
Xerox Corp., 5.5%, 11/15/2003 ........................................................... 10,000,000 10,062,720
-----------
25,447,020
-----------
Energy 1.8%
Lyondell Petrochemical Co., 9.75%, 9/4/2003 ............................................. 4,600,000 5,329,422
Vastar Resources, Inc., 6%, 4/20/2000 ................................................... 12,500,000 12,576,500
-----------
17,905,922
-----------
Metals & Minerals 1.5%
Alcan Aluminium Ltd., 9.625%, 7/15/2019 ................................................. 14,000,000 14,882,140
-----------
Utilities 0.5%
Detroit Edison Co., 5.93%, 2/1/2001 ..................................................... 5,000,000 5,053,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $270,708,638) 270,218,150
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $995,548,553) (a) 991,416,267
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $995,548,553. At December 31,
1998, net unrealized depreciation for all securities based on tax cost was
$4,132,286. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $5,206,532 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$9,338,818.
Abbreviations and other acronyms used in this portfolio:
----------------------------------------------------------------------
REIT Real Estate Investment Trust
NIM Net Interest Margin
Included in the portfolio are investments in mortgage or asset-backed
securities which are interests in separate pools of mortgages or assets.
Effective maturities of these investments may be shorter than stated
maturities due to prepayments. All separate investments in the Federal
National Mortgage Association and the Government National Mortgage
Association issues which have similar coupon rates have been aggregated
for presentation purposes in the investment portfolio.
The accompanying notes are an integral part of the financial statements.
13 - Scudder Short Term Bond Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of December 31, 1998
<TABLE>
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $995,548,553) ................. $ 991,416,267
Cash .................................................................. 563,518
Interest receivable ................................................... 9,065,056
Receivable for Fund shares sold ....................................... 1,120,014
Other assets and receivables .......................................... 170,866
----------------
Total assets .......................................................... 1,002,335,721
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Dividends payable ..................................................... 1,034,319
Payable for Fund shares redeemed ...................................... 8,236,583
Accrued management fee ................................................ 478,091
Other payables and accrued expenses ................................... 646,450
----------------
Total liabilities ..................................................... 10,395,443
-------------------------------------------------------------------------------------------
Net assets, at market value $ 991,940,278
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................................... 1,651,041
Net unrealized appreciation (depreciation) on investments ............. (4,132,286)
Accumulated net realized gain (loss) .................................. (140,712,857)
Paid-in capital ....................................................... 1,135,134,380
-------------------------------------------------------------------------------------------
Net assets, at market value $ 991,940,278
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($991,940,278 / 91,279,720 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) ........................................................ $10.87
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Short Term Bond Fund
<PAGE>
Statement of Operations
year ended December 31, 1998
<TABLE>
<S> <C>
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
Income:
Interest ............................................................... $ 74,703,631
----------------
Expenses:
Management fee ......................................................... 5,850,577
Services to shareholders ............................................... 2,726,758
Custodian and accounting fees .......................................... 268,474
Trustees' fees and expenses ............................................ 48,074
Reports to shareholders ................................................ 190,367
Auditing ............................................................... 65,712
Legal .................................................................. 25,993
Registration fees ...................................................... 47,033
Other .................................................................. 61,344
----------------
Total expenses before reductions ....................................... 9,284,332
Expense reductions ..................................................... (6,802)
----------------
Expenses, net .......................................................... 9,277,530
-------------------------------------------------------------------------------------------
Net investment income 65,426,101
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ............................................................ 1,799,870
Futures ................................................................ (18,440,794)
Options ................................................................ (11,842)
Reimbursement by Adviser (Note C) ...................................... 12,808,543
----------------
(3,844,223)
----------------
Net unrealized appreciation (depreciation) during the period on:
Investments ............................................................ (16,857,941)
Futures ................................................................ 660,661
----------------
(16,197,280)
-------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions (20,041,503)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 45,384,598
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Short Term Bond Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Net Assets 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ......................................... $ 65,426,101 $ 85,116,159
Net realized gain (loss) from investment transactions ......... (3,844,223) (20,654,427)
Net unrealized appreciation (depreciation) on
investment transactions during the period .................. (16,197,280) 11,486,176
---------------- -----------------
Net increase (decrease) in net assets resulting from
operations ................................................. 45,384,598 75,947,908
---------------- -----------------
Distributions to shareholders from:
Net investment income ......................................... (62,427,806) (78,060,393)
---------------- -----------------
Fund share transactions:
Proceeds from shares sold ..................................... 425,742,760 225,970,263
Net asset value of shares issued to shareholders in
reinvestment of distributions .............................. 47,687,597 58,987,223
Cost of shares redeemed ....................................... (629,978,033) (585,484,724)
---------------- -----------------
Net increase (decrease) in net assets from Fund share
transactions ............................................... (156,547,676) (300,527,238)
---------------- -----------------
Increase (decrease) in net assets ............................. (173,590,884) (302,639,723)
Net assets at beginning of period ............................. 1,165,531,162 1,468,170,885
Net assets at end of period (including undistributed
net investment income of $1,651,041 and $379,071, ---------------- -----------------
respectively) .............................................. $ 991,940,278 $1,165,531,162
---------------- -----------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ..................... 105,576,081 132,860,852
---------------- -----------------
Shares sold ................................................... 38,872,025 20,508,345
Shares issued to shareholders in reinvestment of
distributions .............................................. 4,362,339 5,352,697
Shares redeemed ............................................... (57,530,725) (53,145,813)
---------------- -----------------
Net increase (decrease) in Fund shares ........................ (14,296,361) (27,284,771)
---------------- -----------------
Shares outstanding at end of period ........................... 91,279,720 105,576,081
---------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Short Term Bond Fund
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
1998(a) 1997(a) 1996(a) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------
Net asset value, beginning of period ............................... $ 11.04 $ 11.05 $ 11.35 $ 10.91 $ 12.01
-------------------------------------------------------------
Income from investment operations:
Net investment income .............................................. .66 .73 .74 .71 .81
Net realized and unrealized gain (loss) on investments ............. (.19) (.07) (.32) .44 (1.15)
-------------------------------------------------------------
Total from investment transactions ................................. .47 .66 .42 1.15 (.34)
-------------------------------------------------------------
Less distributions:
From net investment income ......................................... (.64) (.67) (.72) (.43) (.64)
From tax return of capital ......................................... -- -- -- (.28) (.12)
-------------------------------------------------------------
Total distributions ................................................ (.64) (.67) (.72) (.71) (.76)
-------------------------------------------------------------
-------------------------------------------------------------
Net asset value, end of period ..................................... $ 10.87 $ 11.04 $ 11.05 $ 11.35 $ 10.91
-------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (%) ................................................... 4.34(b) 6.17 3.86 10.74 (2.87)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 992 1,166 1,468 1,823 2,136
Ratio of operating expenses net, to average daily net assets (%) ... .86 .86 .80 .75 .73
Ratio of operating expenses before expense reductions, to
average daily net assets (%) ..................................... .86 .86 .80 .75 .73
Ratio of net investment income to average daily net assets (%) ..... 6.07 6.64 6.66 6.37 6.93
Portfolio turnover rate (%) ........................................ 95.4 39.4 61.8 101.1 65.3
</TABLE>
(a) Per share amounts have been calculated using weighted average shares
outstanding.
(b) If the Adviser had not reimbursed the Fund (Note C), the total return for
the year ended December 31, 1998 would have been lower.
17 - Scudder Short Term Bond Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder Short Term Bond Fund (the "Fund") is a diversified series of Scudder
Funds Trust (the "Trust"). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end, management investment company.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio debt securities other than money market
instruments with an original maturity over sixty days are valued by pricing
agents approved by the officers of the Fund, whose quotations 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. Money market
instruments purchased with an original maturity of sixty days or less are valued
at amortized cost. All other securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
receives delivery of the underlying securities, 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 is equal to at least the repurchase price.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the period, the
Fund sold and purchased interest rate futures to hedge against changes in the
value of portfolio securities.
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge, the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.
Options. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During the year
ended December 31, 1998, the Fund purchased options on interest rate futures to
manage the duration of the portfolio.
18 - Scudder Short Term Bond Fund
<PAGE>
If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued 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 (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and, that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.
Foreign Currency Translations. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions 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, interest income and
certain expenses at the rates of exchange prevailing on the respective
dates of such transactions.
The Fund does 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 interest and
foreign withholding taxes.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. The Fund accordingly paid no federal income taxes and no provision
for federal income taxes was required.
19 - Scudder Short Term Bond Fund
<PAGE>
At December 31, 1998, the Fund had a net tax basis capital loss carryforward of
approximately $140,296,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December 31,
2002 ($27,264,000), December 31, 2003 ($60,090,000), December 31, 2004
($27,917,000), December 31, 2005 ($18,998,000) and December 31, 2006
($6,027,000), the respective expiration dates.
Distribution of Income and Gains. Substantially all of the net investment income
of the Fund is declared as a dividend to shareholders of record as of the close
of business each day and is paid to shareholders monthly. During any particular
year, net realized gains from investment transactions, in excess of available
capital loss carryforwards, would be taxable to the Fund if not distributed and,
therefore, will be distributed to shareholders. An additional distribution may
be made to the extent necessary to avoid the payment of a four percent federal
excise tax. Distributions of net realized capital gains to shareholders are
recorded on the ex-dividend date.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences primarily relate to investments in futures, options, mortgage-backed
securities, foreign currency contracts, and foreign currency denominated
investments. As a result, net investment income (loss) 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.
The Fund uses the identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting purposes.
Other. Investment security transactions are accounted for on a trade date basis.
Interest income is recorded on the accrual basis. All original issue discounts
are accreted for both tax and financial reporting purposes.
B. Purchases and Sales of Securities
For the year ended December 31, 1998, purchases and sales of investment
securities (excluding short-term investments and U.S. Government obligations)
aggregated $741,928,689 and $941,175,177, respectively. Purchases and sales of
U.S. Government obligations aggregated $227,521,797 and $211,086,875,
respectively.
The aggregate face value of futures contracts opened and closed during the year
ended December 31, 1998 was $18,290,714,979 and $18,495,572,818, respectively.
C. Related Parties
Under the Management Agreement (the "Agreement") with Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"), the Adviser directs the
investments of the Fund in accordance with its investment objectives, policies,
and restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides certain
administrative services in accordance with the Agreement. The management fee
payable under the Agreement is equal to an annual rate of 0.60% on the first
$500,000,000 of average daily net assets, 0.50% on the next $500,000,000 of such
net assets, 0.45% on the next $500,000,000 of such net assets, 0.40% on the next
$500,000,000 of such net assets, 0.375% on the next $1,000,000,000
20 - Scudder Short Term Bond Fund
<PAGE>
of such net assets and 0.35% on such net assets in excess of $3,000,000,000,
computed and accrued daily and payable monthly. Effective October 1, 1998, the
Adviser has agreed not to impose all or a portion of the Fund's management fee
until September 30, 1999 in order to maintain the annualized expenses of the
Fund at not more than .85% of average daily net assets. For the year ended
December 31, 1998, the Adviser did not impose a portion of its management fee
aggregating $6,802, and the amount imposed aggregated $5,843,775. This was
equivalent to an annualized effective rate of .54% of the Fund's daily net
assets. During the year ended December 31, 1998, the Adviser reimbursed the Fund
$12,808,543 for losses incurred in connection with certain portfolio
transactions, and in addition $150,000 has been credited to capital and is due
from the Adviser at December 31, 1998.
Effective September 7, 1998, Zurich Insurance Company ("Zurich"), majority owner
of the Adviser, entered into an agreement with B.A.T Industries p.l.c. ("B.A.T")
pursuant to which the financial services businesses of B.A.T were combined with
Zurich's businesses to form a new global insurance and financial services
company known as Zurich Financial Services. Upon consummation of the
transaction, the Fund's Management Agreement with Scudder Kemper was deemed to
have been assigned and, therefore, terminated. In December 1998, the Board of
Trustees and the shareholders of the Fund approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the former
Management Agreement, except for the dates of execution and termination.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. Included
in services to shareholders is $1,628,687 charged to the Fund by SSC for the
year ended December 31, 1998, of which $120,576 is unpaid at December 31, 1998.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the year ended December 31,
1998, the amount charged to the Fund by STC aggregated $561,842, of which
$43,732 is unpaid at December 31, 1998.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
December 31, 1998, the amount charged to the Fund by SFAC aggregated $158,205,
of which $11,816 is unpaid at December 31, 1998.
The Trust pays each of its Trustees not affiliated with the Adviser an annual
retainer, divided equally among the series of the Trust, plus specified amounts
for attended board and committee meetings. For the year ended December 31, 1998,
Trustees' fees and expenses aggregated $48,074.
D. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $850 million
revolving credit facility for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated among each of the Participants. Interest is calculated based
on the market rates at the time of the borrowing. The Fund may borrow up to 33
percent of its net assets under the agreement.
21 - Scudder Short Term Bond Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder Funds Trust and to the Shareholders of Scudder Short
Term Bond Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Scudder Short Term Bond Fund (the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's 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 auditing standards which require that we plan and
perform the audit to obtain 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 at
December 31, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
February 25, 1999
22 - Scudder Short Term Bond Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Short Term Bond
Fund (the "Fund") was held on December 15, 1998, at the office of Scudder Kemper
Investments, Inc., Two International Place, Boston, Massachusetts 02110. At the
Meeting the following matters were voted upon by the shareholders (the resulting
votes for each matter are presented below).
1. To approve a new Investment Management Agreement for the Fund with Scudder
Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
56,127,339 1,514,259 2,577,804 0
2. To approve the revision of the Fund's fundamental lending policy.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
50,811,662 3,017,662 3,234,871 3,155,207
- --------------------------------------------------------------------------------
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
23 - Scudder Short Term Bond Fund
<PAGE>
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
Trustee; President, Driscoll
Associates; Executive Fellow,
Center for Business Ethics,
Bentley College
Peter B. Freeman
Trustee; Corporate Director
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration, Northeastern
University
Kathryn L. Quirk*
Trustee, Vice President and
Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
Thomas W. Joseph*
Vice President
Ann M. McCreary*
Vice President
Stephen A. Wohler*
Vice President
Thomas F. McDonough*
Vice President and Secretary
John R. Hebble*
Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
24 - Scudder Short Term Bond Fund
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series--
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market Series--
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
- ----------------
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small
Company Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed in order from
expected least risk to most risk. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. ++Only the International Shares of the Fund are
part of the Scudder Family of Funds. +++ +++A no-load variable annuity contract
provided by Charter National Life Insurance Company and its affiliate, offered
by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
25 - Scudder Short Term Bond Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.*
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
* Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- www.scudder.com
1-800-343-2890
Personal Investment Organizer: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
26 - Scudder Short Term Bond Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
800 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
27 - Scudder Short Term Bond Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $230 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
[LOGO]
