SCUDDER
INVESTMENTS (SM)
[LOGO]
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BOND
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Scudder GNMA Fund
Fund #006
Annual Report
January 31, 2000
For investors seeking high current income primarily from U.S. Government
guaranteed mortgage-backed ("Ginnie Mae") securities.
A no-load fund with no commissions to buy, sell, or exchange shares.
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Contents
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4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
9 Portfolio Management Discussion
17 Glossary of Investment Terms
18 Investment Portfolio
20 Financial Statements
23 Financial Highlights
24 Notes to Financial Statements
31 Report of Independent Accountants
32 Officers and Trustees
33 Investment Products and Services
35 Scudder Solutions
2
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Scudder GNMA Fund
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ticker symbol SGMSX fund number 006
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Date of Inception: o During the period of this report, GNMA securities fared
7/5/85 better than many other fixed income securities, owing to
their high quality, government backing, and a trend
Total Net Assets as toward decreasing prepayments.
of 1/31/00:
$313 million o Reflecting the rising interest rate environment,
Scudder GNMA Fund's SEC 30-day yield rose from 4.83% to
6.20% over the 12-month period.
o Performance was helped by management's defensive
positioning of the portfolio and an overweighting of
GNMA securities versus Treasuries.
o The fund continued to provide attractive returns on a
risk-adjusted basis as the fund maintained its overall
4-star Morningstar Rating(TM) among 1,661 taxable bond
funds as of January 31, 2000.^1
^1 Morningstar proprietary ratings reflect historical risk-adjusted
performance as of 1/31/00. Ratings are subject to change every month and
are calculated from the fund's three-, five-, and ten-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 its broad asset class, 10% of funds receive 5 stars, the
next 22.5% receive 4 stars, and the next 35% receive 3 stars. In the
taxable bond category, the fund received a 4-star rating for the three- and
five-year periods, and a 3-star rating for the ten-year period among 1661,
1245, and 390 funds, respectively. Past performance is no guarantee of
future results.
3
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Letter from the Fund's President
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Dear Shareholders,
The U.S. economy continued to exceed investors' growth expectations over the 12
months, as the period capped the longest economic expansion in the nation's
history. This remarkable environment was accompanied by equally impressive
performance from the domestic equity markets. While the Nasdaq composite
continued to set new records over this period, rising interest rates have had a
detrimental effect on bond prices. Fears of accelerating inflation have been
sparked by strong economic growth, full employment, and accelerating global
growth. In an effort to fend off potentially excessive growth that could harm
the U.S. economy in the long run, the Federal Reserve publicly cautioned
investors and increased key short-term interest rates three times in the second
half of 1999 (and a fourth time on 2/1/00). The rate increases carried over into
other segments of the fixed income market, especially longer maturity bonds and
lower quality bonds, causing bond prices to decline overall.
We never like to see price declines, but as professional investment managers we
know that the bond market's ups and downs are an inevitable fact of investing.
With the cyclicality of the fixed income markets a given, we believe that the
job of your fund's management team is to seek the best total returns (price
changes + dividend income) in all market environments while providing attractive
income. This means we must seek to exceed the performance of our peers and
benchmark in rising markets and
4
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decline less in falling markets. We believe that Scudder GNMA Fund's
risk-adjusted 4-star Morningstar Rating(TM) provides evidence of the fund's
success in achieving this goal over time. For a detailed discussion of
management's investment strategy and portfolio positioning, see page 9.
For investors seeking attractive income and less price volatility than long-term
bonds, we think this fund continues to serve as an important component of a
diversified portfolio. However, if you are not comfortable with these price
fluctuations, you may wish to consider one of Scudder's high quality money
market funds that seek to maintain a stable $1.00 share price. For a complete
listing of Scudder funds, see page 33, or call us at 1-800-SCUDDER
(1-800-728-3337) for more information.
For current information on the fund and your account, visit our Internet Web
site at www.scudder.com. There you'll find a wealth of information, including
the fund's most recent performance, the latest news on Scudder products and
services, and the opportunity to perform account transactions. You can also call
us to speak with one of our representatives.
Thank you for your continued investment in Scudder GNMA Fund.
Sincerely,
/s/Lynn S. Birdsong
Lynn S. Birdsong
President,
Scudder GNMA Fund
5
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Performance Update
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January 31, 2000
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Growth of a $10,000 Investment
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
Scudder GNMA Fund Lehman Brothers GNMA Index*
'90 10000 10000
'91 11256 11315
'92 12573 12777
'93 13876 14071
'94 14690 14929
'95 14318 14892
'96 16483 17196
'97 17142 18161
'98 18652 19931
'99 19852 21254
'00 19623 21316
Yearly periods ended January 31
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Fund Index Comparison
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Total Return
Period ended 1/31/2000 Growth of Average
$10,000 Cumulative Annual
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Scudder GNMA Fund
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1 year $ 9,885 -1.15% -1.15%
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5 year $ 13,705 37.05% 6.51%
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10 year $ 19,623 96.23% 6.97%
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Lehman Brothers GNMA Index*
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1 year $ 10,029 .29% .29%
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5 year $ 14,314 43.14% 7.43%
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10 year $ 21,316 113.16% 7.86%
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* The unmanaged Lehman Brothers 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.
6
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Returns and Per Share Information
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THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE ILLUSTRATING THE FUND TOTAL
RETURN (%) AND INDEX TOTAL RETURN (%)
Yearly periods ended January 31
Scudder GNMA Fund Lehman Brothers GNMA Index*
1991 12.55 13.15
1992 11.71 12.92
1993 10.36 10.13
1994 5.87 6.10
1995 -2.53 -0.25
1996 15.12 15.47
1997 4.00 5.61
1998 8.81 9.75
1999 6.43 6.64
2000 -1.15 0.29
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Total
Return (%) 12.55 11.71 10.36 5.87 -2.53 15.12 4.00 8.81 6.43 -1.15
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Index Total
Return (%) 13.15 12.92 10.13 6.10 -0.25 15.47 5.61 9.75 6.64 .29
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Net Asset
Value ($) 14.81 15.26 15.49 15.19 13.86 14.95 14.59 14.88 14.93 13.90
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Income
Dividends ($) 1.23 1.22 1.29 1.18 .93 .95 .93 .95 .88 .86
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</TABLE>
* The unmanaged Lehman Brothers 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.
Performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Total return and
principal value will fluctuate, so an investor's shares, when redeemed, may
be worth more or less than when purchased.
7
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Portfolio Summary
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January 31, 2000
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Diversification
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As Y2K concerns subsided
toward the end of 1999,
management reduced cash
and increased the fund's
weighting in GNMAs.
A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
Government National
Mortgage Association 89%
U.S. Treasury Obligations 10%
Cash Equivalents 1%
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100%
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GNMA Coupons*
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Over the final six
months of the period,
management increased the
fund's position in GNMA
8.5% coupon issues.
A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
0-Less than 7% 30%
7-Less than 8% 47%
8% or greater 23%
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100%
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*Excludes Cash Equivalents and
U.S. Treasury Obligations
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Effective Maturity
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Although rising interest
rates caused mortgage
durations to
automatically extend,
management pursued a
defensive position by
maintaining a shorter
duration (sensitivity to
interest rate changes)
than its benchmark.
A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
0-5 years 1%
5-8 years 11%
Greater than 8 years 88%
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100%
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For more complete details about the Fund's investment portfolio, see page 18. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
8
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Portfolio Management Discussion
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January 31, 2000
In the following interview, portfolio managers Richard L. Vandenberg, Scott E.
Dolan, and John E. Dugenske discuss their strategy for the Fund and the market
environment.
Q: The healthy economic environment of the last 12 months appeared to be a
repeat of 1998. Companies continued to report surprisingly strong earnings
overall and inflation remained benign. Why did interest rates rise?
A: While most of 1998 was "healthy," you may recall that the world's financial
markets were in crisis in the third quarter of that year. The Russian economy
and several emerging markets plunged, a major U.S. hedge fund nearly collapsed,
and investors piled into the safest investments they could find -- namely U.S.
Treasury securities. With market liquidity evaporating, the Federal Reserve
stepped in with three quick cuts in short-term interest rates. The Fed's action
helped to restore market liquidity and investor confidence.
As investors and the markets began to recover in the fourth quarter of 1998,
economic growth in many foreign countries started to show signs of accelerating.
In addition, rising prices for selected commodities and energy combined with
accelerating global economic growth to spark inflation fears at home. In the
U.S., the economy continued to grow faster than expected and was quickly
approaching its longest uninterrupted expansion in history. (January 2000 marked
the 107th consecutive month of U.S. economic growth.)
With the rest of the world picking up economically, investors expected the
demand for goods and services to increase. The fear was that this increased
demand would drive up prices and ultimately cause inflation to accelerate.
Because a higher rate of inflation discounts real bond yields (yield - inflation
= real yield), interest rates began to rise (see the following Key Interest
Rates table). Since bond prices typically move in the opposite direction of
yields, bond prices declined when interest rates rose.
9
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Key Interest Rates
As of January 31st 2000
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1999 2000
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3-month Treasury bill 4.45% 5.69%
10-year Treasury note 4.65% 6.67%
30-year Treasury bond 5.09% 6.49%
Mortgage rates* 6.64% 8.48%
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*Federal National Mortgage Association 30-day Commitment Rate
Q: What has been the role of the Federal Reserve with regard to the recent
interest rate hikes?
A: The Federal Reserve is charged with several responsibilities, including
conducting the nation's monetary policy and maintaining the stability of the
financial system. As such, the Fed uses its power to raise or lower short-term
interest rates to achieve these goals. In early 1999 the Fed began to signal
investors of its intention to raise interest rates as the U.S. economy had not
only emerged from the financial crisis nearly unscathed, but was showing
unprecedented strength. The Fed's first rate increase came on June 30 and was
followed by two more increases before the end of the calendar year. The three
quarter-point rate increases essentially returned the federal funds rate to its
pre-crisis level of 5.50%. (After the close of the fund's fiscal period, the Fed
raised the fed funds rate another quarter-point on 3/21/00.) However, the Fed
remains concerned that too rapid growth may have negative long-term effects on
the U.S. economy. Consequently, it is maintaining a bias toward raising interest
rates as of March.
Q: How did rising rates affect GNMA securities?
A: GNMAs, along with other mortgage-backed securities, generally declined as
interest rates rose over the 12 months. However, GNMAs fared better than many
other fixed income securities, such as non-government-backed mortgages, and
lower quality and longer-term securities (see Bond Market Performance table).
These securities tend to be volatile in a changing interest rate environment.
10
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Bond Market Performance
As of January 31, 2000
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12-month return
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3-month Treasury bill 4.82%
High yield securities 0.46%
GNMAs 0.29%
Government bonds -0.29%
Corporate bonds -1.05%
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All indices are unmanaged and reflected reinvestment of dividends. High yield
securities are represented by the Lehman Brothers High Yield Index, GNMAs are
represented by the Lehman Brothers GNMA Index, government bonds are represented
by the Lehman Brothers Government Bond (Intermediate) Index, and corporate bonds
are represented by the Lehman Brothers Corporate Bond (Intermediate) Index.
Short-term securities provided the best performance relative to other fixed
income securities, but still experienced some price declines as interest rates
rose.
Q: When interest rates are rising, GNMAs are affected by two additional
variables: duration extension risk and declining prepayments. How did these
factors affect GNMAs?
A: Duration extension and declining prepayments are related. As interest rates
rise, the economic incentive to refinance an existing mortgage diminishes,
leading to a decline in prepayments. This decline extends the payoff period (and
duration) for an individual mortgage, which causes mortgages to have greater
price sensitivity to changes in interest rates. The opposite occurs when
interest rates are falling. As interest rates fall, refinancing increases and
mortgage durations decline. (Duration is a measure of price sensitivity in
relation to changes in interest rates.) For portfolio managers this can be a
problem since they typically want to shorten portfolio duration while interest
rates are rising (and lengthen duration when interest rates are falling).
Although it may appear that mortgages provide interest rate exposure (duration)
when least desired, these securities provide other valuable benefits, including
very little credit risk and higher yields than comparable U.S. Treasury
securities. In addition, we
11
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attempt to manage the portfolio's duration to benefit shareholders as the market
environment changes.
Q: The difference between GNMA and Treasury yields -- commonly known as the
"spread" -- is an important indicator of the relative attractiveness of GNMAs.
What is the importance of spreads and what was their relationship to GNMAs over
the period?
A: We look at spreads to help us uncover areas of opportunity in the GNMA and
Treasury markets. For example, if GNMA yield spreads are "narrowing," it
typically means that GNMA yields have been declining (and prices have been
rising), compared with Treasury bonds of similar maturity. Conversely, when
yield spreads are "widening," GNMA yields typically have been rising (and prices
have been falling), versus Treasuries. At any given point in time, there is
usually some segment of this market that is over- or undervalued as indicated by
the spread. As a result, we may increase the fund's exposure to selected
securities that we believe offer attractive value, given our outlook and the
appropriateness of these securities to the portfolio. For example, if yield
spreads widen as they did during the second half of the period, it may be an
indicator that GNMAs are becoming more attractive than Treasuries (because GNMAs
are yielding relatively more and their prices have declined relative to
Treasuries). In this type of environment, considering an increase in GNMAs to
capitalize on the perceived attractiveness often makes sense.
Q: How did the fund perform?
A: The fund performed reasonably well relative to its peers, as it exceeded the
average return of 55 GNMA funds for the 12-month period according to Lipper
Analytical Services, Inc.^1 While we were pleased that it
^1 Source: Lipper Analytical Services, Inc., an independent analyst of
investment performance. Total returns include reinvestment of dividends and
capital gains. As of 1/31/00, the fund's Lipper rankings in the GNMA fund
category are 24 of 55 funds for the one-year period, 22 of 40 funds for the
five-year period and 15 of 24 funds for the ten-year period. Past
performance is no guarantee of future results.
12
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outperformed its average peer fund, we are seeking to be in the top 25% over the
long term. This performance was a step toward this goal, but we have further to
go. Relative to its benchmark, the fund's -1.15% 12-month total return trailed
the 0.29% return of the unmanaged Lehman Brothers GNMA Index. From an income
point of view, the fund's 30-day net annualized SEC yield increased
significantly, as it rose to 6.20% at the end of the period up from 4.83% a year
ago.
Q: What is your approach to managing the fund?
A: We strive to provide high current income and safety of principal for the
fund, while also emphasizing total return. In pursuing this objective we employ
a "top-down" approach that focuses on four key factors: the portfolio's
sensitivity to changes in interest rates (duration), the allocation between GNMA
and Treasury securities, the vintage and "seasoning" of issues, and the fund's
positioning with respect to the yield curve.
To identify securities with the highest potential returns, we conduct an
intensive analysis of the prepayment expectations of individual GNMAs and the
price relationships among mortgages with different coupons. We also actively
manage the fund's exposure to prepayment risk by analyzing refinancing
expectations. This includes adjusting the weighting between seasoned mortgages,
which tend to have more predictable prepayment characteristics, and those that
have been more recently issued. We also invest in Treasury securities, which
have lower yields but tend to provide better performance than GNMAs when
interest rates are declining.
Q: How did you position the fund in this environment?
A: We maintained a shorter portfolio duration than our benchmark over most of
the 12 months. This defensive positioning was intended to mitigate some of the
price declines caused by rising interest rates. This environment, combined with
lower refinancing activity, caused the portfolio's sensitivity to changes in
interest rates (duration)
13
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GNMA securities in a nutshell
Government National Mortgage Association (GNMA) securities, commonly called
"Ginnie Mae" securities are backed by the full faith and credit of the U.S.
government. Each GNMA represents a pool of mortgages from which investors
receive principal and interest payments each month. If interest rates fall,
homeowners tend to refinance and pay off their existing mortgages early, and
mortgage-backed investors are forced to reinvest the proceeds at lower
prevailing rates. If interest rates rise, principal tends to be repaid more
slowly, but GNMA investors may receive lower total returns as previously issued
securities with lower coupon rates are worth less. As a result, GNMA funds tend
to perform best in environments when interest rates are not changing
significantly.
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to lengthen over the first six months of the year. The portfolio began the
fiscal year with a duration of 2.40 years, which increased to 4.19 years by July
31. In the second half of the 12-month period, we maintained a shorter duration
than our peers and benchmark. On the eve of another meeting of the Federal
Reserve on February 1, we closed the period on January 31 with a duration of
4.48 years. By comparison, the Lehman GNMA Index duration was 4.57 years at the
end of the period. The Fund's more conservative positioning reflected our
concern that continued strong economic growth would lead to higher interest
rates.
Anticipating a rally in Treasuries relating to Y2K concerns, we reduced the
portfolio's GNMA position over the first six months from 93% to 87% of assets.
As fears abated, the GNMA weighting increased to 89%.
In the first six months, our positions in GNMA 6%, GNMA 7%, and GNMA 7.5%
coupons were reduced in favor of GNMA 6.5% and 15-year GNMA 7% coupon issues.
These actions reflected our belief that these issues had better risk/reward
characteristics during this period. Over the final six months of the period, we
increased our position in GNMA 8.5% coupon issues. Our overweighting of GNMAs
helped performance over the
14
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year, especially our holdings of GNMAs with 8% and 8.5% coupons in the second
half.
Q: What is your outlook?
A: In the near term we expect interest rates to continue rising, which generally
will not favor fixed income securities. Longer term, we have a positive outlook
for the mortgage-backed market. When comparing GNMA yields to Treasuries, the
differences (spreads) are high by historical measures. We believe that this
condition is not sustainable over the long term. As rate increases cause new
issuance of mortgages to decline, we think spreads will narrow, which should
benefit GNMAs. In addition, the recent rate changes are only one part of the
equation. The fund's now higher yield and government-backed mortgage holdings
are attractive, especially for the high quality portion of an investor's
portfolio. While an investment in the fund is not guaranteed, we continue to
believe that the fund's above-average returns and risk-adjusted performance
should provide some level of comfort to investors seeking income and a
relatively conservative holding for their portfolio.
15
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Scudder GNMA Fund:
A Team Approach to Investing
Scudder GNMA 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 offices across the United States and abroad.
The Adviser believes that a team approach benefits fund investors by bringing
together many disciplines and leveraging the firm's extensive resources.
Lead portfolio manager Richard L. Vandenberg joined the Adviser as a portfolio
manager in 1996, and is responsible for setting the fund's investment strategy
and overseeing security selection for the fund's portfolio. Prior to 1996, Mr.
Vandenberg had been a portfolio manager for several investment management firms
for over 22 years.
Portfolio manager Scott E. Dolan joined the Adviser in 1989 and became a
portfolio manager in 1993. Mr. Dolan began managing the AARP GNMA and U.S.
Treasury Fund in 1997 and the Scudder GNMA fund in 1998.
Portfolio manager John E. Dugenske joined the team in 2000. Mr. Dugenske joined
the Adviser in 1998 and has 10 years of investment industry experience.
16
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Glossary of Investment Terms
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Coupon The interest rate on a bond the issuer (in the case of
mortgage-backed securities, the government) promises to pay to
the holder of the bond until maturity, expressed as an annual
percentage of face value. As an example, a GNMA security with
a 10% coupon would pay $100 on $1,000 of the face amount each
year.
Duration A measure of the portfolio's sensitivity to changes in
interest rates. If an investment portfolio has a duration of 5
years and interest rates decline by 1% from present levels,
the value of the portfolio would rise by about 5%, and vice
versa.
Seasoned Securities (usually from established companies or issuers)
Issues that have gained a reputation for quality with the investing
public and enjoy liquidity in the secondary market.
30-Day SEC The standard yield reference for bond funds, based on a
Yield 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. Total return -- annualized or compound -- 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 showing the term structure of interest rates by
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.
Yield Spread The difference in yield between various types of bonds. A
mortgage-backed security's yield is often measured against the
yield of a Treasury security of similar maturity as a market
yardstick. If GNMA yield spreads are "narrow," for example, it
often means that GNMA yields have been declining, and prices
rising, compared with Treasury bonds of similar maturity.
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
An expanded list of terms is located at our Web site, www.scudder.com.
17
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Investment Portfolio as of January 31, 2000
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Repurchase Agreements 1.5%
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<S> <C> <C>
State Street Bank and Trust Company 5.68%, to be
repurchased at $4,652,734 on 2/1/2000 ------------
(Cost $4,652,000)* ............................................. 4,652,000 4,652,000
------------
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U.S. Treasury Obligations 9.5%
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U.S. Treasury Bond, 12%, 8/15/2013 ............................... 9,700,000 12,860,066
U.S. Treasury Bond, 8.125%, 8/15/2021 ............................ 3,600,000 4,184,424
U.S. Treasury Bond, 8%, 11/15/2021 ............................... 11,800,000 13,570,000
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Total U.S. Treasury Obligations (Cost $30,257,116) 30,614,490
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Government National Mortgage Association 89%**
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6% with various maturities to 3/1/2029 (b)(c) .................... 7,571,377 6,751,927
6.5% with various maturities to 1/15/2030 (b)(c) ................. 93,673,038 87,270,635
7% with various maturities to 9/20/2029 (b)(c) ................... 97,925,778 93,090,905
7.5% with various maturities to 1/15/2030 (b)(c) ................. 55,571,786 54,221,150
8% with various maturities to 12/1/2029 (b)(c) ................... 33,979,119 33,883,966
8.5% with various maturities to 12/15/2029 (b)(c) ................ 9,826,892 10,020,472
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Total Government National Mortgage Association (Cost $298,320,012) 285,239,055
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Contracts
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Purchased Options 0.0%
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Put on U.S. Long Bond, strike price 89, expires 3/31/2000 ------------
(Cost $32,054) .................................................... 36 4,501
------------
% of
Net Assets
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Total Investment Portfolio (Cost $333,261,182) (a) ................ 102.4 320,510,046
Other Assets and Liabilities, Net ................................. (2.4) (7,380,282)
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Net Assets 100 313,129,764
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</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
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(a) Cost for federal income tax purposes was $333,515,306. At January 31, 2000,
net unrealized depreciation for all securities based on tax cost was
$13,005,260. This consisted of aggregate gross unrealized appreciation for
all investments in which there was an excess of value over tax cost of
$357,373 and an aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $13,362,633.
(b) At January 31, 2000, these pools, in part or in whole, have been segregated
to cover when-issued or forward delivery pools.
(c) When-issued or forward delivery pools included.
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At January 31, 2000, open futures contracts sold short were as follows:
<TABLE>
<CAPTION>
Expiration Contracts Aggregate
Face
Futures Value ($) Value ($)
------------------------------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C>
U.S. Treasury Note ............ March 2000 144 14,218,531 13,947,750
U.S. Treasury Bond ............ March 2000 126 11,651,301 11,619,563
------------ -----------
25,869,832 25,567,313
-----------
Total unrealized appreciation on open future contracts sold short 302,519
-----------
</TABLE>
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At January 31, 2000, outstanding written options were as follows:
<TABLE>
<CAPTION>
Principal
Amount Expiration Strike Price
Put Options ($) Date ($) Value ($)
---------------------------- --------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
U.S.Treasury Note .......... 6,373 2/19/2000 94.00 1,875
-----------
Total outstanding written options (Premiums received $3,564) 1,875
-----------
</TABLE>
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* Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
** The investments in mortgage-backed securities of the Government National
Mortgage Association are interests in separate pools of mortgages. All
separate investments in each of these issues which have similar coupon
rates have been aggregated for presentation purposes in the Investment
Portfolio. Effective maturities of these investments will be shorter than
stated maturities due to prepayments.
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities as of January 31, 2000
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Investments in securities, at value (cost $333,261,182) ....... $ 320,510,046
Cash .......................................................... 3,419
Receivable for investments sold ............................... 69,327,533
Interest receivable ........................................... 2,766,912
Receivable for Fund shares sold ............................... 966,420
Receivable for daily variation margin on open futures contracts 115,563
-------------
Total assets .................................................. 393,689,893
Liabilities
- --------------------------------------------------------------------------------
Payable for investments purchased ............................. 43,456,014
Payable for investments purchased-- mortgage dollar rolls ..... 35,775,323
Dividends payable ............................................. 428,859
Payable for Fund shares redeemed .............................. 506,874
Written options, at value (premiums received $3,564) .......... 1,875
Accrued management fee ........................................ 168,918
Other accrued expenses and payables ........................... 222,266
-------------
Total liabilities ............................................. 80,560,129
- --------------------------------------------------------------------------------
Net assets, at value $ 313,129,764
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
Net assets consist of:
Accumulated distributions in excess of net investment income .. (428,859)
Net unrealized appreciation (depreciation) on:
Investments ................................................... (12,751,136)
Futures ....................................................... 302,519
Written options ............................................... 1,689
Accumulated net realized gain (loss) .......................... (31,110,337)
Paid-in capital ............................................... 357,115,888
- --------------------------------------------------------------------------------
Net assets, at value $ 313,129,764
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($313,129,764 / 22,527,357 outstanding shares of
beneficial interest, $.01 par value, unlimited --------------
number of shares authorized) ................................ $ 13.90
--------------
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statement of Operations for the year ended January 31, 2000
- --------------------------------------------------------------------------------
Investment Income
- --------------------------------------------------------------------------------
Interest ....................................................... $ 25,257,167
------------
Expenses:
Management fee ................................................. 2,275,980
Services to shareholders ....................................... 1,000,992
Custodian and accounting fees .................................. 149,050
Auditing ....................................................... 45,816
Legal .......................................................... 15,614
Trustees' fees and expenses .................................... 27,166
Reports to shareholders ........................................ 52,154
Registration fees .............................................. 29,250
Other .......................................................... 17,802
------------
Total expenses, before expense reductions ...................... 3,613,824
Expense reductions ............................................. (18,239)
------------
Total expenses, after expense reductions ....................... 3,595,585
- --------------------------------------------------------------------------------
Net investment income 21,661,582
- --------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- --------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments .................................................... (12,037,849)
Futures ........................................................ 247,944
Options ........................................................ 9,558
------------
(11,780,347)
------------
Net unrealized appreciation (depreciation) during the period on:
Investments .................................................... (14,752,546)
Futures ........................................................ 399,917
Written options ................................................ 1,689
------------
(14,350,940)
- --------------------------------------------------------------------------------
Net gain (loss) on investment transactions (26,131,287)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (4,469,705)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended
January 31, January 31, Year Ended
Increase (Decrease) in Net Assets 2000 1999 March 31, 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ........... $ 21,661,582 $ 19,144,991 $ 24,804,253
Net realized gain (loss) on
investment transactions ....... (11,780,347) 1,847,588 7,697,612
Net unrealized appreciation
(depreciation) on investment
transactions during the period. (14,350,940) 1,391,070 5,956,931
------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations .................... (4,469,705) 22,383,649 38,458,796
------------- ------------- -------------
Distributions to shareholders:
From net investment income ...... (21,659,982) (19,144,991) (24,804,253)
------------- ------------- -------------
Fund share transactions:
Proceeds from shares sold ....... 74,895,641 74,346,313 73,746,402
Reinvestment of distributions ... 16,109,104 14,012,577 18,027,356
Cost of shares redeemed ......... (144,806,607) (90,981,055) (95,991,645)
------------- ------------- -------------
Net increase (decrease) in net
assets from Fund share
transactions ................. (53,801,862) (2,622,165) (4,217,887)
------------- ------------- -------------
Increase (decrease) in net assets (79,931,549) 616,493 9,436,656
Net assets at beginning of period 393,061,313 392,444,820 383,008,164
Net assets at end of period
(including accumulated
distributions in excess of net
investment income of $428,859 at ------------- ------------- -------------
January 31, 2000) ............. $ 313,129,764 $ 393,061,313 $ 392,444,820
------------- ------------- -------------
Other Information
- -----------------------------------------------------------------------------------
Shares outstanding at beginning
of period ..................... 26,319,381 26,503,842 26,796,857
------------- ------------- -------------
Shares sold ..................... 5,195,106 4,984,258 5,020,317
Shares issued to shareholders in
reinvestment of distributions.. 1,121,059 939,252 1,225,867
Shares redeemed ................. (10,108,189) (6,107,971) (6,539,199)
------------- ------------- -------------
Net increase (decrease) in Fund
shares ........................ (3,792,024) (184,461) (293,015)
Shares outstanding at end of ------------- ------------- -------------
period ........................ 22,527,357 26,319,381 26,503,842
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<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>
- ------------------------------------------------------------------------------------
2000(a) 1999(b) 1998(c) 1997(c) 1996(c) 1995(c)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $14.93 $14.81 $14.29 $14.54 $14.07 $14.33
------------------------------------------------------
- ------------------------------------------------------------------------------------
Income from investment
operations:
- ------------------------------------------------------------------------------------
Net investment income .86 .73 .94 .93 .94 .93
- ------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions (1.03) .12 .52 (.25) .47 (.26)
------------------------------------------------------
- ------------------------------------------------------------------------------------
Total from investment
operations (.17) .85 1.46 .68 1.41 .67
- ------------------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------------------
Net investment income (.86) (.73) (.94) (.93) (.94) (.92)
- ------------------------------------------------------------------------------------
Tax return of capital -- -- -- -- -- (.01)
------------------------------------------------------
- ------------------------------------------------------------------------------------
Total distributions (.86) (.73) (.94) (.93) (.94) (.93)
- ------------------------------------------------------------------------------------
Net asset value, end
of period $13.90 $14.93 $14.81 $14.29 $14.54 $14.07
------------------------------------------------------
- ------------------------------------------------------------------------------------
Total Return (%) (1.15) 5.87** 10.44 4.81 10.20 4.94
- ------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 313 393 392 383 425 429
- ------------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.00 .94* 1.02 .96 .94 .95
- ------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) .99 .94* 1.02 .96 .94 .95
- ------------------------------------------------------------------------------------
Ratio of net investment
income (%) 5.98 5.87* 6.38 6.44 6.45 6.65
- ------------------------------------------------------------------------------------
Portfolio turnover rate (%) 308(d) 281(d)* 197(d) 188 158 221(d)
- ------------------------------------------------------------------------------------
</TABLE>
(a) For the year ended January 31, 2000.
(b) For the ten months ended January 31, 1999. On August 10, 1998, the Trustees
of the Fund changed the fiscal year end from March 31 to January 31.
(c) For the year ended March 31.
(d) The portfolio turnover rates including mortgage dollar roll transactions
were 358%, 290%, 251%, and 255% for the periods ended January 31, 2000,
January 31, 1999, March 31, 1998 and 1995, respectively.
* Annualized
** Not annualized
23
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
A. Significant Accounting Statements
Scudder GNMA Fund (the "Fund") is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end, diversified management
investment company and is organized as a Massachusetts business trust.
On August 10, 1998, the Trustees of the Fund changed the fiscal year end from
March 31 to January 31.
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 purchased with an original
maturity greater than 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.
When-issued and Forward Delivery Securities. The Fund may purchase securities
with delivery or payment to occur at a later date beyond the normal settlement
period. At the time the Fund enters into a commitment to purchase a security,
the transaction is recorded and the value of the security is reflected in the
net asset value. The value of the security may vary with market fluctuations. No
interest accrues to the Fund until payment takes place. At the time the Fund
enters into this type of transaction it is required to segregate cash or other
liquid assets at least equal to the amount of the commitment.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian or
sub-custodian bank, 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
principal amount of the repurchase price plus accrued interest.
24
<PAGE>
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 a financial
instrument at a specified price on a specific date (settlement date). During the
period, the Fund purchased interest rate futures to manage the duration of the
portfolio. In addition, the Fund also sold interest rate futures to hedge
against declines in the value of portfolio.
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 dependent upon
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 the 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
period, the Fund purchased put options on securities and wrote call options on
securities as a hedge against potential adverse price movements in the value of
portfolio assets and as a temporary substitute for selling selected investments.
In addition, during the period, the Fund purchased call options on securities
and wrote put options on securities to lock in the purchase price of a security
which it expects to purchase in the near future and as a temporary substitute
for purchasing selected investments and to enhance potential gain.
25
<PAGE>
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
prices 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. Gain or loss is recognized when the
option contract expires or is closed.
If 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 above the exercise price. If the
Fund writes a put option it accepts the risk of a decline in the market value of
the underlying security 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.
Mortgage Dollar Rolls. The Fund may enter into mortgage dollar rolls in which
the Fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase similar, but not identical, securities on
a fixed date. The Fund receives compensation as consideration for entering into
the commitment to repurchase. The compensation is paid in the form of a fee
which is recorded as deferred income and amortized to income over the roll
period, or alternatively, a lower price for the security upon its repurchase.
Mortgage dollar rolls may be renewed with a new sale and repurchase price and a
cash settlement made at each renewal without physical delivery of the securities
subject to the contract.
Federal Income Taxes. The Fund's policy is 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 income to its
shareholders. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
At January 31, 2000, the Fund had a net tax basis capital loss carryforward of
approximately $27,406,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until
26
<PAGE>
January 31, 2003 ($18,025,000) and January 31, 2008 ($9,381,000), the respective
expiration dates, whichever occurs first. In addition, from November 1, 1999
through January 31, 2000, the Fund incurred approximately $3,174,000 of net
realized capital losses. As permitted by tax regulations, the Fund intends to
elect to defer these losses and treat them as arising in the fiscal year ending
January 31, 2001.
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a daily dividend and is distributed to shareholders monthly. 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 at least annually.
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. 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.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Realized gains and losses from investment transactions are recorded on an
identified cost basis. Discount and premiums on mortgage-backed securities are
accreted/amortized for both tax and financial reporting purposes.
B. Purchases and Sales of Securities
During the year ended January 31, 2000, purchases and sales of investment
securities (excluding short-term investments, mortgage dollar rolls, and U.S.
Government obligations) aggregated $742,294,895 and $798,219,892, respectively.
Purchases and sales of U.S. Government obligations aggregated $327,806,660 and
$316,855,305, respectively. Purchases and sales of mortgage dollar roll
transactions aggregated $170,201,580 and $170,554,114, respectively.
27
<PAGE>
Transactions in written options during the year ended January 31, 2000 were:
Premiums
Call Options Contracts Received ($)
- --------------------------------------------------------------------------------
Outstanding at January 31, 1999 ............ -- --
Written .................................... 92 79,890
Exercised .................................. (87) 76,326
Expired .................................... -- --
-------------- --------------
Outstanding at January 31, 2000 ............ $ 5 $ 3,564
-------------- --------------
C. Related Parties
Under the Investment Management Agreement (the "Agreement") with Scudder Kemper
Investments, Inc. (the "Adviser"), the Adviser directs the investments of the
Fund in accordance with its investment objective, 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 0.65% on the first $200,000,000 of the
Fund's average daily net assets, 0.60% on the next $300,000,000 of such net
assets, and 0.55% of such net assets in excess of $500,000,000, computed and
accrued daily and payable monthly. For the year ended January 31, 2000, the fees
pursuant to these agreements amounted to $2,275,980, which was equivalent to an
annual effective rate of 0.63% of the Fund's average daily net assets.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended January 31, 2000, the amount charged to the Fund by SSC aggregated
$544,822, of which $134,642 is unpaid at January 31, 2000.
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 January 31,
2000, the amount charged to the Fund by STC aggregated $210,782, of which
$50,732 is unpaid at January 31, 2000.
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
28
<PAGE>
year ended January 31, 2000, the amount charged to the Fund by SFAC aggregated
$120,970, of which $10,070 is unpaid at January 31, 2000.
The Fund is one of several Scudder Funds (the "Underlying Funds") in which the
Scudder Pathway Series Portfolios (the "Portfolios") invest. In accordance with
the Special Servicing Agreement entered into by the Adviser, the Portfolios, the
Underlying Funds, SSC, SFAC, STC, and Scudder Investor Services, Inc., expenses
from the operation of the Portfolios are borne by the Underlying Funds based on
each Underlying Fund's proportionate share of assets owned by the Portfolios. No
Underlying Fund will be charged expenses that exceed the estimated savings to
such Underlying Fund. These estimated savings result from the elimination of
separate shareholder accounts which either currently are or have the potential
to be invested in the Underlying Funds. At January 31, 2000, the Special
Servicing Agreement expense charged to the Fund amounted to $37,006.
The Fund pays each Trustee not affiliated with the Adviser an annual retainer,
plus specified amounts for attended board and committee meetings. For the six
months ended January 31, 2000, Trustees' fees and expenses aggregated $27,166.
D. Expense Off-Set Arrangements
The Fund has entered into arrangements with its custodian and transfer agent
whereby credits realized as a result of uninvested cash balances were used to
reduce a portion of the Fund's expenses. For the year ended January 31, 2000,
the Fund's custodian and transfer agent fees were reduced by $8,778 and $9,461,
respectively, under these arrangements.
E. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $1 billion
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, pro rata based on net assets, 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 a maximum of 33 percent of its net
assets under the agreement.
29
<PAGE>
F. Plan of Reorganization
On February 7, 2000 the Trustees of the Fund approved an Agreement and Plan of
Reorganization (the "Reorganization") between the Fund and the AARP GNMA Fund,
pursuant to which AARP GNMA Fund would acquire all or substantially all of the
assets and liabilities of the Fund in exchange for shares of a new class of
shares ("Class S") of the AARP GNMA Fund. The proposed transaction is part of
Scudder Kemper's initiative to restructure and streamline the management and
operations of the funds it advises. The Reorganization can be consummated only
if, among other things, it is approved by a majority vote of the shareholders of
the Fund. A special meeting of the shareholders of the Fund to approve the
Reorganization will be held on or about July 13, 2000.
As a result of the Reorganization, each shareholder of the Scudder GNMA Fund
will become a shareholder of the Class S shares of the AARP GNMA Fund and would
hold, immediately after the closing of the Reorganization (the "Closing"), that
number of full and fractional voting shares of the Class S shares of the AARP
GNMA Fund having an aggregate net asset value equal to the aggregate net asset
value of such shareholder's shares held in the Fund as of the close of business
on the business day preceding the Closing. The Closing is expected to take place
during the third quarter of 2000. In the event the shareholders of the Fund fail
to approve the Reorganization, the Fund will continue to operate and the Fund's
Trustees may resubmit the Plan for shareholder approval or consider other
proposals.
30
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees and the Shareholders of Scudder
GNMA 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 GNMA Fund (the "Fund") at
January 31, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
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 auditing standards generally accepted in the United States 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 January 31, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
March 22, 2000
31
<PAGE>
Officers and Trustees
- --------------------------------------------------------------------------------
Lynn S. Birdsong*
o President and Trustee
Henry P. Becton, Jr.
o Trustee; President and General
Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
o Trustee; President, Driscoll
Associates; Executive Fellow,
Center for Business Ethics, Bentley
College
Peter B. Freeman
o Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
o Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
o Trustee; Professor of Business
Administration, Northeastern
University, College of Business
Administration
Jean C. Tempel
o Trustee; Venture Partner,
Internet Capital Group
Kathryn L. Quirk*
o Trustee; Vice President and
Assistant Secretary
Ann M. McCreary*
o Vice President
Richard L. Vandenberg*
o Vice President
John Millette*
o Vice President and Secretary
John R. Hebble*
o Treasurer
Caroline Pearson*
o Assistant Secretary
*Scudder Kemper Investments, Inc.
32
<PAGE>
Investment Products and Services
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
<S> <C>
Money Market U.S. Growth and Income
Scudder U.S. Treasury Money Fund Scudder Balanced Fund
Scudder Cash Investment Trust Scudder Dividend & Growth Fund
Scudder Money Market Series -- Scudder Growth and Income Fund
Prime Reserve Shares* Scudder Select 500 Fund
Premium Shares* Scudder S&P 500 Index Fund
Managed Shares* Scudder Real Estate Investment Fund
Scudder Government Money Market
Series -- Managed Shares* U.S. Growth
Value
Tax Free Money Market+ Scudder Large Company Value Fund
Scudder Tax Free Money Fund Scudder Value Fund***
Scudder Tax Free Money Market Scudder Small Company Value Fund
Series -- Managed Shares* Scudder Micro Cap Fund
Scudder California Tax Free Money Fund** Growth
Scudder New York Tax Free Money Fund** Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Tax Free+ Scudder Select 1000 Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Medium Term Tax Free Fund Scudder 21st Century Growth Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund Global Equity
Scudder California Tax Free Fund** Worldwide
Scudder Massachusetts Limited Term Scudder Global Fund
Tax Free Fund** Scudder International Value Fund
Scudder Massachusetts Tax Free Fund** Scudder International Growth and
Scudder New York Tax Free Fund** Income Fund
Scudder Ohio Tax Free Fund** Scudder International Fund++
Scudder International Growth Fund
U.S. Income Scudder Global Discovery Fund***
Scudder Short Term Bond Fund Scudder Emerging Markets Growth Fund
Scudder GNMA Fund Scudder Gold Fund
Scudder Income Fund Regional
Scudder Corporate Bond Fund Scudder Greater Europe Growth Fund
Scudder High Yield Bond Fund Scudder Pacific Opportunities Fund
Scudder Latin America Fund
Global Income The Japan Fund, Inc.
Scudder Global Bond Fund
Scudder International Bond Fund Industry Sector Funds
Scudder Emerging Markets Income Fund Choice Series
Scudder Financial Services Fund
Asset Allocation Scudder Heath Care Fund
Scudder Pathway Conservative Portfolio Scudder Technology Fund
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio Preferred Series
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
- --------------------------------------------------------------------------------
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**+++ +++
Scudder Horizon Advantage**+++ +++ +++
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Closed-End Funds#
- -----------------------------------------------------------------------------------------
<S> <C>
The Argentina Fund, Inc. Montgomery Street Income Securities, Inc.
The Brazil Fund, Inc. Scudder Global High Income Fund, Inc.
The Korea Fund, Inc. Scudder New Asia Fund, Inc.
</TABLE>
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 or classes thereof 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.
+++ +++ +++ A no-load variable annuity contract issued by Glenbrook Life and
Annuity Company and underwritten by Allstate Financial Services,
Inc., sold 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.
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Scudder Solutions
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1-800-SCUDDER www.scudder.com
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly to
regularly purchase fund shares and "dollar cost average" --
buy more shares when the fund's price is lower and fewer
when it's higher, which can reduce your average purchase
price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to purchase
shares -- use distributions from one Scudder fund to
purchase shares in another, automatically (accounts with
identical registrations or the same social security or tax
identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of your
transactions is electronically debited from a previously
designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government checks
-- invested in up to four Scudder funds at one time.
* 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- Scudder Automated Information Line: SAIL(TM) --
clock electronic 1-800-343-2890
account
service and Personalized account information, the ability to exchange
information, or redeem shares, and information on other Scudder funds
including some and services via touchtone telephone.
transactions
Scudder's Web Site -- www.scudder.com
Personal Investment Organizer: Offering account information
and transactions, interactive worksheets, prospectuses and
applications for all Scudder funds, plus your current asset
allocation, whenever your need them. Scudder's site also
provides news about Scudder funds, retirement planning
information, and more.
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1-800-SCUDDER www.scudder.com
Retirees and Automatic Withdrawal Plan
those who depend
on investment You designate the bank account, determine the schedule (as
proceeds for frequently as once a month) and amount of the redemptions,
living expenses and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into the
automated bank account you designate within three business days after
withdrawal each distribution is paid.
programs
QuickSell
Provides speedy access to your money by electronically
crediting your redemption proceeds to the bank account you
previously designated.
For more Call a Scudder representative at
information about 1-800-SCUDDER
these services
Or visit our Web site at
www.scudder.com
Please address The Scudder Funds
all written PO Box 2291
correspondence Boston, Massachusetts
to 02107-2291
36
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Notes
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<PAGE>
Notes
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<PAGE>
Notes
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<PAGE>
About the Fund's Adviser
SCUDDER
INVESTMENTS (SM)
[LOGO]
PO Box 2291
Boston, MA 02107-2291
1-800-SCUDDER
www.scudder.com
A member of the [LOGO] Zurich Financial Group
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $290 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 over 80
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Financial Services 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 Financial Services Group. The Zurich Financial Services 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.
